Chapter 13 Money, Banking and the Creation of Money   9/4/16

I. Functions of Money Medium of Exchange, Standard of Value, Store of Value
II. The Supply and Demand for Money 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
III. United States 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 Federal Reserve System which is a somewhat private-sector entities established by the authority of the United States Congress.
V. Functions and History of the FED regulate money supply, check processing, federal fiscal agent, supervise and audit financial system, hold reserves, compile Beige Book
VI Fractional Reserve System allows banks to hold less in reserves than the demand deposits given to borrows.
VII. The Monetary Multiplier, controlled by the FED, measures the amount by which partial reserve requirements of banks allows then to loan as demand deposits more than their deposits.
VIII. Recent Developments 1990's deregulation and politicizing the FED

IX. Additional Reading money creation and sundry history
X. Twentieth Century U.S. Political Economy is about money is a decade by decade look at U.S. Political Economy
 XI. Visual Learning Stuff from the Internet.

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 (a reasonable federal debt)
         2. A sound monetary policy (not using inflation to pay the 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.

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
 

II. The Supply and Demand for Money
      A. Three categories of the supply of money
     
     1. M1 = Currency, coins, and demand deposits (checking accounts). 
           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

Continental Currency

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


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 Economist 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.

 

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

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

IV. The Federal Reserve System 
   A. Organization Chart

 

 

 

 

 

 

 

       B. Operations Chart

 

 

 

 

C. 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 2010
Beige Book, which is
                
a quarterly summary of each districts' recent economic activity.
             7. Many Federal Reserve publications are free
             8 Sundry
                a . Lender of last resort
                b. The Federal Reserve System Purposes and Functions
                c. Should FED manage Asset Price Inflation
         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. 
             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. 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 United States.

Global Economic Intersection Newsletter
December 2015 Beige Book
Economy Continues to Grow Modestly
Yellen Says the Economy is Growing Moderately

 

Figure of 'Federal Reserve Distributions to the U.S. Treasury, 2004-2013'. Bar chart. Federal Reserve distributions to the Treasury displayed annually: 2004, $18.1 billion; 2005, $21.5 billion; 2006, $29.1 billion; 2007, $34.6 billion; 2008, $31.7 billion; 2009, $47.4 billion; 2010, $79.3 billion; 2011, $75.4 billion; 2012, $88.4 billion; 2013, $77.7 billion.

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

  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

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.
 

   

 

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
  [49] research published by Alesina and Summers (1993)[50]
                 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 historical creation
                     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 from Project Gutenberg
                     3. Text at Library of Economics and Liberty   

IX. Additional reading
       A. Money Creation
           1. Money creation
from Wiki
           2.
Recollections of Pine Gulch
reviews money.
           3.
Banks Create Money
           4. The (2nd) Deleveraging: What Economists Need to Know of Money Creation
        B. More History 
     
       1. A Brief History of U S Banking Problems 
               and
Dirk-bezemer-the-post-bubble-economy is a four part video explaining
               credit evolution. 7/6/13
            2. 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).
  
        3. 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.
           
  4. Buttonwood, Forty years on from 8/11 of Economist Magazine
   
        5. Mississippi-bubble of 1720 and the-European Debt Crisis
  

X. Twentieth Century U.S. Political Economy is about money
Concise
Interaction of Politics and Economics
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.
               Editor's Note: One has to wonder why
Warren Buffet called the Great Recession
               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
 

  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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