Money and BankingMoney and Banking

There is $665 billion$665 billion in currency [notes & coins]. $37 million$37 million in notes is printed each day.

Dollar DecodedDollar Decoded

Fed bankFed bankthat issuedthat issued

the billthe bill [Chi.][Chi.]

Bills are crowded with numbers andletters that help the U.S. Treasury trackprinting errors & authenticate currency.Here’s what many of them mean:

Number corresponds to letter in Number corresponds to letter in circle indicating issuing Fed bank.circle indicating issuing Fed bank.First letter correspondsFirst letter corresponds

to issuing Fed bankto issuing Fed bank

Last letter tells how many Last letter tells how many times serial number has runtimes serial number has run

25 Branches25 Branches

[Jackson’s portrait is larger, free from the oval]

New $20 colors are peachpeach, blueblue, and greengreen.

This is the 20’20’s s 2020thth new looknew look.

New backgroundNew backgroundcolors add anextra layer of complexitycomplexity forcounterfeiters

Ink appears eithercoppercopper or greengreen,depending uponthe angle at whichthe bill is viewed.

The first $20first $20 billwas introduced in18611861. Back then,$20 was about themonthly wage formanual laborers.

The average $20 bill lasts 3 years3 years.

There are 5 billion twenties5 billion twenties in circulation,enough to circle the earth 19 times.

An ATMATM can hold up to 7,500 bills,or $150,000$150,000 in twenties.

The $20 bill is themost counterfeitedmost counterfeitedin the U. S.in the U. S., whilethe $100 is most$100 is mostcounterfeited abroadcounterfeited abroad.

The New York FedNew York Fed has more gold than any other vault in the world, Including Fort Knox. With walls of steel and concrete several feet thick, it has the gold of 63 countries63 countries, worth over $120 billion.

What To Do If Your Money Gets Damaged!!What To Do If Your Money Gets Damaged!! 30,000 people a year send $96 million of damaged bills to the Bureau of Mutilated DivisionBureau of Mutilated Division. If you can send them 51%51%, they will send you a new bill. An Iowa farmerIowa farmer once left his wallet in a field and a cow ate it. He killed the cow and mailed the cow’s stomach to the bureau. Examiners redeemed the money and sent the farmer $850$850.

$100$100 Dollar Bill – Dollar Bill – Red Polymer ThreadRed Polymer Thread

$50$50 – Yellow – Yellow

$20$20 – Green – Green

$10$10 – Orange – Orange

$5$5 – Blue – Blue[This $5 will be hard to counterfeit][This $5 will be hard to counterfeit]

Shredding of U.S. MoneyShredding of U.S. Money$500 million$500 million is shredded at the 12 Feds each day. That is over $100 billion each year$100 billion each year. A typical dollar last about 18 months. Higher denominations last longer.Despite a camera on those whose job it is to shred money – can you get out of the shredding room with some of the notes? Yes!!!Yes!!!An employee in Washington took $1.7 milliontook $1.7 million in $100 bills [ he sneaked 1,700$100 bills past his security]. He was caught when his bank teller reported hisfrequent large deposits in his bank.

At the Boston Fed, an employee made off with $23,000$23,000 when he stuffed money into his pockets after obstructing the view of his coworkers. He was caughtwhen his employer viewed the video.

Over 50%50% of our money is in circulation overseasoverseas. There is over $2,000 for each man, woman, and child.The Russians have $40 billionRussians have $40 billion. Argentina has $7 billionArgentina has $7 billion.

Never the less, many people think we should get rid of penniesget rid of pennies – just round upor down. If the price is .25, .26, or .27 – just charge 25 cents25 cents; and if the price is.28, .29, or .30, just start 30 cents30 cents. But there is one big problem if we got ridone big problem if we got ridof pennies!!!of pennies!!!

How would Nike pay their workers?How would Nike pay their workers?

No paper notes larger than $100 have been printedNo paper notes larger than $100 have been printed since 1946.since 1946.

It cost 3.5 cents to print a dollar which last 1.5 years.It cost 3.5 cents to print a dollar which last 1.5 years.

It cost 12 cents to mint a sacagawea It cost 12 cents to mint a sacagawea [“bird woman”][“bird woman”] but they last 30 years. but they last 30 years. [500 million were minted but you seldom see them.] [500 million were minted but you seldom see them.]

The government could save $400 million if people would use The government could save $400 million if people would use more sacagaweas.more sacagaweas.

