© 2001 J. Douglass Klein MONEY. © 2001 J. Douglass Klein MONEY.
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© 2001 J. Douglass Klein
MONEY
© 2001 J. Douglass Klein
MONEY
© 2001 J. Douglass Klein
MONEY
© 2001 J. Douglass Klein
MONEY
© 2001 J. Douglass Klein
MONEY
© 2001 J. Douglass Klein
MONEY
© 2001 J. Douglass Klein
MONEY
© 2001 J. Douglass Klein
MONEY
© 2001 J. Douglass Klein
The Equation of Exchange
M V = P Y
Quantity of Money x Velocity of Money
Price Level x Real Output
=
© 2001 J. Douglass Klein
The Equation of Exchange
M V = P Y
What if the money supply grows without any increase in the level of real output?
What if the velocity also increases??????????????
© 2001 J. Douglass Klein
The Equation of Exchange
© 2001 J. Douglass Klein
The Equation of Exchange
© 2001 J. Douglass Klein
Prices, 1750-1890
50
70
90
110
130
150
170
190
210
230
250
1750 1760 1770 1780 1790 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890
MV = PY
© 2001 J. Douglass Klein
Basic Bank Accounting
In any introductory Economics text, review “T” accounts
Assets Liabilities
Specie (gold & silver; reserves)
IOUs (loans owed to the bank, by govt. or individuals)
Notes of Other banksOther Assets
Deposits (money owed to others)
Notes issued by this bank (promises to pay)
© 2001 J. Douglass Klein
Basic Bank Accounting
© 2001 J. Douglass Klein
History of Banking
Origins of Paper Money Goldsmiths in 16th C. Italy Issued deposit receipts
Origins of Fractional Reserve Banking What if you make loans by issuing deposit receipts instead of specie?
Why there is a money multiplier? A certain amount of gold supports more money in circulation.
© 2001 J. Douglass Klein
Basic Bank Accounting
Assets Liabilities
Specie (gold & silver)
Deposit ticket (gold owed to others)
After a while, the deposit tickets circulate instead of goldVoila! Paper money!
© 2001 J. Douglass Klein
Basic Bank Accounting
Assets Liabilities
Specie (gold & silver)
Deposit ticket (gold owed to others)
One day, someone asks for a loan of some gold.The Goldsmith loans the gold in exchange for an IOU
© 2001 J. Douglass Klein
Basic Bank Accounting
Assets Liabilities
Specie (gold & silver)
Deposit ticket (gold owed to others)
One day, someone asks for a loan of some gold.The Goldsmith loans the gold in exchange for an IOU
© 2001 J. Douglass Klein
Basic Bank Accounting
Assets Liabilities
Specie (gold & silver)
Deposit ticket (gold owed to others)
One day, someone asks for a loan of some gold.The Goldsmith loans the gold in exchange for an IOU
I.O.U.1 brick
Loan
The birth of fractional reserve banking
© 2001 J. Douglass Klein
Basic Bank Accounting
Assets Liabilities
Specie (gold & silver)
Deposit ticket (gold owed to others)
The goldsmith doesn’t even have to loan out gold.The goldsmith can ISSUE MORE TICKETS!
I.O.U.1 brick
Loans
I.O.U.1 brickI.O.U.1 brick
I.O.U.1 brick
© 2001 J. Douglass Klein
Basic Bank Accounting
Assets Liabilities
Specie (gold & silver)
Deposit ticket (gold owed to others)
At this point there are 8 deposit tickets supported by four bars of gold. The reserve ratio is .5
I.O.U.1 brick
Loans
I.O.U.1 brickI.O.U.1 brick
I.O.U.1 brick
© 2001 J. Douglass Klein
Basic Bank Accounting
Assets Liabilities
4 Specie (gold & silver)
8 Deposit ticket (gold owed to others)
4 Loans
Any change on one side must be matched by an equal change on the other
+1 Gold +1 deposit ticket
+1 Loan +1 deposit ticket
What happens if depositors begin withdrawing gold?
© 2001 J. Douglass Klein
Problems with Colonial Banking
States issued own money
Continental Congress tried fiat money Not Worth a Continental
Gresham’s Law
© 2001 J. Douglass Klein
Money - 1775-1779
Value of paper money issued (exchange rate of paper to gold coin)
05101520
2530354045
1775 1776 1777 1778 1779
1775 11776 1.5177717781779 42.2
© 2001 J. Douglass Klein
Hamilton’s Bank
“Without a paper, in general currency, equivalent to gold and silver, a considerable proportion of the specie of the country must always be suspended from circulation…” (277)
“To attach full confidence to an institution of this nature, it appears to be an essential ingredient in its structure, that it shall be under a private, not a public direction…” (278)
The capital of the bank is set at $10 million, with the federal government subscribing in the amount $2 million.
© 2001 J. Douglass Klein
Banking abuses
“Perils of State Banking” (1818)
Describe some of the abuses of state banks. (pages 441-443)
Describe the consequences of those abuses.
© 2001 J. Douglass Klein
Basic Bank Accounting
Assets Liabilities
Specie (gold & silver)
Deposit ticket (gold owed to others)
I.O.U.1 brick
Loans
I.O.U.1 brickI.O.U.1 brick
I.O.U.1 brick
I.O.U.1 brick
I.O.U.1 brickI.O.U.1 brickI.O.U.1 brick
I.O.U.1 brickI.O.U.1 brickI.O.U.1 brick
I.O.U.1 brick
© 2001 J. Douglass Klein
Wholesale Prices (1910-14 = 100)
Source: Hughes, American EconomicHistory, p. 217.
End of the First BUS (1811)
Veto of the 2nd BUS (1832)
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