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Lect 2198

This document discusses money and banking. It defines money as a medium of exchange, unit of account, and store of value. It describes different types of money like commodity money, convertible money, and fiat money. It also discusses the functions of banks like facilitating the flow of funds from savers to borrowers and creating liquidity. Bank regulation aims to prevent bank failures by imposing requirements like deposit insurance, capital requirements, and reserve requirements.

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32 views26 pages

Lect 2198

This document discusses money and banking. It defines money as a medium of exchange, unit of account, and store of value. It describes different types of money like commodity money, convertible money, and fiat money. It also discusses the functions of banks like facilitating the flow of funds from savers to borrowers and creating liquidity. Bank regulation aims to prevent bank failures by imposing requirements like deposit insurance, capital requirements, and reserve requirements.

Uploaded by

Amr
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Lecture 21

Money: What is it, and what functions


does it serve
Banking: What role do banks play in
the economy and how are they
regulated
Money

Functions of Money
medium of exchange
unit of account
store of value
Medium of Exchange

A medium of exchange is anything that


is generally accepted in exchange for
goods and services.
Money is a medium of exchange.
Without money, an economy would
have to exchange goods directly for
other goods, a barter system.
Barter is inefficient.
Unit of Account

A unit of account is an agreed measure


for stating the prices of goods and
services.
Using money units to state prices
simplifies price comparisons and
calculating opportunity costs.
Store of Value

Anything that can be held and


exchanged for goods and services at
a future date is called a store of
value.
The more stable the purchasing power
of money, the better it serves as a
store of value.
What counts as money?
list items
ans. can you buy lunch with it
What gives money Value

exchange value vs. intrinsic value


types of money
commodity money
convertible money
fiat money
debt money
Commodity Money

A physical commodity that is valued in


its own right and is also used as a
means of payment is called
commodity money.
The most common forms of commodity
money have been coins made from
gold, silver, and copper.
Problems With
Commodity Money
There are two problems with
commodity money:
There is a constant temptation to cheat on
the value of the money
The item used as a money has an
opportunity cost in consumption.
Lowering the
Value of Money
The usual methods of lowering the
value of money are clipping and
debasement.
Clipping is reducing the size of coins
by an imperceptible amount.
Debasement is lowering the gold or
silver content of the coin, usually by
adding a cheaper metal such as lead.
Gresham’s Law

Gresham’s Law states that bad money


drives out good money.
The bad money is debased currency
which will be spent.
The good money is not debased and
will be hoarded for its purchasing
power.
The Opportunity Cost of
Commodity Money
Gold and silver used as money could
be used to make jewelry instead.
Their value as jewelry is the
opportunity cost of using them as
money.
This creates incentives to find
alternatives to the commodity itself
for use in the exchange process.
Convertible Paper Money

When a paper claim to a commodity


circulates as a means of payment,
that claim is called convertible paper
money.
Under this system, a goldsmith held
the actual gold, issuing a receipt for
the “deposit.”
These receipts circulated as money.
The concept of bank notes
From Convertible Currency
to Fiat Money
Even with fractionally backed paper
money, commodities that could be
used productively are tied up in the
exchange process.
There is an incentive to find an even
more efficient way of facilitating
exchange and freeing up the
commodities used to back the paper
money.
Fiat Money
Fiat money is an intrinsically worthless
commodity that serves the functions
of money.
The bills and coins that most
developed countries use today are
examples of fiat money called
currency.
Fiat money is accepted as a medium of
exchange because everyone believes it
has value.
Deposit Money

Deposit money consists of deposits at


banks and other financial institutions.
Deposit money exists only as
bookkeeping entries in the banks’
computers.
It is money because it is used to settle
debts.
Checks and
Checkable Deposits
The owner of a deposit can transfer
ownership to some other economic
unit by writing a check.
The check is an instruction to the bank
to transfer the funds.
Checkable deposits are deposits
against which checks can be written.
Official measures of money

see figure 13.1page 293


M1: currency plus checkables
M2: M1+ small savings accounts
+time deposits
+mm mutual funds
M3: M2 +large savings accounts
The principle is degree of
liquidity
Banking: The second oldest
Profession
Three major developments in banking
1. negotiable warehouse receipts
(bank notes)
2. homogeneity in deposits
3. the principle of fractional reserves
deposits

cash reserves
time
The Role of Banks in our Economy

1.facilitate the flow of funds from savers


to borrowers. (intermediary)
2. less cost to borrowers
3. less cost to savers
4. create liquidity
$ $

savers Banks Borrowers


Types of Financial intermediaries

commercial banks
business loans
savings banks and credit unions
auto loans
savings and loan associations
mortgage loans
mutual funds
stocks/bonds
Bank regulation
Why is Banking so highly
regulated?
Structure
where can banks locate?
Balance Sheet
deposit insurance
capital requirements
reserve requirements
(see next slide)
ans: fear of bank failures
Simple Bank Balance Sheet

Assets Liabilities
Reserves Deposits
cash Checkables
accts in other bks Savings

Securities Borrowed Funds

Loans Capital Account


The Savings and Loan Fiasco

Trouble brewing in the 1970’s


DIDMCA of 1980(deregulation act)
reduce asset portfolio restrictions
The “Las Vegas” strategy
owners and operators of S and L’s made
very risky investments in an attempt to
return to profitability. What role did
developers play? If they won they would be
rich. If they lost the govt would pay( they
lost )

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