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Jeff Hummel on the Fed’s Treatment of Vault Cash

Summary:
In an email, monetary economist Jeff Hummel, of San Jose State University, writes: There have been some significant Fed changes under Jerome Powell, the most notable being the elimination of reserve requirements and the redefinition of M1 so that it now practically mirrors M2. Unfortunately, in the process, Fed reporting has become slightly less transparent in several ways, reversing the Fed’s increasing transparency under former chairman Ben Bernanke. One of the most annoying of these decreases in transparency is that, as a result of eliminating reserve requirements, the Fed has ceased directly reporting the amount of bank reserves held in the form of vault cash rather than in interest-earning deposits at the Fed. Before eliminating reserve requirements, banks

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In an email, monetary economist Jeff Hummel, of San Jose State University, writes:

There have been some significant Fed changes under Jerome Powell, the most notable being the elimination of reserve requirements and the redefinition of M1 so that it now practically mirrors M2. Unfortunately, in the process, Fed reporting has become slightly less transparent in several ways, reversing the Fed’s increasing transparency under former chairman Ben Bernanke.

One of the most annoying of these decreases in transparency is that, as a result of eliminating reserve requirements, the Fed has ceased directly reporting the amount of bank reserves held in the form of vault cash rather than in interest-earning deposits at the Fed. Before eliminating reserve requirements, banks could use their vault cash to satisfy reserve requirements. Until then, the data on vault cash were most readily accessible in the Fed’s H.3 Release, but the Fed discontinued publishing it after September 2020.

My interest in vault cash stems from tracking what I call the “outside” monetary base, which excludes interest-earning reserves. But you can still derive the amount of vault cash from the Fed’s H.6 Release. The Release’s Table 1, “Money Stock Measures,” now lists only total reserves deposited at the Fed and has a column for “Currency in Circulation” that includes vault cash as well as currency held by the public. But Tables 2 and 3, “Components of M1 and non-M1 M2,” have columns for “Currency” that exclude vault cash and count only currency held by the public. So to derive vault cash, you now need to subtract the latter from the former.

DRH note, based on Jeff’s analysis:

The most recent data the Fed lists are for November 2021. Currency in circulation (not seasonally adjusted), from Table 1, was $2,214.3 billion. Currency that excludes vault cash (not seasonally adjusted), from Table 3, was $2,116.4 billion. Therefore, vault cash was $2,214.3 billion minus $2,116.4 billion, which is $97.9 billion.

Now back to Jeff:

For those interested, the currency figures in the Fed’s H.4.1 Release, which reports the Fed’s balance sheet, have always included vault cash.

David Henderson
David R. Henderson (born November 21, 1950) is a Canadian-born American economist and author who moved to the United States in 1972 and became a U.S. citizen in 1986, serving on President Ronald Reagan's Council of Economic Advisers from 1982 to 1984.[1] A research fellow at Stanford University's Hoover Institution[2] since 1990, he took a teaching position with the Naval Postgraduate School in Monterey, California in 1984, and is now a full professor of economics.[3]

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