Money and the Economy

Gold Confiscation and Bullion

• In 1934-35, the U.S. government outlawed the use of gold in circulation.
• Citizens were required to turn in gold to banks in exchange for paper currency.
• Failure to comply could result in forced seizure of gold.
• This was done to establish a gold bullion standard.
• Gold bullion: gold reserves held in places like the Federal Reserve Bank in New York.
• The Federal Reserve Bank has a secure underground gold reserve with rooms designated for different countries.
• Each room contains gold owned by that country, allowing them to monitor their supply.
• This system is safer than shipping gold, which could attract unwanted attention.
• The majority of the U.S. gold supply is stored underground in the Federal Reserve Bank, not Fort Knox.
• Fort Knox holds a smaller percentage of the total gold reserves.
• California has an untouched mountain of gold owned by the government.
• Releasing this gold to the public would flood the market and decrease its value due to increased supply.
• Scarcity is essential for maintaining the value of precious commodities.

The Nature of Money

• Money: anything that is widely accepted in a society.
• This can include paper money, metal, or other items.
• A crucial factor for something to be considered money is scarcity - limited availability ensures value.

Functions of Money

• Money must fulfill specific functions to be considered valid.
• Medium of exchange: used to purchase goods and services.
• Unit of account: a standardized measure of value (e.g., a dollar bill with the number "1" printed on it).
• Store of value: maintains its value over time without expiring.
• Most liquid: easily used in transactions to settle debts immediately.
• A debit card does not fully function as money because some places only accept credit cards.

Economic Control

• Electronic transactions are easily tracked, providing centralized control and reducing discrepancies.
• Cash transactions offer more privacy due to the lack of documentation.
• Hiding money in offshore accounts is similar to using a safe deposit box to conceal assets from authorities.
• Offshore accounts may be used to avoid taxes by keeping the government unaware of the full extent of one's wealth.

Money Supply

• The Federal Reserve (the central bank) indirectly controls the money supply.
• $M1$: the narrowest definition of money supply, consisting of:
  • Currency: paper money (Federal Reserve notes) and coins.
  • Checkable deposits: liquid funds accessible through ATMs or debit cards.
• Institutions offering checkable deposits: commercial banks, thrift institutions, and credit unions.
• Commercial banks (e.g., Chase, Wells Fargo) are profit-oriented and engage in riskier business activities.
• Thrift institutions, such as credit unions, have limitations on branches and business types.
• A bank run occurs when people panic and withdraw their funds, fearing the bank's collapse.
• Banks can fail due to insolvency or poor decision-making.
• Starting a bank requires approval from the Federal Reserve and the U.S. government.
  • It involves meeting regulations and demonstrating sufficient capital and expertise.
• Commercial banks play a crucial role in economic activity by facilitating money transactions.
• $M2$: a broader measure of money supply, includes $M1$ plus near money.
  • Near money: savings deposits, small-denominated time deposits, and money market mutual fund accounts.
  • Commercial banks also offer near money accounts.
• Detailed in-depth discussion requires financial licensing.
• According to old data, $M2$ equaled $12.4 trillion and may now be closer to $20 trillion.
• Currency (cash) accounts for a small portion of $M2$.
  • Currency is 43% of $M1$, making it about 11% of $M2$.
  • Savings deposits account for 66% of $M2$.

Monetary Standards

• Paper standard: the current system where the government guarantees the stability of the money supply.
• Money's value is based on:
  • Acceptability: people are willing to accept it.
  • Legal tender: recognized for settling debts, both public and private.
  • Relative scarcity: it requires effort or productivity to obtain.
• Commodity monetary standard: prior to 1971, the money supply was backed by gold.
  Nixon administration moved to the paper standard in 1971.

Flexible and Floating Exchange Rates

• Nixon ended the gold price manipulation and moved to floating exchange rates.
• The price of gold and the value of currency:
  • They used to adjust the price of gold to determine the value of currency; US and German government example.
• Other factors determine a nation's currency:
  • Inflation rate
  • Unemployment rate
  • Political stability
  • Economic stability
  • Growth
  • Strength of the economy
  • Strong military force

Contribution of Money to Economic Growth

• It is moving towards a digital transformation where physical cash may not exist.
• Digital transformation eliminates:
  • Printing costs
  • Distribution costs
  • Security costs
• San Francisco Federal Reserve: Very sophisticated, billions of dollars used to be in cash and security included specialists with automatic weapons.
• Counterfeiting:
  • They had counterfeits in the streets before they developed a new one.
  • Digital age, some there's counterfeit money out there that they don't know that it's counterfeit until it goes back to the printing, and they put it under a microscope.
• They can counterfeit digital money.

Triangulation Exchange and Arbitrage

• Exchanges between individuals or states. California (grapes), Idaho (potatoes), and Arkansas (corn) as the three commodities from the three states.
• California wants potatoes, but Idaho doesn't want the grapes.
• California sends money to Idaho, and Idaho will send the commodity potato to California.
• Idaho will use that money to purchase corn from Arkansas.
• Arkansas will take that money and then buy the grapes.
• You see how money is now a tool that's being used, it's not created, it's not destroyed, it's just a tool used to accomplish something.
• Holding on to money just in the form of money, realistically speaking, is worthless because at any time cash money could become worth nothing, absolutely nothing.
• True wealth is infounded in accumulation of assets.
• When you buy something that has really appreciated city value over time, such as precious metals, real estate, whatever things similar to that, That's where the world trade is.
• Examples: California trade rates that Arkansas. Corn. And corn to California, there's no money.
• When the housing market was inflamed, our debt was way too high, major hyperinflation, there were individuals who needed to move from one state to another state because, you know, job relocation, so they need to sell their properties, except they were not getting buyers, so they began to trade.
• I'll trade you my house for your house.
• Inflation was not as high as it is now. Great Recession caused 60% crash.