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“The Economic Way of Thinking”12th Edition
Chapter 14: Money
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Chapter Outline Introduction Cigarettes as Money The Evolution of Money The Myth of Fiat Money The Nature of Money Today So How Much Money is Out There? The Creation of Money What Can Be Created Can Be Destroyed
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Chapter Outline Credibility and Confidence Banks Under Regulation: Legal Reserve Req
uirements The Fed as Monitor and Rule Enforcer The Tools Used by the Fed The Discount Rate Open Market Operations But Who is Really in Charge? Appendix: What About Gold?
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Introduction
R. A. Radford British Economist WWII – POW (prisoner of war) Prisoners created an economy Cigarettes – Principal money or medium of excha
nge
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Cigarettes as Money
WWII POW’s created a monetary system Why replace barter with money? Why use cigarettes as money?
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Cigarettes as Money
Cigarettes were: Generally accepted Homogeneous （同质的） and durable Divisible into small units Red Cross maintained a supply Smokers create value
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Cigarettes as Money
Disadvantages of cigarettes May not remain homogeneous
Hand rolled （手工卷烟） vs. machine rolled （机器卷烟）
Removal of tobacco from machine rolled to make hand rolled
A heterogeneous （混杂的，异质的） money supply Creates uncertainty Reduces trading
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Cigarettes as Money
Gresham’s Law （格雷欣法则） Bad Money drives Good Money out of circulation
2 units of money have same nominal value If in reality one is more valuable
One with lower value will circulate One with higher value will be hoarded （窖藏，储藏）
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The Evolution of Money
Money evolved to facilitate trade.
Precious metals （贵金属） were the first accepted medium of exchange. But it is not easy to determine the true weight and
fineness of the metal
Coin （硬币） evolved to establish a standard measure.
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The Evolution of Money
The coins had greater value than the metal because it reduced transaction cost.
The person minting （铸造） the coin kept some of the metal as profit for minting – seignorage（铸币税） .
Why put ridges （轧边） on the edge of minted coins?
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The Evolution of Money
Goldsmiths （金匠） – the first bankers.
The goldsmiths issued receipts （收据） for metals deposited with them.
The receipts were traded for goods. The first paper money （纸币） .
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The Evolution of Money
Later, commercial bankers arose and began accepting deposits of coined money They could lend out at interest some fraction of th
e money deposited with them because only a few of the owners of these deposits would ever come in at one time to withdraw their money
Moreover, why lend borrows the actual gold or silver coins? Receipts would serve just as well and perhaps even better.―The orgin of most bank notes （钞票）
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The Evolution of Money
Which kinds of money do we have today? Bank notes, such as US dollar, RMB…..
Also Special kinds of bank notes―fiat money （法定货币） they tend to be issued exclusively by government-mana
ged banks they do not promise to pay the holder anything
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The Myth of Fiat Money Fiat
Latin for “let it be” （让它是） or “let it become” （让它变成）
Many people complain Our paper money isn’t real money This is an abuse of governmental authority The government can enrich itself by printing mone
y to finance its extravagances in disregard of the fact that the more paper money it prints, the lower the value of the money held by its citizens
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The Myth of Fiat Money
The above argument are partially correct
It neglect a fundamental fact about money What makes anything money is that it is in fact ac
cepted and used by people as a medium of exchange
Examples 麦当劳汉堡券 你朋友的签名
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The Nature of Money Today
What do we use today as our medium of exchange? Currency （现金） Checkable deposits （支票存款） or demand dep
osits （活期存款）
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The Nature of Money Today
Currency and checkable deposits share two characteristics Accepted as a medium of exchange Liabilities of the issuing institutions ， trusted instit
utions （有信誉的机构）
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The Nature of Money Today
