Money and Banking - Dr. D. Foster
Money BasicsMoney Basics
& Measuring Money& Measuring Money
Money and Banking - Dr. D. Foster
The functions of moneyThe functions of money
The functions money serves:The functions money serves:– medium of exchange.– unit of account.– store of value.– std. of deferred value.
Need money serve all these functions?To be money, the object must To be money, the object must
serve as a final means of serve as a final means of payment.payment.
Money and Banking - Dr. D. Foster
What isn’t money?What isn’t money?
Wealth is not money …Wealth is not money … Income is not money.Income is not money. A credit card is not money.A credit card is not money.
What about . . .• Stored value cards?Stored value cards?• Electronic money?Electronic money?• ““Local” currencies?Local” currencies?
To be money, the To be money, the object must be object must be redeemable on redeemable on demand at face demand at face
value.value.
Money and Banking - Dr. D. Foster
HistoryHistory
Favorable characteristics– portable, durable, recognizable, scarce, commodity– wheat, shells, precious metals– Yap stone wheels
How do we get to paper?– commodity, representative, fiat– U.S. and the “gold standard.”– Deciding on denominations and coins vs. paper.– Evolution to e-money.
Money and Banking - Dr. D. Foster
The G-manThe G-man
Mint coins to create standards of purity.– Revenue source.
[Seignorage]– Beware of “debasing.”
Bank issued “notes” as money. U.S. government - “greenbacks.” Gold standard - 1879 to 1933/1971. Created Federal Reserve in 1913.
Money and Banking - Dr. D. Foster
The Continental StoryThe Continental Story June, 1775 – 2 million Spanish dollars in bills of credit authorized.
12 colonies pledged to redeem from 1779 to 1782.Total money supply est. at 12 million Spanish dollars.End of 1775 – 6 million Continentals issued.End of 1779 – 242 million issued!! [26C=$1]British added counterfeits.End of 1781, 168C = $1.
“A wagon load of money will scarcely purchase a wagon load of provisions”.
Money and Banking - Dr. D. Foster
MeasurementMeasurement
How? - Liquidity of financial assets.
M1 = [Coins and] currency in circulation (C) + “transactions deposits” (D) + TC
M2 = M1 + SDS +TDS + MMMFIndividual
M3 = M2 + TDL + MMMFInstitutional + Euro$ + RPFed Regulation Fed Regulation
DD
Liquidity – how fast, at full market value, an Liquidity – how fast, at full market value, an asset can be converted into a means of asset can be converted into a means of payment.payment.
Money and Banking - Dr. D. Foster
The Monetary BaseThe Monetary Base
Monetary Base (MB) = C + bank reserves (R)Federal Reserve has perfect control over MB:– Prints currency.– All reserves are currency or deposits at the Fed.
M1/M2 is highly correlated to MB … or, was?or, was?M1 relates to economy [M*V=P*Y].MB plays a role in the government’s budget: G = T + Bonds + MB
Money and Banking - Dr. D. Foster
Monetary Data - CurrencyMonetary Data - Currency
Money and Banking - Dr. D. Foster
Monetary Data – M1Monetary Data – M1
Money and Banking - Dr. D. Foster
Monetary Data – Travelers ChecksMonetary Data – Travelers Checks
Money and Banking - Dr. D. Foster
Monetary Data – Demand Monetary Data – Demand DepositsDeposits
Money and Banking - Dr. D. Foster
Monetary Data – DD and OCDMonetary Data – DD and OCD
Money and Banking - Dr. D. Foster
Monetary Data – OCD (banks & Monetary Data – OCD (banks & tot.)tot.)
Money and Banking - Dr. D. Foster
Monetary Data – DD, OCD, TotalMonetary Data – DD, OCD, Total
Money and Banking - Dr. D. Foster
Monetary Data – M2Monetary Data – M2
Money and Banking - Dr. D. Foster
Monetary Data – MZMMonetary Data – MZM
Money and Banking - Dr. D. Foster
Monetary Data – M2 and MZMMonetary Data – M2 and MZM
Money and Banking - Dr. D. Foster
Monetary Data – Monetary BaseMonetary Data – Monetary Base
Sweep Programs and M1Sweep Programs and M1
Sweep programsSweep programs - the shifting of checking deposits to MMDAs to …– avoid reserve requirements.– provide additional income to customer.
The Fed allowed sweeps beginning in 1994.
Sweep programs have distorted the meaning of the M1 measure of money.
Money and Banking - Dr. D. Foster
Monetary Data – M1 and SweepsMonetary Data – M1 and Sweeps
1.40
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00
.95
Money and Banking - Dr. D. Foster
Rothbard on Money
•Money is different than coal …• What is true if the supply of coal rises?
• What is true if the supply of money rises?
• Is there a right amount of money?• What if the money supply doubled?
• Are there economic interests “agitating” for a decline in the money supply?
• Is it wasteful to mine for gold and silver?• What is the significance of a commodity as money?
Money and Banking - Dr. D. Foster
Rothbard on Money
•What about counterfeiting money?• Harms those with “real” money.
• Hard to do with commodity like gold.
• Easy to do with paper/fiat money.
• And, if the government has a monopoly?
• What has the government done to our money?• We’ve forgotten that the name meant a weight.
• Gov’t force through “legal tender” laws.
• Now, gov’t can finance spending withoutraising taxes or borrowing funds!
Money and Banking - Dr. D. Foster
The end of gold
• The gold standard and wartime.• Suspensions to keep banks afloat & gov’t financing
going.
• Wartime inflation only occurs in paper, not in gold!!
• For U.S. – Revolutionary War, War of 1812, Civil War.
• Gold coins and paper circulated until 1933.• This provided some limit on arbitrary money creation.
• Gold contracts (or, clauses) thwart government.• Specify payment in $ equivalent of some amount of
gold.
• FDR cancels all gold clauses; the case of the Halle Building.
The end of order The end of truth
Need a National Currency?Need a National Currency? DollarizationDollarization - Use another country’s currency as your medium of exchange.$ - Ecuador, El Salvador, Timor, British Virgin Islands, Panama
€ - Vatican City, Monaco, Andorra
Currency boardCurrency board - the national currency is backed by an equal amount of a foreign currency.$ - Hong Kong, Bermuda, East Caribbean $
€ - Bulgaria, Estonia, Lithuania
Currency unionCurrency union - A group of countries adopt a common currency. Euro/West Africa/Caribbean
Money and Banking - Dr. D. Foster
Money BasicsMoney Basics
& Measuring Money& Measuring Money
Yap Stone WheelsYap Stone Wheels
Money and Banking - Dr. D. Foster