1. © 2001 J. Douglass Klein MONEY

2. © 2001 J. Douglass Klein MONEY

3. © 2001 J. Douglass Klein MONEY

4. © 2001 J. Douglass Klein MONEY

5. © 2001 J. Douglass Klein MONEY

6. © 2001 J. Douglass Klein MONEY

7. © 2001 J. Douglass Klein MONEY

8. © 2001 J. Douglass Klein MONEY

9. © 2001 J. Douglass Klein The Equation of Exchange M V = P Y Quantity of Money x Velocity of Money Price Level x Real Output =

10. © 2001 J. Douglass Klein The Equation of Exchange M V = P Y What if the money supply grows without any increase in the level of real output? What if the velocity also increases??????????????

11. © 2001 J. Douglass Klein The Equation of Exchange

12. © 2001 J. Douglass Klein The Equation of Exchange

13. © 2001 J. Douglass Klein MV = PY

14. © 2001 J. Douglass Klein Basic Bank Accounting In any introductory Economics text, review “T” accounts Assets Liabilities Specie (gold & silver; reserves) IOUs (loans owed to the bank, by govt. or individuals) Notes of Other banks Other Assets Deposits (money owed to others) Notes issued by this bank (promises to pay)

15. © 2001 J. Douglass Klein Basic Bank Accounting

16. © 2001 J. Douglass Klein History of Banking Origins of Paper Money Goldsmiths in 16th C. Italy Issued deposit receipts Origins of Fractional Reserve Banking What if you make loans by issuing deposit receipts instead of specie? Why there is a money multiplier? A certain amount of gold supports more money in circulation.

17. © 2001 J. Douglass Klein Basic Bank Accounting Assets Liabilities Specie (gold & silver) Deposit ticket (gold owed to others) After a while, the deposit tickets circulate instead of gold Voila! Paper money!

18. © 2001 J. Douglass Klein Basic Bank Accounting Assets Liabilities Specie (gold & silver) Deposit ticket (gold owed to others) One day, someone asks for a loan of some gold. The Goldsmith loans the gold in exchange for an IOU

19. © 2001 J. Douglass Klein Basic Bank Accounting Assets Liabilities Specie (gold & silver) Deposit ticket (gold owed to others) One day, someone asks for a loan of some gold. The Goldsmith loans the gold in exchange for an IOU

20. © 2001 J. Douglass Klein Basic Bank Accounting Assets Liabilities Specie (gold & silver) Deposit ticket (gold owed to others) One day, someone asks for a loan of some gold. The Goldsmith loans the gold in exchange for an IOU I.O.U. 1 brick Loan The birth of fractional reserve banking

21. © 2001 J. Douglass Klein Basic Bank Accounting Assets Liabilities Specie (gold & silver) Deposit ticket (gold owed to others) The goldsmith doesn’t even have to loan out gold. The goldsmith can ISSUE MORE TICKETS! I.O.U. 1 brick Loans I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick

22. © 2001 J. Douglass Klein Basic Bank Accounting Assets Liabilities Specie (gold & silver) Deposit ticket (gold owed to others) At this point there are 8 deposit tickets supported by four bars of gold. The reserve ratio is.5 I.O.U. 1 brick Loans I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick

23. © 2001 J. Douglass Klein Basic Bank Accounting Assets Liabilities 4 Specie (gold & silver) 8 Deposit ticket (gold owed to others) 4 Loans Any change on one side must be matched by an equal change on the other +1 Gold +1 deposit ticket +1 Loan +1 deposit ticket What happens if depositors begin withdrawing gold?

24. © 2001 J. Douglass Klein Problems with Colonial Banking States issued own money Continental Congress tried fiat money Not Worth a Continental Gresham’s Law

25. © 2001 J. Douglass Klein Money - 1775-1779 Value of paper money issued (exchange rate of paper to gold coin)

26. © 2001 J. Douglass Klein Hamilton’s Bank “Without a paper, in general currency, equivalent to gold and silver, a considerable proportion of the specie of the country must always be suspended from circulation…” (277) “To attach full confidence to an institution of this nature, it appears to be an essential ingredient in its structure, that it shall be under a private, not a public direction…” (278) The capital of the bank is set at $10 million, with the federal government subscribing in the amount $2 million.

27. © 2001 J. Douglass Klein Banking abuses “Perils of State Banking” (1818) Describe some of the abuses of state banks. (pages 441-443) Describe the consequences of those abuses.

28. © 2001 J. Douglass Klein Basic Bank Accounting Assets Liabilities Specie (gold & silver) Deposit ticket (gold owed to others) I.O.U. 1 brick Loans I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick I.O.U. 1 brick

29. © 2001 J. Douglass Klein Wholesale Prices (1910-14 = 100) Source: Hughes, American EconomicHistory, p. 217. End of the First BUS (1811) Veto of the 2nd BUS (1832)