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

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.

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. A credit card is not money. What about... Stored value cards? Electronic money? Electronic money? “Local” currencies?“Local” currencies?Local To be money, the object must be redeemable on demand at face value.

4. Money and Banking - Dr. D. Foster History Favorable characteristics –portable, durable, recognizable, scarce, commodity –wheat, shells, precious metals –Yap stone wheelsYap stone wheels How do we get to paper? –commodity, representative, fiat –U.S. and the “gold standard.” –Deciding on denominations and coins vs. paper. –Evolution to e-money.

5. Money and Banking - Dr. D. Foster The G-man Mint coins to create standards of purity. –Revenue source. [Seignorage] –Beware of “debasing.” Bank issued “notes” as money. U.S. government - “greenbacks.” Gold standard - 1879 to 1933/1971. Created Federal Reserve in 1913.

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

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 + SD S +TD S + MMMF Individual M3 = M2 + TD L + MMMF Institutional + Euro$ + RP Fed Regulation D Fed Regulation D Liquidity – how fast, at full market value, an asset can be converted into a means of payment.

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. or, were! 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

9. Money and Banking - Dr. D. Foster Monetary Data – M1 Jan. 2016 $3.22 tr.

10. Money and Banking - Dr. D. Foster Monetary Data - Currency Dec. 2015 $1.34 tr.

11. Money and Banking - Dr. D. Foster Monetary Data – DD, OCD, Total Dec. 2015 $1.7 tr. $1.2 tr. $0.5 tr.

12. Money and Banking - Dr. D. Foster Monetary Data – Travelers Checks Dec. 2015 $2.5 bil.

13. Money and Banking - Dr. D. Foster Monetary Data – M2 Jan. 2016 $12.33 tr.

14. Money and Banking - Dr. D. Foster Monetary Data – MZM Jan. 2016 $13.74 tr.

15. Money and Banking - Dr. D. Foster Monetary Data – M2 and MZM

16. Money and Banking - Dr. D. Foster Monetary Data – Monetary Base Jan. 2016 $3.65 tr.

17. Sweep Programs and M1 Sweep programs 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.

18. Money and Banking - Dr. D. Foster Monetary Data – M1 and Sweeps Jan. 2014 last update

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

20. Money and Banking - Dr. D. Foster Rothbard on Money Money is different than coal … What is true if the supply of coal rises? What is true if the supply of money rises? Is there a right amount of money? What if the money supply doubled? Are there economic interests “agitating” for a decline in the money supply? Is it wasteful to mine for gold and silver? What is the significance of a commodity as money?

21. Money and Banking - Dr. D. Foster Rothbard on Money What about counterfeiting money? Harms those with “real” money. Hard to do with commodity like gold. Easy to do with paper/fiat money. And, if the government has a monopoly? What has the government done to our money? We’ve forgotten that the name meant a weight. Gov’t force through “legal tender” laws. Now, gov’t can finance spending without raising taxes or borrowing funds!

22. The gold standard ends: The gold standard ends: Money and Banking - Dr. D. Foster The gold standard and wartime. Suspensions to keep banks afloat & gov’t financing going. Wartime inflation only occurs in paper, not in gold!! For U.S. – Revolutionary War, War of 1812, Civil War. Gold coins and paper circulated until 1933. This provided some limit on arbitrary money creation. Gold contracts (or, clauses) thwart government. Specify payment in $ equivalent of some amount of gold. FDR cancels all gold clauses; the case of the Halle Building. the end of order the end of order the end of truth the end of truth

23. : Do We Need a National Currency? For Your Consideration: Do We Need a National Currency? Dollarization Dollarization - Use another country’s currency as your medium of exchange. $ - Ecuador, El Salvador, Timor, British Virgin Islands, Panama € - Vatican City, Monaco, Andorra Currency board Currency board - the national currency is backed by an equal amount of a foreign currency. $ - Hong Kong, Bermuda, East Caribbean $ € - Bulgaria, Estonia, Lithuania Currency union Currency union - A group of countries adopt a common currency. Euro/West Africa/Caribbean

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

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