Chapter 13 Money, Banking and the Creation of Money  
Updated 9/14/17    Please  

I. Functions of Money  1 video
II. The Supply and Demand for Money
III. United States Private Banking System
IV. Organization of The Federal Reserve System

V. Functions and History of the FED  1 video
VI Fractional Reserve System
VII. The Monetary Multiplier
VIII. Recent Developments 1 video

IX. Additional Money Creation and History Reading
X. Twentieth Century Banking History by decade
XI. Visual Learning Stuff

XII. Quick Notes Economic Reviews for those pressed for time.
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. A 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 replaces
        barter Video 7 min.
   
F. Unit 1 Review Functions of Monet are Medium of Exchange,
        Standard of Value, Store of Value

II. The 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. Backed by faith in the government's ability to control inflation.
           4. Value is determined by acceptability (it is legal tender and
               scarce).
          
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.
               a. 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 after the war.
                    2.  State issued their own money.
                    3. Ben Franklin on Paper Money Economy
               b. Greenbacks (demand notes on the Treasury) that were
                   green in color were issued as legal tender during the
                   Civil War.
               c. An intermittent return to
Gold Standard (only gold is money)
                   followed although the U.S. left gold for good in 1971as high
                   inflation caused a run on gold that the U.S. Treasury could
                   not satisfy.             
           7. Today, coins are called token money because they have little
                intrinsic value.
           9. Types of money has more information

Image result for Creating Money Cartoons

Continental Currency

Image result for Ben Franklin quotes on Paper money cartoon

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

 

 

 

 

 

     C. The Demand for Money 
          1. Transaction D, Dt, results 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. more interesting history.
          5. For more information visit
Demand for money


Unit 1 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

D. History

1. Brief History of Money Or, 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)
 

 

 

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.?

III. United States Private Banking System
   
A. Two 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. 
     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.
Private Banking System has Commercial Banks have savings accounts and demand deposits, Savings Banks just savings accounts and The Federal Reserve System

 

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, the term does not coincide with
                  the 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 markets

                     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 on Financial Crises, Populist Backlashes and the Lessons of History 82
    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.

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

Federal Open Market Committee meeting at the Federal Reserve in Washington, DC

The Federal Reserve System 
   
Organization Chart

       Operations Chart

 

 

 

 

Districts

   

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

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

Stay Current With
Global Economic Intersection Newsletter
Latest Beige Book
Economy Continues to Grow Modestly
Yellen Says the Economy is Growing Moderately

Profit isn't usually listed as a function of the FED but $325 from 20010 -13 isn't chicken feed. 1/11/14 Source

   B. 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 control 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 the US to stops the 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. A Century of U.S. Banking: Fall 2013 Ben Bernanke
              b. How the Federal-reserve-was-created-100-years-ago
              c. Philadelphia Reflections: Whither, Federal Reserve?
                  is a well done, concise history of banking in the
              d. President at War With His FED Over 5 Decades

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. The Truth is Out: Money is Just an IOU and
               the Banks are Rolling In It
           2. Money Creation in the Modern Economy
           3. 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.

 

 

 

 

 

 

 

 

 

 

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

monetary-base-laffer-wsj-2009

 

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

 

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.

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

      Unit VIII. Review Fewer controls and anti-trust activities

 

 

 

 

 

 

 

 

 

 

 

Helicopter Money

Image result for 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.
Dirk-bezemer-the-post-bubble-economy is a four part video explaining
             credit evolution. 7/6/13
          3
. A 9-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,"
  
              "Populist Party," "free silver," and William Jennings 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).
         4.
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.
            5. Buttonwood, Forty years on from 8/11 of Economist Magazine
   
         6. Mississippi-bubble of 1720 and the-European Debt Crisis

Other Macro Chapters

8) Measuring Total Economic Activity 

9) The Business Cycle


10) Macro Equilibrium
 
11) Competing Macro Theories and Issues


1
2 Keynesian Economics: Expanded View

14) Fiscal Policy

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

17) Budget Deficits

18) Economic Growth
 
 


Last Chapter  Chapter 13 Class Discussion Qu

X. Twentieth Century U.S. Political Economy is About Money
Source Concise U.S. Economic History

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.

     Class Discussion Questions   Chapter 13 Homework Questions  

     Next Chapter  Table of Contents Economics Internet Library
 

 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/

 

 

 

 

 

 

 

 

 

 

 

 

 

Facts On The Early History Of The US Dollar