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The Origin of Money

• Barter

Commodity money
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Fiat or token money
Money accepted by law
THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC
AND PRIVATE
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Have you ever stopped to examine the features of
a dollar bill?
Number refers to 5th district also corresponds
to the letter E
Federal Reserve Bank of Richmond
Treasurer of the United States
Secretary of the Treasury
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the American bald eagle
the pyramid a symbol of material strength and
endurance
The Great Seal of the United States
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ANNUIT COEPTIS - He has favored our
undertakings
What does the eye inside the triangle represent?
Why is the pyramid unfinished?
NOVUS ORDO SECLORUM A New Order of the Ages
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the former 13 colonies
Out of Many, ONE
The Executive Branch
The Legislative Branch
The Judiciary Branch
PEACE and WAR
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Functions of Money

• Medium of exchange
• Store of value
• Unit of account

Liquidity property of money
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Measuring the money supply

• M1 transactions money
• M2 broad money
• or near monies
• M3 large-denomination money

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Transactions money
M1 currency in circulation demand
deposits travelers checks other
checkable deposits
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Near Monies M2 M1 savings
accounts time deposits (market accounts repurchase agreements
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M3 M2 time deposits (100,000) repu
rchase agreements (100,100) Eurodollars
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Financial Intermediaries

• Commercial banks
• Savings and loan associations
• Life insurance companies
• Pension funds

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How the Modern Banking System Works

• Fractional reserve banking system
• Reserves
• Legal reserve requirement
• Excess reserves
• Loans

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Illustration of money creation

• Assume 20 legal reserve requirement
• Suppose Nina deposits 1,000 in her checking
  account at Citibank.
• T-account of
  Citibank
• ______Assets________________Liabilities____
  ________
• Reserves 200
  Demand deposits 1,000
• Loans 800

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• Kevin borrows 800 from Citibank, and buys a
  computer at CompUSA.
• CompUSA deposits Kevins check at Fleet Bank.
• Fleet Banks
  T-account
• _____Assets________________Liabilities________
  _____
• Reserves 160 Demand
  Deposits 800
• Loans 640

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• Vivian borrows 640 from Fleet Bank and buys a
  new TV set at Sears department store.
• Sears deposits Vivians check at Bank of New
  York.
• T-account of Bank of New York
• ______Assets____________________Liabilities
  _______
• Reserves 128 Demand
  deposits 640
• Loans 512

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Total demand deposits after lending
and re-lending by banks
Banks
Demand Deposits Citibank
1,000 Fleet
800 Bank of New York
640 ? ? other banks
additional deposits

___________
5,000 Total
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The Money Multiplier
Money multiplier (m) 1 / required reserve
ratio 1 / .20
5 Total demand deposits (M) m x
initial deposit 5,000 5
x 1,000
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The End