Money and Banks

I. What is Money? Root of all evil; money is debt –And all that is good: how do you think Brangelina got to look like that? 1) Medium of exchange (bartering sucks*) 2) Unit of account (relative worth: one computer = 1,324 Big Macs?) 3) Store of value (liquid, but no returns) Form irrelevant: anything generally accepted as a medium of exchange is money

Characteristics DurabilityPortabilityDivisibilityUniformity Limited Supply Acceptability

Types of Money (Source of Value) Commodity money Representative Fiat money –Legal tender

M1 Public’s currency –Token money: intrinsic value < face value Coins: 2-3% of M1; Federal Reserve Notes: 37% All checkable deposits (not CDs or savings accounts) –Largest component M1 –Commercial banks, Thrifts (S+Ls, mutual savings, credit unions) NOT currency/deposits owned by gov’t/financial institutions –Double counting M1= $3.1 trillion (2016)

M2 M1 + Near-monies 1) noncheckable savings accounts 2) Money Market Deposit Account (MMDA) 3) Small time deposits (<$10,000; CDs, etc.) 4) Money Market Mutual Fund M2= $12.5 trillion (2016)

II. Money Creation Fractional reserve system Required reserves: an amount of funds equal to a specified percentage of the bank’s own deposit liabilities (either as vault cash or in Fed district bank) –Purpose is to give Fed control over banks’ lending decisions, and thereby M Reserve ratio = required reserves / demand- deposit liabilities Excess reserves = actual reserves – required Money Multiplier: 1/RRR Excess reserve x m= maximum money creation Depends on willingness and ability to lend full amount