Money Basics & Measuring Money Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster The functions of money 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 serve as a final means of payment. Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster What isn’t money? Wealth is not money … Income is not money. A credit card is not money. What about . . . Stored value cards? Electronic money? “Local” currencies? To be money, the object must be redeemable on demand at face value. Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Brief History Evolution of money – a “useful commodity” portable, durable, recognizable, scarce wheat, shells, precious metals Yap stone wheels Evolution of money – paper notes convenience factor, but can be inflationary. Evolution of money – fiat money The paper is the money because we have faith! Evolution of money – Is e-money next? Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster The G-man Mint coins to create standards of purity. Revenue source. [Seignorage] Beware of “debasing.” Created 1st & 2nd Banks of the U.S. They used notes to buy gov’t. debt. Civil War & pure fiat money - “greenbacks.” Gold standard - 1879 to 1933/1971. Created Federal Reserve in 1913. Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster The Continental Story June, 1775 – 2 million Spanish dollars in bills of credit authorized. “A wagon load of money will scarcely purchase a wagon load of provisions”. 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. Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Measurement 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$ + RP Liquidity – how fast, at full market value, an asset can be converted into a means of payment. Fed Regulation D Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster The 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 are highly correlated to MB … or, were! 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

Money and Banking - Dr. D. Foster Monetary Data – M1, TD, C $3.66 tr. M1 $2.09 tr. TD $1.65 tr. C Q2 2018 Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Monetary Data: DD, OCD, Total (Trans. deposits) $2.09 tr. Total $1.47 tr. Dem. D. $612 b. Other CD Q2 2018 Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Monetary Data – Travelers Checks Q2 2018 $1.8 bil. Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Monetary Data – M2 Q2 2018 $14.02 tr. Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Monetary Data – M1, M2 and MZM $15.47 tr. MZM $14.02 tr. M2 $3.66 tr. M1 Q2 2018 Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Monetary Data – MZM/M2 +14% MZM is 10% higher than M2 -3% Q2 2018 Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Monetary Data – Monetary Base Q3 2018 $3.65 tr. Money and Banking - Dr. D. Foster

Sweep Programs and M1 Sweep 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. 16

Money and Banking - Dr. D. Foster Monetary Data – M1 and Sweeps $3.454 tr. $2.66 tr. Dec. 2013 last update Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Monetary Data: (M1+Sweeps)/M1 Dec. 2013 1.3 Money and Banking - Dr. D. Foster

Money Basics & Measuring Money Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Yap Stone Wheels Money and Banking - Dr. D. Foster