What%20is%20Money?

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What is Money?

• This may seem an odd question, but it actually
  has merit. Each economy or society that has used
  money (and many did not) has had to define
  exactly what money is and what the relationship
  between money and people is.

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Money!

• Money is what money does. This Gumpian
  explanation is as valid as any other I have run
  across.
• To validate this, we can look at several examples
  from history
• A. cacao beans
• B. cheese
• C. gold/silver
• D. paper
• E. debt

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Functions of Money

• In order to be money, whatever is serving in that
  capacity must be able to serve as
• 1. a medium of exchange-something that can be
  used to buy and sell goods and services that is
  acceptable to all. Without a medium of exchange
  all trade for goods and services would need to be
  coordinated by barter and the coincidence of need

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Functions of money

• 2.Money is also a unit of account, a yardstick
  for measuring the value of the relative worth of
  a wide variety of goods and services. As well,
  this function of money allows us to figure GDP,
  define debt, determine taxes, and figure profits.
• 3. Money functions as a store of value.

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Characteristics of Money

• Durability
• Portability
• Divisibility
• Relative Scarcity
• Authenticity

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The supply of money

• So, if we need to use money where does it come
  from and what does it consist of?
• Presently money in the US and most industrial
  nations is the debt of governments and financial
  institutions. This fact enables the creation and
  destruction of money to influence economic
  rhythms as deemed necessary by those in control
  of it.

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MONEY as DEFINED

• M1 2,988,000,000,000.00
• The narrowest definition of the money supply
  consisting of currency (coins and paper), all
  checkable deposits in comercial backs and
  thrifts/savings orgs upon which checks may be
  drawn.
• Currency is the debt of government and checkable
  deposits are the debt of financial institutions.
  So all of our money is DEBT

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Currency

• All coins are TOKEN money, that is, the intrinsic
  value of the coin is less than the face value.
• All paper money is Federal Reserve Notes issued
  by the Federal Reserve System and are essentially
  debt in small doses

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Checkable Deposits

• Checkable deposits are non interest bearing, non
  contractual deposits (for the most part) in US
  banks or thrifts that are readily accessible to
  pay for goods and services whether with check or
  payment card. They are also largely and quickly
  convertible into currency and coin.

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More Money!!!

• M2 money supply11,820,000,000,000.00
• M1 plus
• a. savings deposits and money market accounts
• b. small time deposits (those worth less than
  100,000 or cds
• c. Money market mutual funds
• This definition of money is about twice as large
  as M1 alone

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A note about credit cards

• While credit cards may act like money and people
  certainly use them as if they are money, that
  isnt the reality.
• Credits cards are really short term high interest
  loans
• However, they do enable us as a society to
  function with less money

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What backs the money supply?

• The US backs its money supply with the assurance
  that the government has the ability to keep the
  value of the currency relatively stable.
• There is no link between the supply of money and
  any commodity.
• Money is only exchangeable for more paper money.

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So why does it have value at all?

• Why does US paper money have value and the ones I
  can print up not have value?
• A. acceptability
• B. Legal tender
• C. Relative scarcity

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POLICY

• Stabilization of moneys value is a requirement
  for 21st century governments. They can accomplish
  this with a variety of methods.
• One method is appropriate FISCAL policy
• Another is appropriate MONETARY policy

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Demand for Money

• The Demand for Money Two ComponentsThere are
  two sources of money demand or two reasons why do
  we want to hold M1 money in our wallets, purses,
  and in our checking account, instead of putting
  it in the bank to earn interest. They are the (1)
  transactions demand and the (2) asset demand. The
  (3) Total demand for money (keeping money in our
  wallets and not in our savings account where they
  can earn interest) then is the transactions
  demand plus the asset demand. harpercollege.edu/mh
  ealy/eco212i/lectures

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Transactions Demand

• Transactions Demand for Money (D?)
• Definition We keep M1 money in order to buy
  things
• It is the demand for money as a medium of
  exchange
• Transactions demand and nominal GDP
• directly related when GDP increases the
  transactions demand for money also increases
  (shifts to the right).
• the main determinant of transactions demand is
  nominal GDP
• Transactions demand and interest rates
• we'll assume that they are unrelated, so on a
  graph the transactions demand looks like
  harpercollege.edu/mhealy/eco212i/lectures

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harpercollege.edu/mhealy/eco212i/lectures
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Asset Demand For Moneyharpercollege.edu/mhealy/eco
212i/lectures

• Asset demand (D?)
• Definition we keep some money so that we can
  spend it later
• the demand for money as a store of value
• What determines how much money (M1) we keep in
  our wallets, purses, and checking accounts?
• The problem with holding money is that you are
  not earning interest on it

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Continued Asset Demandharpercollege.edu/mhealy/eco
212i/lectures

• Asset demand and interest rates are inversely
  related. If interest rates are high, people will
  keep less in their pockets and more in their
  savings accounts (and in other interest earning
  assets)
• if interest rates are low, people will keep more
  money in their pockets, because they are not
  losing much and it is more convenient

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harpercollege.edu/mhealy/eco212i/lectures
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harpercollege.edu/mhealy/eco212i/lecturesTotal
Money Demand

• Total Money Demand
• Total MD transactions demand asset demand
• Graphically The black vertical Dt is the
  transactions demand and the black, downward
  sloping Da is the asset demand. If we add them
  together we get the blue total demand for money.

