What is Money? This may seem an odd question, but it actually has merit. Each economy or society that has used money (and many did not) has had to define exactly what money is and what the relationship between money and people is.

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Money! Money is what money does. This Gumpian explanation is as valid as any other I have run across. To validate this, we can look at several examples from history: A. cacao beans B. cheese C. gold/silver D. paper E. debt

Functions of Money In order to be money, whatever is serving in that capacity must be able to serve as: 1. a medium of exchange-something that can be used to buy and sell goods and services that is acceptable to all. Without a medium of exchange all trade for goods and services would need to be coordinated by barter and the coincidence of need

Functions of money 2.Money is also a unit of account, a yardstick for measuring the value of the relative worth of a wide variety of goods and services. As well, this function of money allows us to figure GDP, define debt, determine taxes, and figure profits. 3. Money functions as a store of value.

Characteristics of Money Durability Portability Divisibility Relative Scarcity Authenticity

The supply of money So, if we need to use money where does it come from and what does it consist of? Presently money in the US and most industrial nations is the debt of governments and financial institutions. This fact enables the creation and destruction of money to influence economic rhythms as deemed necessary by those in control of it.

MONEY as DEFINED M1: 2,988,000,000,000.00 The narrowest definition of the money supply consisting of currency (coins and paper), all checkable deposits in comercial backs and thrifts/savings orgs upon which checks may be drawn. Currency is the debt of government and checkable deposits are the debt of financial institutions. So all of our money is DEBT

Currency All coins are TOKEN money, that is, the intrinsic value of the coin is less than the face value. All paper money is Federal Reserve Notes issued by the Federal Reserve System and are essentially debt in small doses

Checkable Deposits Checkable deposits are non interest bearing, non contractual deposits (for the most part) in US banks or thrifts that are readily accessible to pay for goods and services whether with check or payment card. They are also largely and quickly convertible into currency and coin.

More Money!!! M2 money supply:$11,820,000,000,000.00 M1 plus a. savings deposits and money market accounts b. small time deposits (those worth less than $100,000 or cds c. Money market mutual funds This definition of money is about twice as large as M1 alone

A note about credit cards While credit cards may act like money and people certainly use them as if they are money, that isn’t the reality. Credits cards are really short term high interest loans However, they do enable us as a society to function with less “money”

What backs the money supply? The US backs its money supply with the assurance that the government has the ability to keep the value of the currency relatively stable. There is no link between the supply of money and any commodity. Money is only exchangeable for more paper money.

So why does it have value at all? Why does US paper money have value and the ones I can print up not have value? A. acceptability B. Legal tender C. Relative scarcity

POLICY Stabilization of money’s value is a requirement for 21st century governments. They can accomplish this with a variety of methods. One method is appropriate FISCAL policy Another is appropriate MONETARY policy

Demand for Money The Demand for Money: Two Components There are two sources of money demand or two reasons why do we want to hold M1 money in our wallets, purses, and in our checking account, instead of putting it in the bank to earn interest. They are the (1) transactions demand and the (2) asset demand. The (3) Total demand for money (keeping money in our wallets and not in our savings account where they can earn interest) then is the transactions demand plus the asset demand. harpercollege.edu/mhealy/eco212i/lectures

Transactions Demand Transactions Demand for Money (Dᴛ) Definition: We keep M1 money in order to buy things It is the demand for money as a medium of exchange Transactions demand and nominal GDP directly related: when GDP increases the transactions demand for money also increases (shifts to the right). the main determinant of transactions demand is nominal GDP Transactions demand and interest rates we'll assume that they are unrelated, so on a graph the transactions demand looks like: harpercollege.edu/mhealy/eco212i/lectures

harpercollege.edu/mhealy/eco212i/lectures

Asset Demand For Moneyharpercollege.edu/mhealy/eco212i/lectures Asset demand (Dₐ) Definition: we keep some money so that we can spend it later the demand for money as a store of value What determines how much money (M1) we keep in our wallets, purses, and checking accounts? The problem with holding money: is that you are not earning interest on it

Continued Asset Demandharpercollege.edu/mhealy/eco212i/lectures Asset demand and interest rates are inversely related. If interest rates are high, people will keep less in their pockets and more in their savings accounts (and in other interest earning assets) if interest rates are low, people will keep more money in their pockets, because they are not losing much and it is more convenient

harpercollege.edu/mhealy/eco212i/lectures

harpercollege.edu/mhealy/eco212i/lecturesTotal Money Demand Total MD = transactions demand + asset demand Graphically: The black vertical Dt is the transactions demand and the black, downward sloping Da is the asset demand. If we add them together we get the blue total demand for money.

harpercollege.edu/mhealy/eco212i/lectures

The Market for Money: Interaction of Money Supply and Demand Now lets add the MS (money supply) The graph below illustrates the money market. It combines demand with supply of money. An increase in the MS will move the MS curve to the right, decreasing interest rates. A decrease in the MS will move the MS curve to the left increasing interest rates.

