Money & Banking By: Professor Jermaine Whirl For Students of East Georgia College
What is Money? • Assets that people are generally willing to accept in exchange for goods and services or for payment of debts. • Assets: Anything of value owned by a person or firm.
Where did money come from? • Evolution of Money • Simple economies began as bartering system in which they traded a good for a good. • This system had major short comings, because the value of one good may not equate to the value of another good. Example (Chicken and a new wood chair).
Evolution of Money • Commodity Money • Fiat Money • Checks • Electronic Payment (Pay-Pal) • E- Money (Debit Cards) • Smart Card- Prepaid store of value card • Questions: Are we headed for a cashless society? • Are there any benefits of having a cashless society? • Should we still make the Penny?
Functions of Money • Medium of Exchange: • Money serves as a medium of exchange when sellers are willing to accept it in exchange for goods or services. • Unit of Account: • Creates a way of measuring the value of goods and services within the economy in terms of money. • Store of Value: • If you don't use all you accumulated dollars to buy goods and services today, you can hold the rest to use in the future. Money accumulated over time holds value.
Durable- Money should last for an extended time. It shouldn't be easily decompose, deteriorate, degrade, or otherwise change form. Divisibility- means money can be divided into small increments that can be used in exchange for goods of varying values Transportability- means that money can be easily moved from one location to another when such movement is needed to complete exchanges. Non-Counterfeiting- means that money cannot be easily duplicated. A given item cannot function as a medium of exchange if everyone is able to "print up," "whip up," or "make up" a batch of money any time that they want. Money Characteristics
What Can Serve as Money? • Commodity Money: • Gold, Silver, Copper at times: • Problems with this is that these items must be pure, the values of these things can change. • Fiat Money: • Money such as paper currency, that is authorized by a central bank of governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money.
Money Aggregates • Money Aggregates were created to track down where money is going, it's current circulation, and the current supply of money in the economy. • Knowing this will enable policy makers to make sound judgments on the correct monetary policies to use to regulate the economy.
Money is the United States • M1: Narrowest Definition of Money: • Currency, which includes all paper money and coins in "circulation" (meaning not held by banks or the government. • The value of all checking accounts (Demand Accounts) at banks • The value of Traveler's checks. • Some facts: • 80% of all purchase made in the US are through Checking Accounts • 60% of US Currency is actually held outside the US.
Money is the United States • M2: A Broader Definition of Money • M2 includes everything in M1 • Plus Savings Accounts • Small-Denomination Time Deposits- such as CDs • Balances in Money market Deposits • & Non-Institutional money market accounts (or non-banking institution money market accounts) • Large Denomination of time deposits & repurchase agreements • Money Market Mutual Fund Shares (Institutional) • Repurchase Agreements • Eurodollars- US dollars deposited in foreign banks outside the US, or in foreign branches of US Banks.
Money in the United States • M3- has been discontinued by the Federal Reserve as of March 2006. • http://www.federalreserve.gov/pubs/supplement/2008/08/table1_10.htm • Large Denomination of time deposits are now published by the Board in the Flow of Funds Accounts
Money Creation in the US • No other body can print money besides the Federal Reserve System/ US Treasury (not congress, the president, or anyone else. • Money can be created in the US two ways: • Federal Reserve prints money (which can cause inflation) • Or Lending of money from bank to bank • The Money Supply itself, is only controlled by the Federal Reserve System!
Role of the US Treasury • Managing Federal finances; • Collecting taxes, duties and monies paid to and due to the U.S. and paying all bills of the U.S.; • Currency and coinage; • Managing Government accounts and the public debt; • Supervising national banks and thrift institutions; • Advising on domestic and international financial, monetary, economic, trade and tax policy; • Enforcing Federal finance and tax laws; • Investigating and prosecuting tax evaders, counterfeiters, and forgers.