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money, which can be spent the same way another debit card is used, at an ATM, or a store. Because these can be dispensed and refilled at stores, like cell phone minutes, these have become an important source of banking services to poor people who might not have any other bank.72 
The ATM network is an important component of the card payment systems. When you withdraw cash from an ATM, or from the point-oj-sale terminal (POS) at a grocery store, the ATM network signals approval from your bank, and then you withdraw cash from the ATM owner's cash account while an ACH transaction to match it is created. You get the cash immediately, but it takes a day or so for the corresponding ACH transaction to clear. 
ATM transactions are one of the few payment systems that involve the actual movement of physical money. The movement is not a result of the transaction itself, but of the truck that brought cash to put into the ATM in the first place. The customer then takes the money and moves it further. 
Securities 
Among the interesting payment systems out there are payment systems for securities. When you buy a government bond, it is very seldom that you actually receive a piece of paper in exchange. The vast bulk of US Government bonds exist only as entries in the Fed's electronic ledger73 When a bond is bought or sold, the entries in the ledger change to record the new ownership. There is a whole welter of rules and procedures to make sure that it happens properly and only after payment has been verified. Of course since the payment probably consists of transfers between Fed members, this is generally not difficult. 
A very similar kind of arrangement works for municipal bonds, commercial paper, and a large number of the stocks for sale on US exchanges. Almost all of these are kept at the Depository Trust & Clearing Corporation (DTCC). Buyers and sellers ex- 
72 And an important avenue to exploit those poor people, too. Companies that demand their employees be paid via direct deposit have increasingly turned to prepay debit cards for employees without a bank account. But many such cards have Significant fees for withdrawals, so cashing a paycheck might cost a few dollars, a big deal to a minimum-wage worker. 
73 A notable exception is the Social Security Administration, which-by order of Congress-keeps the bonds that make up the Social Security Trust Fund in a locked file cabinet at the Bureau of the Public Debt in Parkersburg, West Virginia. 

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change entries in the DTCC database. Until the DTC (the DTCC's predecessor) was founded in 1973, brokers would exchange real pieces of paper when a security was sold. The messenger business in Manhattan was a growth industry in the 1960s, when the volume of securities traded escalated dramatically. Between 1965 and 1968, volume on the New York Stock Exchange tripled, and it became ever more difficult to keep up with the paperwork. The advent of the DTC relieved the market participants from the burden, and increased security besides. 
Mobility 
What's amusing about these payment systems is how similar they are to Victorian England. From the middle of the 19th century until the 1920s, London was the financial capital of the world. Almost all the world's gold was stored in vaults at the Bank of England and a small number of banks in its orbit. This gold was stored on behalf of businesses and governments around the world. International trade was made possible by cross-border capital flows that often consisted of a clerk in London scratching out one accounting ledger entry and making another. One hundred years later, money moves in much the same fashion, by changing ledger entries at a Single location. 
As ethereal as money is, it takes physical arrangements like these payment systems to move it around. What's more, in many of these systems, the money is stationary and what moves is the directions to move money from one account to another in a single bank. A check you write could cross the country once to make some payment, and then back again to be cleared, with the result being a couple of ledger lines changed at the Federal Reserve. You want to send money to India? Your local credit union might make a deposit at BankAmerica with a check drawn on its correspondent bank, which would result in transferring money from one account to another at the Fed. Funds "at" BankAmerica, but actually on account at the Fed, could then be transferred via CHIPS to the State Bank of India by transferring money between accounts at the Bank for International Settlements (BIS) the central bank for central banks, located in Basel, Switzerland. The State Bank of India would then transfer the funds to one of its member banks, until it reaches an account owned by your recipient. 

CHAPTER 3. BANK OPERATION MADE SIMPLE(R) 
New forms of payments 
Ironically, though capital is as mobile today as it has been in history, it is still the physical manifestations of money that travel much farther and more often than the insubstantial forms. Cashpaper and metal-travels in people's pockets and in armored trucks that supply a bank's branches and ATMs. The ethereal and abstract forms of money-accounts at the Fed or the DTC, for example-tend to be immobile, even if they can be traded all over the world. Orders to pay may travel by mail and over wires, but the funds themselves don't. 
This is the innovation of biicoin, and what makes it so differ- 
'-;~~~~~~~~
ent from any other form of electronic funds. A bitcoin uses so- 
phisticated encryption to create a pattern of bits whose origin and history can be verified by decoding it. A central registry records the date and time of transactions, which are also recorded in the bitcoin itself. Once a bitcoin changes hands, the bits representing the coin itself also change, and any pre-change copies become obvious fakes. The history of dates in the registry must match the dates recorded in the bitcoin, but the registry does not record who owns the bitcoin. It is thus an anonymous form of payment, and can be sent in an email or uploaded to a distant web site, exactly what has made it popular among drug smugglers and gamblers. 
Another related innovation is in the use of cell phone minutes. 
In parts of Africa, informal markets have developed with brokers able to sell minutes to pre-pay cell phone plans. When brokers appeared who were also willing to buy them, it became possible to send money across borders by sending the codes to unlock cell phone minutes. You can buy minutes in one country and text the code numbers to unlock the minutes to someone in another country, who can sell that code for cash. 
More formal cell phone payment systems are coming online, too. They are already widely used in many countries. When you pay for something with a cell phone, you have more or less initiated a debit card transaction, but with the amount paid to appear on your phone bill instead of being debited from your bank account. The phone company, in turn, has a settlement account at some Fed member bank, and uses that to send or receive the payment from the other party. 
There seem to be few limits to the variety of payment systems out there, and fewer still for the variety yet to be invented. It's not 
82 

