Float (money supply)

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In economics, float makes up the smallest part of the money supply. Float occurs when there is a delay in the clearing of payments between banks. It is most obvious in the time delay between when you write a cheque and when the funds to cover that cheque are deducted from your account.

Once the holder of your cheque deposits it in his account, his bank immediately credits (increases) his account, assuming that your bank will ultimately send the funds to cover the cheque. Until your bank actually sends the funds, both you and the holder of the cheque have the "same" money in both of your accounts.

Once his bank notifies your bank (usually by presenting the cheque you wrote and he endorsed), the "duplicate" funds are removed from your account and the cheque is considered to have "cleared" your bank.

Float causes marginal changes in the money supply. Before electronic cheque clearing, bad weather or communication problems often caused float to significantly increase, as the clearing of cheques was delayed. In some cases, the Federal Reserve had to engage in open market operations to counteract the effects of changing float.

Another aspect of float time is its use to defraud, commonly known as cheque kiting. Electronic cheques and particularly the Cheque Clearing for the 21st Century Act in the United States, or Cheque 21 as it is more commonly called, will effectively eliminate this type of fraud.