MONEY NEED FOR MONEY

Avoid “double coincidence of wants”

FUNCTIONS OF MONEY Medium of Exchange Unit of Account Store of Value

More About Money Characteristics of “Good” Money

Controlled Durable Divisible Portable

Examples Playing cards Shells Cigarettes

MONEY SUPPLY TYPES OF MONEY

Coins Currency Demand Deposits (checkbook money) “Near” Money But NOT Credit Cards

FIAT VS. COMMODITY MONEY

A Short History Of Money in the U.S. Pre Revolutionary War—Foreign Revolutionary War—fiat money Revolution to Civil War

Gold coins Bank money—currency and demand deposits

1862-1879—gold, bank notes, greenbacks 1879-1933—gold standard Since 1933—fiat money GRESHAM’S LAW—bad money drives out

good money

11-5

Measures of MoneyComponents of M1Components of M2

Savings deposits (50%)

Checking accounts (49%)Small-denomination

time deposits (17%)

Currency (51%)

M1 (28%)

Money market mutual funds (13%)

Traveler’s checks (<1%)

M1 (20%)

FINANCIAL INTERMEDIARIES A Financial Transaction Mirrors Every Real Transaction

Financial Intermediaries Bring Borrowers and Lenders Together

Financial Intermediaries

Financial Sector

LoansSaving

Gov’t

House-holds

Corpor-ations

Pension fundsCDsSavings

depositsCheckable

depositsStocksBondsGovernment

SecuritiesLife insurance

Large business loans

Small business loans

Venture capital loans

Construction loans

Investment loans

Gov’t

House-holds

Corpor-ations

BANKING Fractional Reserve Banking

A Short History of Banking Bank profits & interest rates Bank reserves

Money not lent out Fractional reserve banking & consumer

confidence Bank runs

Sources and Uses of Bank Funds Sources of Funds

Demand Deposits Savings and Time Deposits Shareholder Equity Interest Earned

Uses of Funds Operating Expenses (e.g., O&M, salaries) Reserves Interest Paid Purchase of Earning Assets (e.g., loans) Payments to shareholders (e.g., dividends)

Good Banking Practices Conservative Diversification Primarily local Adequate liquidity Regulatory Oversight

FEDERAL RESERVE SYSTEM A bank for banks Organization

12 districts Board of Governors Chair: Ben Bernanke

Independence of FED Self-supporting Long terms—14 years

FEDERAL RESERVE SYSTEM (cont.) Functions

Currency to banks Clearing house for checks Specify reserve requirements Supervise banks Make loans to banks Regulate money supply

Change interest rates Alter overall economic performance

FEDERAL DEPOSIT INSURANCE CORPORATION

$250,000 per account

Banks contribute to fund the FDIC