Womack Report

August 28, 2007

Money and Banking, August 28

Filed under: Economics,Notes,School — Phillip Womack @ 2:37 pm

Getting started up again. Trying to get a student loan from someone. Frustrating process. My income last year was too high for me to get much support, and there seems to be an assumption by most parties involved that everyone understands the basic process. Going to have to pick it up again tomorrow, most likely.Quizzes start next week, over chapters 1 & 2. Will need to buy a package of the half-sheet scantron forms. Need eight of them total for this class.

Talking about money and banking today. Issues: How do glabalization and technology affect the economic role of banking and financial institutions? What are some of the functions of money? How has money changed over time? What are money aggregates? How have changes in payment technologies affected things?

Chapter 1:

Domestic and global financial institutions are blending together, which introduces much more and more effective competition between them.

Money is anything that people are willing to accept in payment for goods, services, financial assets, or debt. Money is a medium of exchange, a replacement for direct bartering, a store of value, has a standard of value or unit of account.

A standard of value or unit of account is a consistent, measurable value of the money.

Bartering is the original, most basic means of trade. Bartering is awkward, because it requires a double coincidence of wants to be efficient. This means that the parties involved must each have something they are willing to trade that the other party wants, and which is equivalent in value to the item they wish to get.

The next evolution of money was commodity money, which is money backed by real goods. Often this was money pegged to the value of precious metals.

The current state of money is most commonly fiat money, which is money accepted on the basis of it being a unit of exchange only, without being directly attached to any commodity standard.

Seignorage is the difference between the market value of a physical money token and the amount required to produce that token. Most money costs less to produce than its face value. Debasement is the reduction of the intrinsic value of the material in a unit of money without reducing its stated value. Traditionally, this means using less of the expected precious metals in coins.

The U.S. Treasury is responsible for issuing money, and controls the Mints and the U.S. Bureau of Engraving and Printing. The Federal Reserve System is independent of the government, although mcuh of its leadership is selected by the federal government. The Fed issues direction to the Treasury on how much money should be collected or printed.

Liquidity is the ease with which a financial asset can be transformed into ready cash.

M1 monetary aggregate is physical cash, traveller’s checks, and transactions deposits held at depository institutions. Transactions deposits are checking accounts and equivalent arrangements.

M2 monetary aggregate is M1 plus small denomination time deposits at depository institutions savings deposits and money market deposit accounts at depository institutions, and funds held by individuals, brokers, and dealers in money market mutual funds.  Savings accounts are interest bearing deposits without set maturities.  Money market deposit accounts are savings accounts that permit limited checking privileges.

M3 monetary aggregate is M2 plus large denomination time deposits (jumbo CDs), term repurchase agreements and term Eurodollars, repurchase agreements at depository institutions and Eurodollar deposits held by U.S. residents at foreign branches of U.S. depository institutions, and institution-only money market mutual fund balances.  Eurodollar accounts are accounts in non-U.S. banks kept in U.S. dollars.  Repurchase agreements are agreements, usually between organizations, to exchange funds for financial assets and then buy the financial assets back at a later time.

Chapter 2:

Electronic Cash — Read the Chapter.

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