I. Functions of Money  1 video
II. The Supply and Demand for Money
III. United States Private Banking System 1
 IV. Federal Reserve System Organization 1
V. Functions and History of the FED 2
VI Fractional Reserve System

VII. The Monetary Multiplier  6/4/20
VIII. Recent Developments 1 video
 IX. Money Creation
X. Twentieth Century Banking History
XI. Visual Learning Stuff
See A Concise History of US Banking

Lecture Notes

I. Functions of Money
    A. Medium of exchange: facilitate exchange eliminating
         barter which requires people with mutually needs.
   B. Standard of value: allows for the pricing of
        heterogeneous goods.
   C. Store of value: maintains value and provides liquidity
        so extra spending power is available as needed.
        Maintaining money's value requires
        1. Sound fiscal policy is not paying federal debt with inflation.
        2. A sound monetary policy (not paying federal debt)
        3. A Brief History of U S dollar Debasement?
  D. Standard of deferred payment: makes credit contracts
       possible so credit transactions are possible.
  E. Trade necessitated the development of modern money.
       The Ducat was created in 1140 to replace barter. Video 7 min.
  F. All of the World’s Money and Markets in One Visualization

Review Functions of Monet are a Medium of Exchange, Standard of Value, Store of Value

 

II. Supply and Demand for Money
      A. Three categories of the supply of money
           1. M1 = Currency, coins, and demand deposits. 
           2. M2 = M1 plus near monies such as small time deposits
               (savings accounts) and short-term government securities
           3. M3 = M2 plus large time deposits (over $100,000)
     B. What backs the dollar?
           1. In 1971 President Nixon took the U.S. off a partial
               gold standard. See The Gold Reserve Act 
           2. It is a debt of the federal government.
           3. Faith in the government's ability to maintain value.
           4. Value is determined by acceptability -it's legal tender).
           5. Commodity money, such as tobacco used as money
               in the Virginia colony, has intrinsic value of its own.
           6. It's fiat (by decree of the government) money.
     C. Fiat money's first appearance in the U.S. when
          Congress issued Continental currency with no gold backing
          1. Gresham's Law (bad money chases good) caused it to
              disappear during periods of high inflation.
          2. Problem when war is financed by printing
          3. Latest US example was Vietnam War
          4. State issued their own money.
          5. Ben Franklin on Paper Money Economy
          6. Greenbacks (green Treasury demand notes) were
              issued as legal tender during the Civil War.
              a. An return to Gold Standard requiring the government
                  owns enough gold to back U.S. currency.
              b. Printing money was used to finance much of the War
              c. Returning to gold slowed government spending
                  financed by debt.
              d. In 1971 as high inflation caused a run on gold.
                  Rather than raise taxes to pay for spending,
                  the U.S. left the Gold Standard.             
              e. Token money, coins, have little intrinsic value.
          7. Types of money has more information
          8. Does Gresham's Law applies to people as bad
              economic times causes people to leave an area
              making those remaining, on average, less able
              to compete.

  D. The Demand for Money
      1. Transaction D, Dt, result s because people hold money,
            often in a money market account, to use as a medium
           of exchange.
       2. Asset Demand, Da , results because people accumulate
           money, often held in an investment account, to buy assets.
       3. The demand for money Dm= D t + Da
       4. Interest rates are set in the money market.
       5. For more information visit Demand for money


 

 

Review Types of money are M1 cash
DD are only backed by faith
M2 are Near moneys
 like savings accounts and treasury bonds
B3 M2 plus time deposits $100,000

 

Political 
 Economy

 

 

 

 

 

 

 

 

 

 

 

 

 

Gresham's Law
Applies to People.
 Economic stagnations related to
 1) 160,000 Italians moved abroad in 2018
2) many people to move out of the south after the civil war
 3)  people are now moving into urban centers
 for employment reasons.

1923 Germany Hyperinflation in
the Weimar Republic
  A 50,000,000 (50 million)
mark banknote

 

Continental Currency

 

 

Image result for Ben Franklin quotes on Paper money cartoon

 
III. US Private Banking System
    A. Three kinds of banks
           1. Commercial banks offer demand deposits (checking accounts)

           2. Savings and loan associations used to specialize in time deposits
               (saving accounts) and home mortgages. Now, because of
               deregulation during the early 1980's, they are similar to

               commercial banks. 
          3. Shadow banks 2 min video

    B. Federal deregulation contributed to banking difficulties in the 1980's.

    C. Visit  brief history provided by the Federal Reserve Bank for
         a time line of the U.S. banking System. Be sure to point at each date
         to see what happens during that period.