New FloridaNew Florida QuarterQuarter

And – The And – The New DollarNew Dollar To Be Introduced To Be Introduced

Next Week In Honor of McDonald’s SuccessNext Week In Honor of McDonald’s Success

““Show me the Show me the wampum!!”wampum!!”

History of U.S. Money History of U.S. Money [A Panorama of Legal Tender][A Panorama of Legal Tender]

From Wampum to Credit CardsFrom Wampum to Credit Cards

Wildcat Banking 1790-1860Wildcat Banking 1790-1860

State banks issued paper notes in denominations from $1 to $13.They lost their value the farther away you were, thus the name,“wildcat banking”, only a wildcat could get back to a distantbank to verify its authenticity.

Over 3,000 banks issued10,000 billsbut 5,000 were

counterfeit.

Because some banks were more sound than others, a $5 note at onerarely had the same purchasing power as a $5 note at another.

Yap Island MoneyYap Island Money

Yap Island is a tiny, U.S. trust territory in the S. Pacific, 500 miles from Guam. It is one of the 4 Federated States ofMicronesia & has 12,000 Yapese & 6,000 “rai” 12,000 Yapese & 6,000 “rai” limestone stones. limestone stones.

Overview of Money, The Fed and Overview of Money, The Fed and Monetary PolicyMonetary Policy

1. The 1. The functionsfunctions and measurement of money and measurement of money 2. The 2. The Federal ReserveFederal Reserve and its functions and its functions 3. 3. Fractional reserve bankingFractional reserve banking & how it works & how it works 4. The 4. The Money MultiplierMoney Multiplier [ 1/RR(.10) = 10 [ 1/RR(.10) = 10 5. 5. Tools of Monetary PolicyTools of Monetary Policy a. a. Discount RateDiscount Rate-rate the Fed charges banks-rate the Fed charges banks b. b. Reserve Ratio-Reserve Ratio-%% of of deposits banks havedeposits banks have to to

keep in reserve and can not loan out.keep in reserve and can not loan out. c. c. BBuyinguying (recession)(recession) & & ssellingelling (inflation(inflation)) of of bbondsonds

..

ObjectivesObjectives 1. Three functions (roles) of moneyfunctions (roles) of money a. medium of exchange b. unit of account c. store of value 2. What constitutes moneyWhat constitutes money in our economy? paper dollars-50%) paper dollars-50%) coins-2% coins-2% b. DD-48%b. DD-48%

3. What “backs” the money supply“backs” the money supply? (gold/silver/the faith of the “G”)

4. Explanation of the demand for moneydemand for money.5. The four-part make-up of the Federal Reservefour-part make-up of the Federal Reserve a. Board of Governors b. FOMC c. 12 Fed Banks d. Member banks

MoneyMoney – any good widely accepted for goods and services or repayment of debt. Money is anything generally acceptable as a medium of exchange.

““Faith” of theFaith” of the “G”“G”

However, before trade could occur, there had to be a “double coincidence“double coincidence of of wants”wants”. Each trader had to have something the other wanted.

I’ll trade you a chicken for a pair

of shoes.

I would love to sell you these shoes but I can’t eat chicken, due to my bad teeth, caused by smoking.

..

In a barter economybarter economy a chickenchicken

farmer who wants to buy shoesshoes

may have to first trade chickenschickens

for apples apples and then apples apples for

shoes shoes because the guy selling

shoes shoes wants only applesapples. Money eliminates this problem.

BarterBarter – goods and services were – goods and services were

traded without the exchange of moneytraded without the exchange of money..

..

It is It is less expensiveless expensive to use money. to use money. Using money Using money saves timesaves time and and time istime is moneymoney..

The “calculation of exchange”“calculation of exchange” by bartering bartering is much slower than the “calculation of exchange”“calculation of exchange” in a monetary systemmonetary system.

It is less expensiveless expensive to use money. The “calculation“calculation of of exchange”exchange” is fast & easyfast & easy because whatever the price is, you pay that amount.

Here’s $2.00 for one gallon.

Money is also Money is also easier to taxeasier to tax. . So a So a monetary system is bettermonetary system is better than athan a

barter systembarter system..

TThe he mmonetary system enables theonetary system enables the “calculation“calculation of exchange”of exchange” to go much faster. to go much faster.

Three FUNCTIONS OF MONEYThree FUNCTIONS OF MONEY

1.1. Medium of ExchangeMedium of Exchange[any asset that sellers will accept as payment for g/s]

Avoids “double coincidence of wants”Avoids “double coincidence of wants” that bartering requires.You would have to have a trading partner who “wants to sellyou goods you want to buy” and “wants to buy goods you want to sell.”

