Kenneth R. Szulczyk
deferred availability cash items (DACI), and it is always positive. As a float increases, it
expands both the bank reserves and money supply.
For example, you live in California, and you sent a $1,000 check to a firm in New York
City to buy a computer. Computer firm deposits the check in its bank account. Subsequently, its
bank sends the check to the Fed because the Fed can clear the check between your bank and the
computer firm's bank. Accordingly, the Fed credits the computer firm’s bank a $1,000 asset, the
DACI. Next, the Fed must collect $1,000 from your bank, the CIPC. We record the computer
firm’s bank and Fed’s T-accounts below:
The Computer Firm’s Bank
Assets Liabilities
+$1,000 DACI +$1,000 Deposits
The Federal Reserve
Assets Liabilities
+$1,000 CIPC +$1,000 DACI
Computer firm’s bank cannot touch the asset, DACI. The Fed acknowledges the asset and is
in the process of collecting money for the computer firm’s bank. After two days, the Fed
converts the DACI into bank reserves. Consequently, the bank can lend these reserves.
The Federal Reserve
Assets Liabilities
- $1,000 DACI
+$1,000 Reserves for computer firm’s bank
The Computer Firm’s Bank
Assets Liabilities
- $1,000 DACI
+$1,000 Reserves at the Fed
If the Fed did not collect $1,000 from your bank with two days, subsequently, the Fed
extends credit to the computer firm’s bank. Thus, the total reserves of the banking system
increase because banks did not lose reserves. That $1,000 check you wrote now exists as a
$1,000 in your bank account and the computer firm’s bank account. We calculated the float
from your check in Equation 1, and it equals $1,000.
Float = CIPC – DACI = $1,000 - 0 = $1,000 (1)The Fed collects the $1,000 from your bank. Accordingly, the float returns to zero, and your
checking account decreases by $1,000. Your check for $1,000 no longer exists in two places.
Check clearing process is a long-drawn-out process because if you write a check for $100 and