    D. A Concise History of US Banking from Quick Notes

IV. Organization of the FED

    A . Board of Governors oversee the Federal Reserve System
         1. Seven governors
         2. Governors are appointed by the President and confirmed by the Senate.
         3. The chair is appointed by the President for a four-year term.
             a) To foster independence, term does not coincide with President's term. 
             b) Other board members are appointed to 14-year terms on a staggered
                  basis to insure an experienced board.
             c) Understand Political Economy using the FED and financial market videos
                     1) The Man Who Knew: The Life and Times of Alan Greenspan 45
                     2) More Money Than God: Hedge Funds and the Making of a New Elite 58
                     3) Niall Ferguson: Financial Crises, Populist Backlashes, Lessons of History 82
            d) Who Owns the FED
            e) Is political-influence appropriate

Districts

 



    B. Federal Open Market Committee
        1. Membership consists of the Board of Governors and 5 of the
            12 Federal Reserve bank presidents with the N.Y. president
             always a member because N.Y. City is the financial center
             for U.S. international trade.
        2. The Committee tries to affect interest rates by affecting the
             supply of money by buying and selling U.S. government bonds
            (See Chapter 15).

    C. Federal Advisory Council 12 prominent commercial bankers,
         one from each district, who advise the Board of Governors

    D. Twelve Federal Reserve Banks
         1. The United States is divided into 12 homogenous districts
             and each has its own bank
         2. Bank for the federal government
         3. Bank for member banks
         4. Graphic is complements of the Board of Governors of the
              Federal Reserve System.

    E. Member commercial banks

    F. Nonmember commercial banks and thrifts are regulated
         by other government agencies.

    G. Century of Enslavement: The History of The Federal Reserve

Unit IV. Summary  FED is a somewhat private-sector entities
established by the authority of the United States Congress.

 

  V. Functions and History of the FED
        A.  Functions
             1. Regulate the money supply
             2. Check collection and clearing
             3. Fiscal agent for the government
             4. Supervise  and audit member banks 
             5. Hold reserves (deposits) for member banks
             6. Compile economic statistics such as the
                 Latest Beige Book quarterly summary of
                 each districts' recent economic activity.
      7. Readings
                a. Full Employment Mandate of the Federal Reserve
                b. Federal Reserve System Purposes and Functions
                c. Lender of last resort
            8. Sundry
                 a. Should FED manage Asset Price
                 b. Why Are Banks Regulated?      
                 c. Did Dodd-Frank Act Make Financial System Safer?
                 d. Blind Spots in Shadow Banking 3/24/17

The Federal Reserve System 
   Organization Chart

     

  Expanded Operations Chart

 

 

 

 

 

 

Federal Open Market Committee meeting at the Federal Reserve in Washington, DC
     B. FED Powell's Annotated Press Conference 4/29/20

     C. The Fed's Coronavirus Response in Historical Perspective

     D. History
            1. The Bank that Hamilton Built
            2. ANDREW JACKSON took on the eastern bankers, vetoed the charter extension
                of the Second Bank of the United States because he felt it had excessive
                power over farmers.
            3. THEODORE ROOSEVELT took on the corporate monopoly Trusts that controlled
                 railroad rates and routes and thus destroyed small towns and farms. 
                a. Panic of 1907
                b. T.R. vs. J.P
            4. Nixon Shock inflationary pressure and French President De Gaulle force US
                the to stops convertibility of dollars to gold and a new mandate adds low
                unemployment to the job.
            5. Cooperation, conflict and the emergence of the FED
            6. Greenspan's Latest Bio
                a. The Man Who New Video
                b. Book review from Brookings is a good summary
            7. Other Histories
                a. Enslavement: The History of The Federal Reserve video
                b. A Century of U.S. Banking: Fall 2013 Ben Bernanke
                c. How the Federal-reserve-was-created-100-years-ago
                d. Philadelphia Reflections: Whither, Federal Reserve?
                    is a well done, concise history of banking in the
                e. President at War With His FED Over 5 Decades

Unit V. Review Functions
include regulate money supply, check processing,
federal fiscal agent, supervise audit financial system,
 hold reserves, compile the Beige Book 1.

VI. Fractional Reserve System/Creation of Money
      A. Commercial banks are required to keep a reserve (cash)
           of about 12% of their demand deposits (checking
           accounts) at their bank or on deposit with the Federal
           Reserve (required reserves). The remainder, (Excess
           Reserves) may be loaned out even though they support
           deposits.
      B. Money is created by these loans as long as the demand
          deposits (DD) created by them stay within the banking
          system, that is, the money loaned is redeposit as a DD
          into a bank within the system. The banks owe the demand
          deposits created by the loans to each other. These inter-
          brain debts  are canceled with a bookkeeping entry.
          It should be pointed out that the demand deposits created
          by such loans are spent, and goods transferred, just as
          if the transaction involved  currency.
     C. Example: Bank A has $50,000 in demand deposits.
          A reserve requirement of 10% would yield required
          reserves of .10 x $50,000 = $5,000. If Bank A had
          $7,000 in reserve, it could loan up to $2,000 in the
           form of demand deposits. Suppose Bank B does
           exactly the same with both banks' customers
           depositing their DD in the other bank. Banks would
           owe cashed checks to each other, would cancel
           interbank debts, and money  has been created.
      D. The system works in reverse with money destroyed
           if reserves leave the system.
      E. Required reserves, reserves not loaned, and
           loans of cash (reserves) represent a leakage
           which eventually stops money supply growth.
      F. Readings and Video
           1. Today’s Source of Money Creation
           2. The Truth is Out: Money is Just an IOU and 
               the Banks are Rolling In It
           3. Money Creation in the Modern Economy
           4. Money Creation Video 13.03 minutes is well done