Three FUNCTIONS Three FUNCTIONS OF OF MONEYMONEY

2.2. Unit ofUnit of AccountAccount[measuring the relative value of goods by stating prices]

Example: Microsoft Stock is selling for $50 a share. The new Jag is selling for $32,000.A $2 item is twice as valuable as a $1 item.

Money is like a yardstickyardstick. People use it to compare the worth of things that they buy and sell.

Three FUNCTIONS OF MONEYThree FUNCTIONS OF MONEY

3. Store of Value3. Store of Value [storing wealthstoring wealth from one one point inpoint in time time to anotherto another]

[doesn’t wear out easily and holds up to inflationdoesn’t wear out easily and holds up to inflation]

Ability of money to hold value over timehold value over time[Money that lacked durabilitydurability or did not hold up well to inflationinflation would not make good money [would not store valuenot store value].

Other desirable qualitiesdesirable qualities for money are:A. ScarcityScarcity B. PortabilityPortability C. DivisibleDivisible D. Difficult to counterfeitDifficult to counterfeit

Greek Coin2,500 years old

Currency (coins & paper money)

plus Checkable deposits

equals M1

M1 M2 M3

$1236

2003 Data(billions of dollars)

MONEY SUPPLY

M1 M2 M3

$1236

2003 Data(billions of dollars)

$5899

MONEY SUPPLYCurrency (coins & paper money)

plus Checkable deposits

equals M1

plus Savings deposits,

including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances

equals M2

M1 M2 M3

$1236

2003 Data(billions of dollars)

$5899

$8595

MONEY SUPPLYCurrency (coins & paper money)

plus Checkable deposits

equals M1

plus Savings deposits,

including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances

equals M2 plus Large time deposits

equals M3

Currency (coins & paper money)

plus Checkable deposits

equals M1

plus Savings deposits,

including MMDA’s plus Small time deposits plus Money market mutual fund (MMMF) balances

equals M2

WHAT ABOUTWHAT ABOUT CREDIT CARDS? Are They Money?CREDIT CARDS? Are They Money?They are not “plastic money.”not “plastic money.” They do serve as a medium of medium of exchangeexchange & the credit card statement serves as a unit of accountunit of account. However, they do not have a store of valuenot have a store of value. If the credit card credit card company goes out of business company goes out of business or decides not to honor your not to honor your cardcard, it is worthlessworthless. They are not money because they don’t not money because they don’t store valuestore value.

WHAT ABOUTWHAT ABOUT Debit CARDS? Are They Money?Debit CARDS? Are They Money?

Debit cards areare moneymoney. They serve as a mediummediumof exchangeof exchange; they serve as a store store of of valuevalue (notan extension of credit); and debit card statementsdebit card statementsserve as a unit of accountunit of account.

Debit CardDebit Card

Our Money Is Growing More AbstractOur Money Is Growing More AbstractMoney has grown increasingly more abstractmore abstract - from a physical commodityphysical commodity,

- to a piece of paperpiece of paper representing a claim claim on a physical commodityon a physical commodity,

- to a piece of paper of no intrinsic valuepiece of paper of no intrinsic value,

- to an electronic entryelectronic entry representing a claim

on a ppieceiece of of paper paper of noof no intrinsic value intrinsic value.

[just a Federal Reserve note][just a Federal Reserve note]

TheThe Value of MoneyValue of Money andand Price LevelPrice Level

The value of money goesvalue of money goes in the oppositeopposite directionof the general price levelgeneral price level. Or, the amount a dollar will buyamount a dollar will buy varies inverselyinversely with the price level.

Value of MoneyValue of Money PricesPrices

Old Bond PricesOld Bond Prices and theand the Interest RateInterest Rate

$1,000 x .08 = $80$1,000 x .08 = $80

$800 x .10 = $80$800 x .10 = $80

$1,333 x .06 = $80$1,333 x .06 = $80

CommercialCommercial BankBank//ThriftThrift FailuresFailures

Cost of Bank/Thrift FailuresCost of Bank/Thrift Failures

Ra

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Amount of money demanded(billions of dollars)

0 50 100 150 200 250 300

10

7.5

5

2.5

0

Dm

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Sm

THE MONEY MARKET

Suppose the moneysupply is decreasedfrom $200 billion, Sm,

to $150 billion Sm1.

Ra

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Amount of money demanded(billions of dollars)

0 50 100 150 200 250 300

10

7.5

5

2.5

0

Dm

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Sm

A temporary shortageof money will requirethe sale of some assetsto meet the need.

Sm1

THE MONEY MARKET