Let's look at some other aspects of the role that You and Your Bank play in the monetary system. We have covered what actions by banks, together with bank customers, cause the money supply to expand. Now let's see what actions contract the quantity of money.

To set the stage, let's assume that you inherit $500,000 from an unknown relative. Conveniently it comes in the form of cash (or bank credit more accurately.) This first step will demonstrate how banks transfer money from one bank to another through the Fed.

Funds Transfer Through the Fed

The Federal Reserve plays a big role in the transfer of funds from one bank to another.

Monetary Contraction

Another transaction with You and Your Bank that reduces the quantity of money.