Unit VI. Review Banks allowed to hold less in reserves than demand deposits creating money for borrowers.

VII. The Monetary Multiplier
       A. An infusion of reserves into the system by the Treasury as
            directed by the Federal Reserve can be loaned a number
            of times by the commercial banking system. For example,
            the Federal Reserve may buy a $100 Treasury bond from
            Ms. A who deposits the Federal Reserve check
           (reserves) into Bank A. 
       B. Bank A's new DD of $100 requires them to keep $10 (10%)
            in reserve leaving $90 excess to loan to Mr. B who deposits
            it in Bank B.
       C. Bank B needs to keep only $9 ($90 x .1) in reserve and may
             loan out $81. 
       D. This process continues and as long as the demand deposits
            being created by the loans stay within the commercial 
            banking system, interbank debts are canceled and money
            has been created
       E. Monetary multiplier (M) sets the upper limit of the expansion
           1. R = reserve requirement = 10% = .1
           2. M = 1/R = 1/.1 = 10
       F. In the above example the total amount of DD created
           beginning with Bank A's $90 in excess reserves would equal 
           Excess Reserves x M = $90 x 10 = $900. If the $100 infusion
           by the Federal Reserve is included, the increase is 10 x 100
           = $1,000.
      G. Video 2.43 minute Practice Problems Video 3.02
      H. Visit The Banking System and the Money Multiplier from
            Jay Kaplan of the University of Colorado at Boulder for
            more information.

      Unit VII. Review Monetary multiplayer measures the
      amount actual increase in loan created demand
      deposits in relation to the FED created excess reserve.

 

History Readings

1. How we learned to stop worrying and embrace the abstraction

2. 300 Years-of-financial-crises-1620-1920

3. Gold Timeline

4. The continental currency crisis of 1779 and today's European debt crisis  4/11/14

5. Central bank crisis management during wall street's first crash in 1792  5//14

6. The Slump that Shaped Modern Finance 4/14

7. Infographic History of U.S. Money

8. History of the Gold Standard

9. History of Money

10. A Brief History of U S Banking Problems and

11. The Essence of Money, a Medieval Tale (7:36)

 

Stay Current With

Global Economic Intersection Newsletter
Latest Beige Book

Economy Continues to Grow Modestly

Yellen Says the Economy is Growing Moderately

 

 Source and prediction of coming inflation A. Laffer, 6/11/14

VIII. Recent Developments
    A. 1990's Liberalization
            1. Financial Institutions Reform, Recovery and Enforcement Act of 1989, 
                liberalized banking laws, caused a declined in their importance
                although reforms resulting from the Great Recession of 2008
                cold change this.

            2. Consolidation has caused their numbers to decline and their
               size to increase.

            3. Many bank/thrift services are now performed by insurance
                companies, pension, and securities companies.

            4. Rise of the Shadow-Banking System
            5. Long Term Capital Management collapsed in the late 1990s
    B.  Politicizing the FED
            1. Some politicians think the Federal Reserve system is too
                independent.   

            2. Congress Is Politicizing the Fed Jan 25, 2010

            3. Central bank independence versus inflation
                 This often cited research published by Alesina and Summers (1993)
                 is used to show why it is important for a nation's central bank (i.e.-
                 monetary authority) to have a high level of independence. This
                 chart shows a clear trend towards a lower inflation rate as the
                 independence of the central bank increases. The generally agreed
                 upon reason independence leads to lower inflation is that politicians
                 have a tendency to create too much money if given the opportunity
                 to do it. The Federal Reserve System in the United States is generally
                 regarded as one of the more independent central banks.
             4. Presidential Elections of 1828 and 1832 were about the need for a
                 strong central bank
            5. Former FED Chairman Ben Bernanke defined the FED economic roll
                 as follows
                 a. Inflation targeting i.e. macro stabilization
                 b. Financial Oversight
                 c. Unlimited crisis intervention See Lombard Street for origin
                     1. Macro prudential regulation used by FED to regulates and
                         controls the financial system (investment banks) as FED
                         does  banking system
                     2. Lombard Street: A Description of the Money Market,
                         Project Gutenberg
                     3. Text at Library of Economics and Liberty