The Federal Reserve and the Banking System See: http://www.federalreserveeducation.org/fed101/structure/ Know: Board of governors Federal Open Market Committee (FOMC) 12 Federal Reserve BanksThe Federal Reserve and the Banking System

Who runs the Federal Reserve 2. The central controlling authority for the system is the Board of Governors and has seven members appointed by the President for staggered 14 year terms. Its power means the system operates like a central bank. Board of Governors seven members appointed by the US president and confirmed by the senate 14 year terms the US president selects the chairperson (currently Janet Yellen).

FOMC 3. The Federal Open Market Committee (FOMC) includes the seven governors plus five regional Federal Reserve Bank presidents whose terms alternate. They set policy on buying and selling of government bonds, the most important type of monetary policy, and meet several times each year. FOMC 12 members: the 7 members of the BOG the president of the New York Federal Reserve Bank 4 of the other 12 Fed bank presidents on a rotating basis conduct open market operations (Open Market Operations [OMO]

Fed Districts

Fed Actions and Powers 1.they act like a central bank coordinated by the Fed BOG 2.quasi-public banks each Federal Reserve Bank is owned by the private commercial banks in its district 3.but the BOG, a government body, sets the basic policies 4.making a profit is not their goal, any profits go to the U.S. Treasury.. Goal is to help economy

The Fed and its Powers 5. There are about 7,300 commercial banks in the United States. They are privately owned and consist of state banks (three-fourths of total) and large national banks (chartered by the Federal government). 6. Thrift institutions consist of savings and loan associations, credit unions, and mutual savings banks. They are regulated by the Treasury Dept. Office of Thrift Supervision, but they may use services of the Fed and keep reserves on deposit at the Fed. Of the approximately 11,000 thrift institutions, most are credit unions.

Fed Actions and Powers a bank for banks: banks keep deposits at the Fed. these are the the RESERVES of the banks. banks take out loans from the Fed (the Discount Rate [DR). In making loans, the Federal Reserve is the "lender of last resort," meaning that the Fed is available to lend money should other avenues (e.g. other commercial banks) not be available.

Functions of the Fed and money supply: 1. The Fed issues "Federal Reserve Notes," the paper currency used in the U.S. monetary system. 2. The Fed sets reserve requirements and holds the reserves of banks and thrifts not held as vault cash. 3. The Fed may lend money to banks and thrifts, charging them an interest rate called the discount rate.

Functions Continued 4. The Fed provides a check collection service for banks (checks are also cleared locally or by private clearing firms). 5. Federal Reserve System acts as the fiscal agent for the Federal government. 6. The Federal Reserve System supervises member banks. 7. Monetary policy and control of the money supply is the "major function" of the Fed.

Controversy and the Fed Federal Reserve independence is important but is also controversial from time to time. Advocates of independence fear that more political ties would cause the Fed to follow expansionary policies and create too much inflation, leading to an unstable currency such as that in other countries

Controversy The Federal reserve is independent of political control The BOG is appointed by the president for 14 year terms Advocates of independence fear that more political ties would cause the Fed to follow expansionary policies and create too much inflation, leading to an unstable currency such as exists in some other countries

Controversy Most countries maintain political control over their central banks. There is currently a move to rein in Fed independence by more conservative members of Congress. The 12 members of the FOMC can decide to decrease the MS (to fight inflation) and put millions of people out of work and there is little recourse. Politicians would prefer to have more say in Fed policy decisions for a variety of reasons.

Summary Structure—The Federal Reserve is a “decentralized central bank” with both private and public elements operating independently within the government. The Board of Governors of the Federal Reserve is a government agency. The 12 Federal Reserve Banks are not government agencies; they represent the private component of the Fed.

Summary Monetary Policy—The primary focus of monetary policy is price stability. The body that is charged with setting monetary policy is the Federal Open Market Committee, which regulates the amount of money and credit in the economy.