<p>M0 are notes (e.g. dollar bills in the US) and coins Held by the public. It seems likely that almost all the notes and coins come from the public withdrawing them from banks. </p>

<p>Banks get the notes and coins via exchanging settlement balances at the Federal Reserve (“reserves”) for them, which are put in vaults for distribution.</p>

<p>The only alternative is for the Federal government to directly pay out notes and coins, which is possible, but this does not appear to be common practice.</p>

<p>If we ignore that alternative creation mechanism, we can answer your questions.</p>

<p>Firstly, an increase of M0 is reliant on the public withdrawing notes and coins from a bank. This is only possible if the bank has notes and coins in its vault, so this process is limited. In order to be sustained, the vaults need to be replenished.</p>

<ul>
<li>Yes, banks need to exchange reserves for notes and coins.</li>
<li>A bank could borrow reserves from another bank or at the discount window to get vault cash, but those are two transactions.</li>
<li>Settlement balances are destroyed when exchanged for notes and couns.</li>
</ul>

CC BY-SA 4.0
2020-04-28T12:56:01.313Z
2020-04-28T12:56:01.313Z
Brian Romanchuk
<p>Are the following true?</p>

<ul>
<li><p>m0 is only created by destroying something else (federal reserve deposits)? </p></li>
<li><p>m0 can be created as a loan?</p></li>
</ul>

<p>Related questions: can something other than federal reserve deposits be exchanged for m0? what happens to the FRD, they get destroyed? </p>

CC BY-SA 4.0
2020-04-28T00:12:28.323Z
If M0 is notes and coins outside the central bank, then increasing it without doing something else to offset this certainly does increase the money supply.
Henry
CC BY-SA 4.0
2020-04-28T02:20:34.527Z
The title of the question bears no relation to the contents. I cannot parse “ m0 cannot be loaned out without exchanging a pre-existing asset?”. Also “ As far as I understand m0 does not increase the money supply” is incorrect. This question needs to be be cleaned up before anyone can answer it.
Brian Romanchuk
CC BY-SA 4.0
2020-04-28T11:33:17.493Z
@BrianRomanchuk “ m0 cannot be loaned out without exchanging a pre-existing asset?” would just mean: 'can m0 be created as a result of a loan' like the title.
user3181821
CC BY-SA 4.0
2020-04-28T11:35:34.850Z
@BrianRomanchuk I got that creating m0 does not increase the money supply from https://economics.stackexchange.com/questions/8320/how-and-when-is-m0-money-created
user3181821
CC BY-SA 4.0
2020-04-28T12:44:20.617Z
I didn’t see anything that says that. M0 is part of *any* money supply aggregate. I changed the question to eliminate problematic text.
Brian Romanchuk
CC BY-SA 4.0
2020-04-28T15:36:00.670Z
@BrianRomanchuk "If a bank asks the Fed to trade their electronic dollars for paper (or vice versa, the Fed will oblige. If the Fed runs short on paper, they will have the treasury print more, but this doesn't expand MB." "Think of paper dollars as ice, electronic dollars as flowing water and MB as all the water in the system (frozen or flowing). Whatever the form, it is not important as the total amount of water remains the same."
user3181821
<money-supply><federal-reserve>
Can m0 be created as a loan?
user3181821
# Can m0 be created as a loan?

(Asked by: username_0 on 2020-04-28)

Are the following true?

* m0 is only created by destroying something else (federal reserve deposits)?
* m0 can be created as a loan?

Related questions: can something other than federal reserve deposits be exchanged for m0? what happens to the FRD, they get destroyed?

**Tags:** money-supply, federal-reserve

> **Comments:**
> **username_1**: If M0 is notes and coins outside the central bank, then increasing it without doing something else to offset this certainly does increase the money supply.  
> **username_2**: The title of the question bears no relation to the contents. I cannot parse “ m0 cannot be loaned out without exchanging a pre-existing asset?”. Also “ As far as I understand m0 does not increase the money supply” is incorrect. This question needs to be be cleaned up before anyone can answer it.  
> **username_0**: @username_2 “ m0 cannot be loaned out without exchanging a pre-existing asset?” would just mean: 'can m0 be created as a result of a loan' like the title.  
> **username_0**: @username_2 I got that creating m0 does not increase the money supply from https://economics.stackexchange.com/questions/8320/how-and-when-is-m0-money-created  
> **username_2**: I didn’t see anything that says that. M0 is part of *any* money supply aggregate. I changed the question to eliminate problematic text.  
> **username_0**: @username_2 "If a bank asks the Fed to trade their electronic dollars for paper (or vice versa, the Fed will oblige. If the Fed runs short on paper, they will have the treasury print more, but this doesn't expand MB." "Think of paper dollars as ice, electronic dollars as flowing water and MB as all the water in the system (frozen or flowing). Whatever the form, it is not important as the total amount of water remains the same."  

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## 1 answers

### Answer by username_2 on 2020-04-28. Score: 0 | Accepted answer

M0 are notes (e.g. dollar bills in the US) and coins Held by the public. It seems likely that almost all the notes and coins come from the public withdrawing them from banks.

Banks get the notes and coins via exchanging settlement balances at the Federal Reserve (“reserves”) for them, which are put in vaults for distribution.

The only alternative is for the Federal government to directly pay out notes and coins, which is possible, but this does not appear to be common practice.

If we ignore that alternative creation mechanism, we can answer your questions.

Firstly, an increase of M0 is reliant on the public withdrawing notes and coins from a bank. This is only possible if the bank has notes and coins in its vault, so this process is limited. In order to be sustained, the vaults need to be replenished.

* Yes, banks need to exchange reserves for notes and coins.
* A bank could borrow reserves from another bank or at the discount window to get vault cash, but those are two transactions.
* Settlement balances are destroyed when exchanged for notes and couns.


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