1. MONEY AND BANKING WHY MONEY – THE “BONANZA” STORY

2. SO BANKS DEVELOPED AS A SAFE AND EASY PLACE TO STORE “HARD” MONEY DEPOSIT GOLD – GET A “RECEIPT” THAT WAS THEN ITSELF USED FOR PAYMENTS

3. NEXT STEP – DEVELOPMENT OF LOANS BANKS FOUND NOT EVERYONE CAME FOR THEIR GOLD AT ONCE ALWAYS HAD “EXCESS GOLD” IN VAULT COULD PRINT MORE RECEIPTS AND MAKE LOANS BASED ON THIS EXCESS GOLD CHARGE “INTEREST” FOR THE LOANS – NOW PAID FOR DEPOSITS

4. BANKING TERMS RESERVES = DEPOSITS EXCESS RESERVES = “EXTRA” DEPOSITS NOT NEEDED FOR USUAL WITHDRAWALS FRACTIONAL RESERVE SYSTEM = THE SYSTEM OF HAVING MORE “CLAIMS” ON DEPOSITS IN THE VAULT THAN THERE ARE DEPOSITS

5. EXAMPLE $1,000,000 RESERVES (DEPOSITS) KEEP 10% IN VAULT ($100,000) MAKE LOANS OF $900,000 TOTAL “CLAIMS” ARE $1,900,000

6. BENEFITS AND COSTS OF THE BANKING SYSTEM BENEFIT – LOANS CREATE ECONOMIC DEVELOPMENT BUT POTENTIAL PROBLEMS: 1. NO COMMON CURRENCY 2. “RUNS” ON BANKS IF EVERYONE WANTED THEIR DEPOSITS AT THE SAME TIME SO HAD PERIODIC BANK “PANICS”

7. THE “FEDERAL RESERVE” TO THE RESCUE? CREATED A “BACKSTOP” TO THE BANKING SYSTEM, CALLED THE “FEDERAL RESERVE” * CREATED COMMON CURRENCY * CREATED RULES TO ENSURE BANK HONESTY * REGULATES “EXCESS RESERVES”

8. MORE ON REGULATING EXCESS RESERVES REQUIRED RESERVE RATIO – % OF RESERVES TO KEEP IN VAULT FED REDUCES IF WANTS MORE LENDING FED INCREASES IF WANTS LESS LENDING

9. REGULATING EXCESS RESERVES, CON’T CONTROL OF INTEREST RATES: FED CONTROLS TWO SHORT- TERM INTEREST RATES REDUCE IF WANT MORE LENDING INCREASE IF WANT LESS LENDING

10. REGULATING EXCESS RESERVES, CON’T FED CAN DIRECTLY INCREASE AND DECREASE RESERVES IN THE BANKS VAULTS: CALLED OPEN MARKET OPERATIONS INCREASE RESERVES (AND LOANS) BY BUYING INVESTMENTS FROM BANKS AND PAYING FOR WITH NEW MONEY DECREASE RESERVES (AND LOANS) BY SELLING INVESTMENTS TO BANKS AND TAKING MONEY OUT OF THE SYSTEM

11. PREVENTING BANK RUNS TO PREVENT A “RUN” BEFORE IT HAPPENS – INCREASE RESERVE REQUIREMENT AND INCREASE INTEREST RATES TO DEAL WITH A “RUN” ALREADY HAPPENING: INJECT MONEY INTO BANKS’ VAULTS SO CAN MEET WITHDRAWALS OF DEPOSITORS

12. SIDEBAR ON GOLD NO LONGER USED AS MONEY – NO “GOLD STANDARD” BIG DISADVANTAGE – SUPPLY DOESN’T NECESSARILY GROW AS ECONOMY GROWS – CAN LEAD TO DEFLATION FEDERAL RESERVE NOW CONTROLS THE MONEY SUPPLY THROUGH ITS CONTROL OVER BANK RESERVES

13. COULD THERE BE OTHER FORMS OF MONEY (LIKE BITCOINS)? PEOPLE LOOK FOR THREE CHARACTERISTICS OF MONEY: 1.ACCEPTABILITY FOR PAYMENT (MEDIUM OF EXCHANGE) 2.UNIT OF ACCOUNT (CAN BE USED FOR FINANCIAL MEASUREMENT) 3.STORE OF VALUE (HOLDS VALUE AND CAN’T BE STOLEN)