It is difficult to control the quantity of money in a society Amount of money in an economic system can be
expanded by any institution that can persuade people to hold and circulate its liabilities
Private as well as public institutions that are able to do this have the ability to creat money
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So How Much Money is Out There? The People’s Bank of China （ PBC ，中国
人民银行）
货币供应量是中央银行重要的货币政策操作目标
几个层次的货币供应量
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So How Much Money is Out There? M0
流通中的现金，即中国人民银行历年货币发行总额
M1 （狭义的货币 ） 流通中的现金 + 企业的活期存款 + 机关团体存款 + 农村集体存款 M1的流动性极强 , 是国家中央银行重点调控对象；例如，银行出借会增加M1
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So How Much Money is Out There? M2 （广义的货币 ）
M1 + 居民储蓄存款 + 企业定期存款 + 其他存款 ( 财政存款除外 )
M3 （更广义的货币 ） M2 + 债券、财政存款 + 其他金融机构存款 + 货币银行同业存款
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So How Much Money is Out There? The Fed Reserve （美联储） M1
Sum of currency in circulation + Demand deposits （活期存款） + Other checkable deposits + Traveler’s checks （旅行支票）
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So How Much Money is Out There? M2
M1 + Non-checkable deposits （定期存款） (<$100,00
0) + Retail money market mutual funds （货币市场共
同基金） Funds allowing initial investments <$50,000
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So How Much Money is Out There? M3 = M2 +
Non-checkable deposits >$100,000 + Mutual funds requiring >$50,000
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So How Much Money is Out There? Changes in M1 and M2 result from
Public preferences on how to hold Money Money-like assets
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So How Much Money is Out There? People at the Central Bank （中央银行） cal
culate the 3M’s Attempt to determine implications for the future
各国货币政策（所声称）的目的包括 保持本国货币币值稳定 保持物价稳定 保证经济可持续增长
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The Creation of Money
Scenario: You borrow $500 from your bank. The $500 is deposited into your account （账户） . You now have $500 in money.
Since your money went up by $500, the money supply has increased by $500.
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The Creation of Money Where did the money ($500) come from?
The bank created it. You write a check for a $500 computer and the st
ore accepts it as a medium of exchange. The store deposits the check in its checking acco
unt. The store’s bank will clear the check through the F
ederal Reserve’s check clearing system. Your account balance （账户余额） will be reduc
ed by $500 when the check clears.
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The Creation of Money
Questions Does the total quantity of money change when
your account balance is reduced by the $500?
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The Creation of Money
Questions
Why was the bank willing to creat $500 for you? Because you gave the bank your own IOU, a credible pr
omise to pay the bank $500 plus interest at some specified future date
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The Creation of Money Questions
Why was the bank able to create $500? Because people are willing to accept its demand deposit
s liabilities and use them as a medium of exchange
Wouldn’t the quantity of money in circulation expand and expand until it no longer had any value at all?
If the banks have such a good thing going, why should they ever stop?
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What Can Be Created Can Be Destroyed Question
What would be the impact of paying back the $500 loan?
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What Can Be Created Can Be Destroyed Scenario:
You write a check to the bank for $575 (principal and interest)
Your account balance falls by $575 The money supply falls by $575
Remember: Currency counts as money when and only when it
is held outside the banking system
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What Can Be Created Can Be Destroyed What happened to the $500?
The liability (demand deposit) and asset (loan) are removed from the bank’s books
The bank’s account increases by $75
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What Can Be Created Can Be Destroyed Money is created when banks make loans, a
nd it’s destroyed when customers repay bank loans
The total quantity of money in circulation is going to increase during any period when banks are making new loans at a faster rate than old bank loans are being repaid
The quantity of money will decrease whenever old bank loans are being repaid faster than new ones are being made
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Credibility and Confidence （信誉和信心） If not regulated, the only limit on a bank creati
ng money is The ability to maintain its credibility.