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harpercollege.edu/mhealy/eco212i/lectures
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The Market for Money Interaction of Money Supply
and Demand

• Now lets add the MS (money supply) The graph
  below illustrates the money market. It combines
  demand with supply of money.
• An increase in the MS will move the MS curve to
  the right, decreasing interest rates. A decrease
  in the MS will move the MS curve to the left
  increasing interest rates.

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The Federal Reserve and the Banking System

• See http//www.federalreserveeducation.org/fed101
  /structure/
• Know
• Board of governors
• Federal Open Market Committee (FOMC)
• 12 Federal Reserve BanksThe Federal Reserve and
  the Banking System

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Who runs the Federal Reserve

• 2. The central controlling authority for the
  system is the Board of Governors and has seven
  members appointed by the President for staggered
  14 year terms. Its power means the system
  operates like a central bank.
• Board of Governors seven members
• appointed by the US president and confirmed by
  the senate
• 14 year terms
• the US president selects the chairperson
  (currently Janet Yellen).

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FOMC

• 3. The Federal Open Market Committee (FOMC)
  includes the seven governors plus five regional
  Federal Reserve Bank presidents whose terms
  alternate. They set policy on buying and selling
  of government bonds, the most important type of
  monetary policy, and meet several times each
  year.
• FOMC 12 members
• the 7 members of the BOG
• the president of the New York Federal Reserve
  Bank
• 4 of the other 12 Fed bank presidents on a
  rotating basis
• conduct open market operations (Open Market
  Operations OMO

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Fed Districts
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Fed Actions and Powers

• 1.they act like a central bank coordinated by the
  Fed BOG
• 2.quasi-public banks each Federal Reserve Bank
  is owned by the private commercial banks in its
  district
• 3.but the BOG, a government body, sets the basic
  policies
• 4.making a profit is not their goal, any profits
  go to the U.S. Treasury.. Goal is to help economy

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The Fed and its Powers

• 5. There are about 7,300 commercial banks in the
  United States. They are privately owned and
  consist of state banks (three-fourths of total)
  and large national banks (chartered by the
  Federal government).
• 6. Thrift institutions consist of savings and
  loan associations, credit unions, and mutual
  savings banks. They are regulated by the Treasury
  Dept. Office of Thrift Supervision, but they may
  use services of the Fed and keep reserves on
  deposit at the Fed. Of the approximately 11,000
  thrift institutions, most are credit unions.

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Fed Actions and Powers

• a bank for banks banks keep deposits at the Fed.
  these are the the RESERVES of the banks.
• banks take out loans from the Fed (the Discount
  Rate DR). In making loans, the Federal Reserve
  is the "lender of last resort," meaning that the
  Fed is available to lend money should other
  avenues (e.g. other commercial banks) not be
  available.

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Functions of the Fed and money supply

• 1. The Fed issues "Federal Reserve Notes," the
  paper currency used in the U.S. monetary
  system.2. The Fed sets reserve requirements and
  holds the reserves of banks and thrifts not held
  as vault cash.3. The Fed may lend money to banks
  and thrifts, charging them an interest rate
  called the discount rate.

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Functions Continued

• 4. The Fed provides a check collection service
  for banks (checks are also cleared locally or by
  private clearing firms).5. Federal Reserve
  System acts as the fiscal agent for the Federal
  government.6. The Federal Reserve System
  supervises member banks.7. Monetary policy and
  control of the money supply is the "major
  function" of the Fed.

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Controversy and the Fed

• Federal Reserve independence is important but is
  also controversial from time to time. Advocates
  of independence fear that more political ties
  would cause the Fed to follow expansionary
  policies and create too much inflation, leading
  to an unstable currency such as that in other
  countries

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Controversy

• The Federal reserve is independent of political
  control
• The BOG is appointed by the president for 14 year
  terms
• Advocates of independence fear that more
  political ties would cause the Fed to follow
  expansionary policies and create too much
  inflation, leading to an unstable currency such
  as exists in some other countries

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Controversy

• Most countries maintain political control over
  their central banks. There is currently a move to
  rein in Fed independence by more conservative
  members of Congress.
• The 12 members of the FOMC can decide to
  decrease the MS (to fight inflation) and put
  millions of people out of work and there is
  little recourse.
• Politicians would prefer to have more say in Fed
  policy decisions for a variety of reasons.

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Summary

• StructureThe Federal Reserve is a decentralized
  central bank with both private and public
  elements operating independently within the
  government.
• The Board of Governors of the Federal Reserve is
  a government agency.
• The 12 Federal Reserve Banks are not government
  agencies they represent the private component of
  the Fed.

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Summary

• Monetary PolicyThe primary focus of monetary
  policy is price stability. The body that is
  charged with setting monetary policy is the
  Federal Open Market Committee, which regulates
  the amount of money and credit in the economy.