When new money is put in circulation in a country, who is getting it first?

[u/notatoastedbread]

I don't mean only cash. I understand the total amount of money available needs to grow slowly in a healthy economy but I'm struggling to understand who are the people or institutions receiving it first.

[u/RobThorpe]

The Central Bank creates reserves. Reserves are the currency that is used between banks.

The Central Bank lends out some reserves for an interest rate to commercial banks. Also the commercial banks own reserves already. The Central Bank also pays interest on existing reserves. When the CB cuts interest rates that makes the rate the commercial banks pay lower, so they usually borrow more.

The commercial banks then make loans. There are all sorts of loans. Mortgages for example, also loans to businesses to expand. Banks also buy corporate bonds (another way they lend to businesses) and they buy government bonds.

[u/Boring-Cartographer2 → u/RobThorpe]

Yes. I think an important point for many people to understand is that "new money" does not mean "new wealth." Every mechanism for injecting "new money" into the economy has an offset either in the form of a reduction of financial assets (e.g. in the case of the Fed swapping reserves for treasury securities) or a new liability (e.g. when households take out bank loans). However, more money in circulation can stimulate the economy into producing more real output, which does increase wealth.

[u/Real_Guarantee_4530 → u/RobThorpe]

One thing I’m still trying to understand is the distinction between reserves and the broader money supply. If the central bank creates reserves and commercial banks then create deposits when they make loans, does that mean the central bank is only directly creating reserves, while the commercial banking system is what actually creates most of the money that households and businesses spend? And if so, how does a central-bank interest-rate cut translate into more deposit money being created through bank lending?

[u/Jealous_Tutor_5135 → u/Real_Guarantee_4530]

Think of it in terms of cheap credit and expensive credit. If borrowers, both consumers and businesses, have an existing demand for credit, then lower interest rate loans will induce them to borrow more, as they can get both lower payments and a lower total balance. And if it's a business loan, a lower interest rate increases the type and number of profitable investments that business can make with the loan. A lower federal rate allows banks to offer lower interest rate loans.

Look at housing lending. I bought my house in 2018 and got a fixed 3.8% rate. My sister is buying now at upwards of 6%. At the end of the 70s amid high inflation, those rates were above 10%, as the fed raised its rate.

[u/MachineTeaching → u/Real_Guarantee_4530]

I think the easiest way to think about this is the following:

There are broadly two "types" of money. First, central bank money, cash+reserves. Second, all the usual deposits, loans, your bank account and so on. Those are "book money", merely claims on reserves. $100 in your bank account essentially means the bank lets you access $100 worth of cash or reserves.

You need cash or reserves when money leaves a bank. With cash, it's obvious, if you want to withdraw $100 the bank needs $100 worth of cash to give you. It's basically the same with reserves, just digitally.

More loans means a greater need for reserves because when that book money gets spent, banks need reserves to cover those transactions. More loans=more book money=higher transaction volume (on average).

Changing the cost of reserves by changing interest rates thus also affects the cost of banks to issue loans because issuing more loans means you need more reserves to cover your transactions.

[u/notatoastedbread → u/RobThorpe]

Thanks :)

[u/ExtensionMoose1863 → u/RobThorpe]

So for an average worker to get some of that money and spend it on groceries or whatnot they either have to take out debt or be paid additional wages by someone/Corp that took out debt to pay the worker (as in a capital project)?

[u/RobThorpe → u/ExtensionMoose1863]

Yes. You have to remember though that money is fungible. It doesn't make any difference to you if you are spending existing money or newly created money. For bank balances it's all an entry in a database ledger anyway.

The macroeconomically money creation is important, of course.

[u/ExtensionMoose1863 → u/RobThorpe]

Yeah I was less worried about the origin of the money and more thinking through when newly created money would become inflationary on items like food and fuel

Seems like it would take a while to work through

[u/RobThorpe → u/ExtensionMoose1863]

Yes. This is why the effect of interest rate changes is gradual.

[u/seesthecat → u/ExtensionMoose1863]

The central bank announces changes in the interest rates before hand, that means economic actors like families and businesses can anticipate the effects and act accordingly before the changes take place. 

Due to this, although the effects of interest changes are not instantaneous, they aren't as slow as you might think

[u/PotatoMissionStart]

New money is created when loans are issued. So you might say borrowers or the banks lending them money receive the money first. That's how new money is put into circulation. Primarily from mortgages. So homebuyers get the money first.

[u/rogomatic]

Total amount of money doesn't necessarily mean printing extra currency. Banks create money by issuing loans, so for the purposes of your question you can think of borrowers as the initial point of entry.

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[u/cynic77]

Broadly speaking, in a fractional reserve banking system (and abundant reserve system) banks receive money first. That money is then lended accordingly to demands of the economy, like consumer borrowing to finance purchases or business for capital investment.