WHERE ARE THE MAGIC BEANS? 
83 
clear where bitcoin itself is going, for example, but the technology has been invented and is there for someone else to use if they can figure out how. In the same way, innovations in card technology and cell phone payments will change the way we use money, and the way we think of it. 
Where are the magic beans? 
The other day in a banker's care, 
I saw some money that wasn't there. It wasn't there again today, 
I wish I wish it would go away. 
Nol by Hughes Mearns (1875-1965). 
So after all this, where's the magic part, where banks create money? 
In one sense the magic of money creation is, like all stage magic, an illusion that depends on where you're standing. The banker doesn't see money being created. The banker sees him or herself taking a risk by loaning out some money that's been deposited, and managing that risk somehow. Ask a banker where the money creation happens, and he or she might give you a funny look. 
From outside the bank, though, it looks different. An observer of some bank might see customers deposit a million dollars into it, and then watch while its loan officers make $900,000 in loans out of that, keeping 10% for reserves. (Presumably this bank has some capital as well.) This is where the money is created, because the depositors still assume they have $1 million in the bank/4 and 
74 A friend and I joked once that this was like the quantum mechanics of money. 
When a bank creates a loan, they typically just open a checking account for the borrower and say there is money in it. (See page 50.) Just like a subatomic particle that could be here and could be there, it could be said that the money is now in two places at once: in the borrower's account, but also in the accounts of the original depositors. This is one of those analogies that has more truth in it than the analogy-makers Originally recognized, for while the usual interpretation of quantum mechanics does allow for a wave function to imply that a particle is in two places at once, this is only true until you actually measure the particle's location. 

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the borrowers are free to take their $900,000 wherever they want, and now the economy has $1.9 million where before it had only one million. This is the multiplier, and it can be applied again by whatever bank receives the loaned money. 
Unless the loaned money is kept on account at the lending bank, it isn't available to that bank any more. If the loaned money was withdrawn, the bank that loaned out $900,000 now only has $100,000 of the original million sitting around (plus the agreements with its borrowers) to manage its depositors' needs. The managers hope they made the right choices of borrowers, but managing those choices is all they can do. A single bank can't do any more than apply the multiplier once to its deposits, though a banking system can apply it indefinitely." 
Huge banks, or banks with a dominant position in some local market, can count on a fair amount of funds being returned to them. BankAmerica, for example, will see a relatively large number of the recipients of their loans doing their banking at BankAmerica. Because they have so many customers, lots of the money they loan will make its way back into some BankAmerica account. A smaller bank, or a public bank with a relatively small number of customers, can't count on that. Those banks can participate in the multiplier, but they cannot own the results without the deposits returning to them. 
All is not lost, though. Even a smaller bank that loans out some money might be able to count on the money taking some time to exit the bank. Say the $900,000 loan above was in service of some construction project estimated to take two years. If the customer shares the draw-down plan with the bank-as would be typical 
At that point, you know that it's only in one place. 
In precisely the same way, you can imagine the money being in two different accounts at the same time-and some people do make a big thing out of thisbut this illusion vanishes the moment the money's location is measured. What's the analogy for "measuring" money here? Withdrawing it. At some point, the depositor will return for his or her money, or the borrower will write a check and some other bank will return the check to the original bank. At that moment, the money's location is known, and the bank has to be able to produce it in some form the customer or other bank will approve. None of these are unusual events, so this analogy is really only for amusement value, and that's why it's in a footnote and not in the text. 
75Lot5 of the loaned funds will leak out of the banking system and become either currency instead or deposits that move too fast to lend (bankers might call them too "hot" to lend), so the multiplier only reaches its mathematical maximum under unusual circumstances. 

WHERE ARE THE MAGIC BEANS? 
85 
of a public construction project like building a bridge or a sewage treatment plant-the bank can continue to count on some of that money to be on deposit, and can use it accordingly, perhaps for a short-term loan or investment. 
As we saw in "Borrowing" on page 58, another way the original bank can get more funds to loan is borrow them from other banks, and the multiplier can work on this money, too. For example, the original bank here might seek to borrow $900,000 from other banks to make up for its loans. This kind of borrowing, in the Fed funds market, is common, but the unsecured loans are generally for very short terms, ~ften overnight. These can usually be rolled over ad infinitum, but a bank incurs a fair amount of interest rate risk doing so, since the rate they pay will be quite volatile, depending heavily on the the borrowing bank's credit rating, the broader financial markets, and the weather. A bank wouldn't want to make long term fixed rate loans with this money, except maybe with the cooperation of the other bank, and even then, only warily. Slightly longer-term money is available in the repo market, but those are secured loans, so the cost of the funds is higher than the interest rate would have you believe. Most banks will have better luck with something like the FHLB's secured advances to expand their lending. 
In other words, while the multiplier can in theory be applied indefinitely, real-world considerations-such as a clear-eyed assessment of the risks a bank is incurring-will often prevent it from reaching its theoretical maximum. Of course, lots of bankers do not have such clear eyes. 
In the sample balance sheets on page 31, you can see the degree to which the different banks rely on borrowing from parties other than their depositors. BankAmerica has $67 billion outstanding in other borrowing and $61 billion in the Fed funds market, compared to deposits of $1.2 trillion. This is about 5-10%, and probably consistent with using that money mainly for liquidity management. Washington Trust, on the other hand, has $417 million borrowed and $2.2 billion in deposits. This is 19%, and consistent with the suspicion that Washington Trust is much closer to its lending limit than either of the larger banks, BankAmerica or RBS Citizens.