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

2. 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

3. 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

4. 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

5. 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 to 1933/1971.
Created Federal Reserve in 1913.
Money and Banking - Dr. D. Foster

6. 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

7. 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

8. 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

9. Money and Banking - Dr. D. Foster
Monetary Data – M1, TD, C
$3.53 tr. M1
$2.04 tr. TD
$1.48 tr. C
July 2017
Money and Banking - Dr. D. Foster

10. Money and Banking - Dr. D. Foster
Monetary Data:
DD, OCD, Total (Trans. deposits)
$2.04 tr.
Total
$1.47 tr.
Dem. D.
$565 b.
Other CD
July 2017
Money and Banking - Dr. D. Foster

11. Money and Banking - Dr. D. Foster
Monetary Data – Travelers Checks
Q2 2017
$2.1 bil.
Money and Banking - Dr. D. Foster

12. Money and Banking - Dr. D. Foster
Monetary Data – M2
July 2017
$13.59 tr.
Money and Banking - Dr. D. Foster

13. Money and Banking - Dr. D. Foster
Monetary Data – M1, M2 and MZM
$14.97 tr.
MZM
$13.59 tr. M2
$3.53 tr. M1
July 2017
Money and Banking - Dr. D. Foster

14. Money and Banking - Dr. D. Foster
Monetary Data – Monetary Base
Aug. 2017
$3.91 tr.
Money and Banking - Dr. D. Foster

15. 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. 15

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

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

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

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