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 a cheque being written and the funds to cover that cheque being deducted from the payer's account.

Once the recipient of a cheque (the payee) deposits it in their account, their bank immediately credits (increases) the payee's account, assuming that the payer's bank will ultimately send the funds to cover the cheque. Until the payer's bank actually sends the funds, both the payer and the payee have the "same" money in both of their accounts.

Once the payee's bank notifies the payer's bank (usually by presenting the checks), the "duplicate" funds will be removed from the payer's account and the checks will be considered to have "cleared" the 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 in the United States, 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 Check Clearing for the 21st Century Act in the United States (or Check 21 as it is more commonly called) are designed to target this kind of fraud.