             6. Money, Banking and the Federal Reserve 43 min conservative video

             7. Central Bank Independence: Growing Threats 1/2/17
        C. The Money Project has many informative visuals
        D. Banking Left To The States and Crypto-currency Boom

  

monetary-base-laffer-wsj-2009

 Source and prediction of coming inflation A. Laffer, 6/11/14

 

Helicopter Money

IX. Additional reading
   A. Money Creation
           1. Money creation
           2. Recollections of Pine Gulch reviews money.
           3. Banks Create Money
            4. The (2nd) Deleveraging: What Economists Need to Know of Money Creation
      B. Keynes' Liquidity Preference Trumps Debt Deflation in 1931
      C. More History           
          1. A Brief History of U S Banking Problems
          2. U.S. Central Banking History  
          3. Dirk Bezemer-the post bubble economy
              is a four part video explaining credit evolution. 
          4. A-page summer read  for historical context in understanding the history
                of monetary policy: the famous Wizard of Oz, an economic allegory/satire
                on who will create US money: federal government as "money" or a central
                bank as "debt." This issue was the foundation for the "Greenback Party,"
                and Willings Bryan's three presidential campaigns (and "Cross of Gold" speech) 
                or a film version of this allegory, The Secret of Oz  can be viewed online
       (winner of two 2010 international Best Documentary awards).
           5. The Nixon Shock from Business Week 8/14/11 How Nixon stopped backing
                the dollar with gold and changed global finance,
                a 40-year-old decision that still echoes in Greece, Ireland, and the U.S.
        6. Buttonwood, Forty years on from 8/11 of Economist Magazine
          7. Mississippi-bubble of 1720 and the-European Debt Crisis
          8. a. A time of controversy  William Jennings Bryan Cross of Gold Speech July 8, 1896
          b. Grover Cleveland, Message on the repeal of the Sherman Silver Purchase Act 8/8/1893
     D. 21st Century Monetary Policy
       1. Modern Monetary Theory  2/19/19
       2. “Minsky moment” and “We’re all Minskites now”.  

Source The Economist   4/5/14

Editor's Note: How much of recent price stability  is the FED and How much is world-wide competition.?

 

Image result for hELICOPTER mONEY


 

 

Other Macro Chapters

 8) Measuring Total Economic Activity 

 9) The Business Cycle

10) Macro Equilibrium
 
 11) Competing Macro Theories and Issues

12 Keynesian Economics: Expanded View

 14) Fiscal Policy

 15) Monetary Policy
  
16) Stagflation & Rise of Supply-Side Economics

 17) Budget Deficits

 18) Economic Growth  
X. Twentieth Century U.S. Political Economy is About Money
Source A Concise History of U.S. Banking

Leading monetary economists of the 20th century
Milton Friedman and Anna Schwartz
authored the classic
A Monetary History of the United States


 

The 19th Century ended with Monarchs in control and liberal economic thought expanding.
1900-09 A sever recession brings the need government take-over of central banking.
1910-19 FED becomes the Lender of Last Resort, few labor gains and war.
1920-29 Recession then economy and Wall Street dominates with loans to war-torn to nations.
1930-39 Great Depression dominates, Keynes Wins, communism affects Western economies.
1940-49 U.S. dominates world after WWII and Marshal Plan hopes to defeated communism.
1950-59 U.S. vs. with communists, labor power, and segregationists don't slow economy.
1960-69 OPEC oil slows manufacturing and Vietnam enrages many.
1970-79 Nixon starts inflation, closes gold door, opens China, and lies.
1980-89 FED recession solve inflation, RR cuts taxes and regulation.
1990-99 Tax increase hurts Bush, free trade and capital markets expands.
2000-09 Two tax cuts, three wars and one health care acts expand government
2010-04 Government expands to end Great Recession and expand health care.

Interesting Studies   

Can We Afford Entitlements    

Can We Afford Large Deficits

   Editor's Note:
     One has to wonder why
      Warren Buffet Predicted the 2007-8 Financial Crisis
     in 2002 three years before Greenspan's 2005 retirement.

 

Last Chapter 
Chapter 13 Class Discussion Questions
Chapter 13 Homework Questions
Next Chapter
Table of Contents
Economics Internet Library
 

 

Facts On The Early History Of The US Dollar

 

 

 

 

 

 XI. Visual Learning Stuff.

buddy-loans-what-is-money-smaller

source econintersect.com/

Some Central Banks Are Easing to
Create Growth, Some Are Not  

 

from http://www.ritholtz.com/blog/2013/04/mid-week-pm-reads-15/

 

inflation-us-1792-2012-erb-harvey-golden-dilemma

Source econintersect.com 2014/09/28/

 

  

 

 

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