Notes on Money and Banking

Complexity of Modern Money Management

  • Understanding money involves complexities beyond just physical currency.
  • Influenced by technology and globalization.
  • Key questions: Where does money come from? How do economies rely on it? What ensures the public's trust in its value?

Different Forms of Money

  • Money serves various functions: medium of exchange, store of value, measure of worth.
  • Modern money: stamped metal or printed paper issued by governments.
  • Characteristics of money include:
    • Portability: Easy to carry (e.g., cash vs. a cow).
    • Divisibility: Can be divided into smaller units (e.g., dollars into quarters).
    • Durability: Long-lasting (unlike livestock).
    • Stability: Value does not fluctuate wildly.

U.S. Money Supply Measurement

  • M-1: Spendable forms of money (currency, checks, checking accounts).
  • M-2: M-1 plus less liquid forms (savings accounts, time deposits). Total in March 2020: M-2 was $16.103 trillion.

The Federal Reserve's Role

  • The Federal Reserve (the Fed) manages the U.S. economy and monetary policy.
  • Key tools:
    • Open-market operations: Selling and buying government securities.
    • Discount rate: Interest rate for banks borrowing from the Fed.
    • Reserve requirements: Percentage of deposits banks must keep on hand; currently set at 10%.

Money Creation by Financial Institutions

  • Financial institutions create money through the lending process:
    • For example, a $100 deposit allows a bank to loan out $90, creating new money in circulation.
  • The FDIC insures bank deposits up to $250,000, restoring trust in banks during failures.

Changes in the Money and Banking System

  • The banking system has faced major changes due to:
    • Economic interventions from the government (e.g., TARP during the 2008 crisis).
    • Stricter regulations to prevent financial manipulation (Dodd-Frank Act).
    • Evolution of electronic banking and services (ACH networks, mobile banking).

International Banking and Finance

  • Currency exchange rates are crucial for international trade; they fluctuate based on supply and demand.
  • Various institutions (World Bank, IMF) play roles in financing and stabilizing international trade.
  • The financial landscape is influenced by both governmental policies and electronic technology advancements.