A bank can creat money by creating liabilities only so long as People have confidence in those liabilities, i.e. the
y believe the bank will be willing and able to pay its debts when asked to do so
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Credibility and Confidence
“Bank run” （银行挤兑）
Private banks （私人银行） want to earn interest by creating money to lend
They must maintain a balance between Desire for additional income The need to retain the confidence of their deposito
rs
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Banks Under Regulation: Legal Reserve Requirements （法定存款准备金） Banks are not allowed
To have deposit liabilities in excess of some multiple of reserves （储备，存款准备金）
Called a required reserve ratio（存款准备金率 ） 目前中国几家主要银行的存款准备金率为 15.5% In US, typically averages <10%
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Banks Under Regulation:Legal Reserve Requirements Reserves earn no interest
Excess reserve （超额储备） 指商业银行及存款性金融机构在中央银行存款帐户
上的实际准备金超过法定准备金的部分 Used by banks to seek profitable investments
Typically in the form of loans i.e. borrow at a low rate of interest and lend at a higher r
ate of interest
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Banks Under Regulation:Legal Reserve Requirements
Increasing the required reserve ratio for a bank will mean: Lower excess reserves Reduction in ability to make loans Higher costs Reduction in potential profitability
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The Fed as Monitor and Rule Enforcer Federal Reserve – central bank in US
Created in 1913 Government agency 12 district banks Restrains lending activities of commercial banks Controls the process of money creation
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The Fed as Monitor and Rule Enforcer FDIC (Federal Deposit Insurance Corporation,
联邦存款保险公司 ,1933) Bank deposits insured by US government Ended “bank runs” With fewer “runs” – fewer bank failures
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The Fed as Monitor and Rule Enforcer The Fed will loan additional reserves
Entire system is more flexible And more resistance to crises and temporary
dislocations
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Tools Used by the Fed
Authority to establish legal reserve requirements The Fed rarel changes the required reserve ratio
Altering the discount rate （贴现率） The Fed alters the discount rate only infrequently
Open market operations （公开市场操作） The most common technique
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The Discount Rate The interest rate the Fed charges banks for s
hort term loans.
Decrease or increase in discount rate Increase or decrease the overall reserves of the b
anking system, and therefore Increase or decrease nation’s money supply
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Open Market Operations Open Market Operations – most common tec
hnique used by the Fed. Fed buys US government bonds
Banks get additional reserves M1 increases Interest rates fall
Fed sells US government bonds. Banks’ reserves reduced M1 decreases Interest rates rise
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Who Is Really in Charge?
The Federal Open Market Committee (FOMC) 12 members
7 of the board of governors （理事会） President of the NY Fed Presidents of 5 of the remaining 11 Fed banks chosen o
n a rotating basis
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Who Is Really in Charge?
Main Questions Does the FOMC set the appropriate goals? Does the FOMC achieve its goals?
The management of the monetary system is a difficult and delicate task Fundamental importance But carry some weighty unintended consequence
s
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Appendix: What About Gold?
Questions What provides backing （后盾） for money? Doesn’t money have to have some kind of backin
g? Where does gold （黄金） fit into the picture?
The conviction that money must have “backing” if it is to have value raises an interesting but misleading question
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Appendix: What About Gold?
The value of money determined by The demand A limited supply Confidence that the supply will remain limited
Gold Standard （金本位） Currency exchanged for gold at fixed ratio Limited gold supply restricts increase in money su
pply
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Appendix: What About Gold?
Similarity Nature makes gold relatively rare The Fed keeps Federal Reserve notes and check
able deposits relatively rare
Many people have far more confidence in the reliability of nature than in the reliability of central banks and governments They like to see us return to a genuine gold stand
ard
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Appendix: What About Gold? Governments always face the temptation
to creat additonal money as a way of financing expenditures
without the painful necessity of openly levying taxes
They haven’t always resisted the temptation
The consequence inflation A more concealed but hardly a more equitable way
for the government to finance its expenditures
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Once Over Lightly
Money as a social institution. An item is money if exchangeable. Financial institutions liabilities and money
supply. M1 – M2 – M3 Commercial banks / reserve requirements.
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Once Over Lightly
Fed reserve requirements, discount rate and open market operations.
Money must be acceptable as an exchange and have limited availability.
