The Mechanics of Money

The Mechanics of Money

Money Basics & Measuring Money 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 Money and Banking - Dr. D. Foster payment. What isnt money? Wealth is not money Income is not money. A credit card is not money.

What about . . . Stored value cards? Electronic money? Local currencies? Money and Banking - Dr. D. Foster To be money, the object must be redeemable on demand at face value.

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 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 govt. debt. Civil War & pure fiat money - greenbacks. Gold standard - 1879 to 1933/1971. Created Federal Reserve in 1913. 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

Measurement How? - Liquidity of financial assets. Liquidity how fast, at full market value, an asset can be converted into a means of payment. M1 = [Coins and] currency in circulation (C) + transactions deposits (D) + TC M2 = M1 + SDS +TDS + MMMFIndividual M3 = M2 + TDL + MMMFInstitutional + Euro$ + RP

Money and Banking - Dr. D. Foster Fed Regulation 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 governments budget: G = T + Bonds + MB Money and Banking - Dr. D. Foster Monetary Data M1, TD, C $3.66 tr. M1 $2.09 tr. TD

$1.65 tr. C Q2 2018 Money and Banking - Dr. D. Foster Monetary Data: DD, OCD, Total (Trans. deposits) $2.09 tr. Total $1.47

tr. Dem. D. $612 b. Other CD Q2 2018 Money and Banking - Dr. D. Foster Monetary Data Travelers Checks

Q2 2018 $1.8 bil. Money and Banking - Dr. D. Foster Monetary Data M2 Q2 2018 $14.02 tr.

Money and Banking - Dr. D. Foster Monetary Data M1, M2 and MZM $15.47 tr. MZM $14.02 tr. M2 $3.66 tr.

M1 Money and Banking - Dr. D. Foster Q2 2018 Monetary Data MZM/M2 +14% MZM is 10% higher than

M2 -3% Money and Banking - Dr. D. Foster Q2 2018 Monetary Data Monetary Base Q3 2018 $3.65 tr.

Money and Banking - Dr. D. Foster 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. Monetary Data M1 and Sweeps $3.454 tr. $2.66 tr. Dec. 2013

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

Money Basics & Measuring Money Money and Banking - Dr. D. Foster Yap Stone Wheels Money and Banking - Dr. D. Foster

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