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August 18, 2017 

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ZERO COUPON BOND: Also termed a zero bond, a bond that does not pay interest, in which the return is generated by the difference between the purchase price and the face value paid at maturity. Because they do not pay interest, zero coupon bonds are sold at a discount. For example, a $10,000 zero coupon bond that matures in one year, would generate a 10% return if it sold at a discount of $9,000.

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VAULT CASH:

Paper bills and metal coins kept in bank vaults or elsewhere in banks (such as teller drawers). Vault cash is used, quite literally, to "cash" checks and otherwise to satisfy currency withdrawal demands of the depositors. Because vault cash is in the possession of banks and not the nonbank public, it is not considered as "money in circulation" and is not part of the official M1 money supply. Vault cash is one of two types of bank assets that are considered reserves and used to satisfy reserve requirements. The other is Federal Reserve deposits.
Vault cash is the money or currency (paper bills and metal coins) in the possession of banks. This vault cash is used as reserves to back up deposits, especially to meet any demands that customers have to withdraw cash from their accounts. Although the common notion is that banks have vaults full of cash, vault cash is generally less than one percent of a bank's total assets and perhaps only one-third of total bank reserves.

A Lot of Paper and a Little Metal

Like currency in circulation, vault cash is comprised of paper bills and metal coins. The same paper bills and metal coins that make up the currency in circulation also make up vault cash. The only difference is that vault cash is not in circulation among the consuming public.

Here is a quick once over of the paper bills and metal coins that make up vault cash.

  • Federal Reserve Notes: These are issued under the authority of the Federal Reserve System. They come in denominations of $1, $5, $10, $20, $50, and $100. A few bills carrying a $2 denomination are encountered from time to time, but they are not as widely used as the others. Denominations larger than $100 ($500, $1,000, $5,000, and $10,000) were also available once upon a time, but they too are seldom seen beyond the collections of numismatics.

  • Treasury Coins: These are issued under the authority of the U.S. Department of the Treasury. They come in denominations of one cent, five cents, ten cents, twenty-five cents, fifty cents, and one dollar. The coins were once made from pure metal (copper, nickel, and silver), with relative sizes reflecting the value of the metal content. However, pure metals gave way to less expensive metal alloys as coins made the transition from commodity money to fiat money.

Out of Circulation

Vault cash is NOT part of the M1 money supply or any of the other monetary aggregates. The reason is quite simple. M1 includes the currency that is in circulation. It is that money that can be used to make purchases or complete exchanges.

Vault cash, in contrast, is part of the economy's stock of currency that is out of circulation and stored by the banking system. Much like retail stores keep inventories of consumer goods awaiting purchase by the public, banks keep inventories of cash awaiting withdrawal by the public.

While vault cash is NOT part of the M1 money supply, it is included in what is termed high-powered money or monetary base. The monetary base includes the currency held by the nonbank public, vault cash held by banks, and Federal Reserve deposits of the banks. These are the three monetary components over which the Federal Reserve System has relatively complete control and is often used as a guide for monetary policy.

The Other Reserve

Vault cash is one of two assets that legally qualify as bank reserves and used to back up deposits. The other is Federal Reserve deposits.

Federal Reserve deposits are deposits that banks keep with the Federal Reserve System to clear checks and assist in other banking activities. The Federal Reserve System provides banks with a range of banking services, including loans and deposits. Banks are not only required to keep deposits as a means of joining the Federal Reserve System, these deposits are used to process checks through the banking system.

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Recommended Citation:

VAULT CASH, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: August 18, 2017].


Check Out These Related Terms...

     | bank reserves | Federal Reserve deposits | legal reserves | required reserves | excess reserves | fractional-reserve banking | full-reserve banking | no-reserve banking |


Or For A Little Background...

     | banks | banking | traditional banks | thrift institutions | money | M1 | monetary economics | government functions | financial markets | liquidity |


And For Further Study...

     | money creation | Federal Reserve System | Federal Deposit Insurance Corporation | Comptroller of the Currency | central bank | monetary policy | bank panic | monetary aggregates | barter | monetary base |


Related Websites (Will Open in New Window)...

     | Federal Reserve System |


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