Chapter 13-Money and Banking

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Money

An Asset that can be used to make a purchase

Three jobs of money

The three jobs of money are:
1. medium of exchange
2. standard of value
3. store of value

Money as a medium of exchange

Whaen any good or service is used, people use money.Money doesn't need ot have a inherent value or use-such as corn, or cacoa beans, it needs to be accepted as a meium of exchange by the people.

Money as a Standard of Value

Ex.If i purchase gasoline for $1, we would all want to know wherethe gasoline was purchased. If someone bought a hamburger for $10 we would think that they are crazy. A clerical job that pays $5 per hour would be hard to fill. One that pays $50 would be more easily filled.

Money as a Store of Value

Money tends to lose its value due to inflation. After World War II it has been a very poor store of value. Over relatively short times, money does not lose it's value.

Other useful properties of Money

1. Scarcity: Example gold is scarece enought that it can be used as money.
2. Divisibility:Not a problem, with paper money, but wpuld be a problme if cattle were used as currency.
3. Portability: Paper currency is portale. imagine having to pay with sacks of corn. Coins are not veyr poratable.

Bartering

The only way to do business, if you do not have money. Ex. How many quarter sections of beef do you want for that car? Will you accept four pounds of sugar for a steak?

What does our money supply consist of?

1. Coins
2. Paper money
3. Demand (or checking) deposits
4. Checklike deposits-Negotiable order of withdrawal accounts held by a nonpublic account.

Checks vs. checkable deposits.

Checks are not money. Checkable deposits are money. Checkable deposits are payable on demand.

Curency

Legal tender for all debts. money is currency, demand deposits, traveler's checks an dothercheckable deposits. Other checkable deposits include shre draft acocunts and checking accounst issed by credit unions.

Credit Cards and Debit Cards

Neither Credit Cards or Debit Cards are considered forms of money.

Electronic Transactions

Today, 3/4s of all transactions aree electronic. Example: Payment of Social Security benefits, direct deposit.

M1

currency, demand deposits, traveler's checks, and other checkable deposits. Our basic money supply.

M2

Adding savings, deposits, small-denomination time deposits, and money market mutual funds held by individuals to M1, we get M2.
M1+savings, small denomination time deposits, and money market accounts =M2

Time Desposits

Hold funds that need to be left in the bank for a specified period of time-a week, a month, three months, a year, five years, or more.

Saving withdrawal

Legally the bank could require 30 days prior to releasing my funds.

Money market mutual funds

Issued to stock brockers and other instiutions, they pay higher interest than banks, and offer check writing priveleges.

John Maynard Kaynes reasons that people hold onto money

1. To make transactions
2. For precautinary reasons
3. To speculate

Transaction motive to hold money-Most important reaso to hold onto money.

The transactions motive. individuals and businesses need to to hold certain amount of money for regular expenses.

Precautionary Motive to hold onto money.

Rainy Day Fund. Poeple keep it on hand, just in case of some unforeseen emergency, although it is not money spent.

Speculative Motive to hold onto money.

Based on the belief that better opportunitiesfor incestment will come along and that, in particular, interest rates will rise.

Four Influences on the Demand for Money (Influences the amount of money that we hold onto)

1.Inflaton
2. Income
3. Interest Rate
4. Credit Availability.

Inflation and demand for money.

During inflation, prices rise, and you need to increae the amount of money you need to meet the day to day needs.

Income and demand for money,

The more you make, the more you spends, the more money you need to have in cash or in your checking account. As income rises, so does the demad for moeny balances.

Interest rate and demand for money.

The quantity of money demanded decreses as the interestrates rise. Negative relationship. As interest rates increase, assets in the form of bonds, money markey funds, time deposits and other interest-bearing securities, become more attractive than money balances.

Credit Availability and demand for money

Increasing credit availability has exterted a downward pressue on the demand for money. Credit avialibilty means that less people hold onto money.

Commercial banks

Make up the bulk of checkable deposits. Up until 1980, they were the only ones allowed to issue checking deposist and they were the only ones recognized as "banks". They have the word "bank" in their name. They lent money for very short-term commercial loans, but recently have brached out into consumer loans, commercial and residential mortgages and some offer brokerage services.

Modern Banking

Banks would like to keep about 2% of their deposit in the form of vault in cash. banks are now required to keep 10% of their checking deposits on reserve.

Savings and Loan Associations

Originally established to finance home building, they now offer most of the services offered by commercial banks. Invest more than 3/4s of their savings deposits in home mortgages.

Mutual Savings Banks

Most are found in the northeastern United States.
They were created to encourage savings among the "common people". Traditionally they offered small personal loans, however today they offer the same range of services as commercial banks.

Credit Unions

Hold less that 5% of total savings in deposits. Specialize in small consumer loans. They are cooperatives that generally serve a specific employee, union or community group.

Banking Act of 1980

Blurred the distinctions between commercial banks and three other depository institutions. Before 1980 only commercial banks were legally allowed to issue checking accounts.

Consoladation effects in banking

1.Consolidation of financial institutions over the last 25 years. Means less competition, and is cause for alarm.
2. Consolidation also brought about the ATM machine.

Banking Principle:

Borrow money at low interest and lend money out at much higher interest rates.

Financial Internediaries

Channel funds

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