Intro lecture - Refresher
September 4, 2022 8:39 PM
Dictionary: BS=Balance Sheets
• A refresher chapter could be "Howells & Bain", chapter 1
• Some of the pre-required knowledge
○ Intermediate macro economics
○ Basic banking
○ Accounting
○ Econometrics
▪ OLS
▪ Fixed effect models
▪ Limited dependent variables
• Role of a domestic financial sector:
• The real economy generates deficit and surplus sectors (ultimate lenders and
borrowers)
• Economy needs credit for investment and working capital, banks provide this
• The economy needs a paymlent system (=liquidity) and a store of welth
• Finance includes both ultimate and proximate sources of development (Explanatory
Growth Framework),
• Why does production and trade leads to financing needs?
• Liquidity creation is one of the key functions of the banking system
• IE: my promise of paying back a loan turned into a liquid loan
• There's no financial system without surplus/deficit units
• Earning and spending are net flows
• Surplus units net lend (save), deficit units net borrow
• Saving is not finance (=gross asset/liability changes)
• i.e.: borrowing to invest in shares is not net borrowing
• Saving does not equal real invesmtent
○ (Y-C)-I=NAFA
•
• Saving is a real concept and means income - expenditures (=Y-C)
• Finance is a financial concept and means total assets or liabilities (each side of the BS)
• Real capital (i.e.: a machine) is not financial capital (i.e.: a financial asset)
• Financial capital (a stock) is not credit (a flow)
Summary:
Banking Page 1
,W2 - Lecture prep
September 7, 2022 11:47 AM
Title:
Bezemer, 2019
• Money is a…
WI money?
• Means of settlement
○ Modern money is debt. This is based on the premise that credit is built on
promise
○ Money is the way in which people find common ground to settle liabilities
(we need to be able to pay our own way).
• Standard of value and unit of account
○ By means of money, all economic agents are able to translate value into
common terms
• Social institution sanctioned by the state
○ What is accepted as means of settlement must be decided in society. This
consensus makes transactions more efficient.
• A liability
○ It only works when everyone is 'liable' (=obliged) to accept it
○ By this means is how money is used as a tool to bridge time
• Hierarchical instrument
○ Not all money has the same acceptability. M1>M2>M2 and so forth
○ The more liquid the money, the more generally accepted
▪ In boom cycles, the differentials between monies with different
liquidity narrow
• Some history: Money is preceded by debt. Different cultures used different
Is money older than
debt? mechanisms to register debt on a double entry system. Money originates from the
need to make this creditor-debtor relationship more liquid as common mean of
payment.
WI money worth? • The value of money is not fixed but depends on a societal valuation (i.e.: inflation and
deflation)
• Inflation is generally referred to the valuation of goods and services, not of
WI inflation? financial assets
○ This is a general concern in monetary economics
WR Assets? ○ Assets' (i.e.: stocks, bonds, futures, real estate and insurance policies)
prices normally grow at a faster pace than goods/services
▪ There can be fast money grow with low inflation if most of the
money is poured into the assets market (independent from growth
in output)
Ryan-Collins, 2011. Ch. 2: 'What do banks do'
WI the role of banks Orthodox economics believes that banks are neutral agents in the economy, which do
•
according to not determine themselves economic outcomes. This view is wrong and leads to
orthodox economics? unrealistic assumptions as that a higher level of savings will necessarily lead to higher
WD it overlook? levels of investments in productive businesses.
• This view also overlooks the question 'where does money come from?'
HI money created
according to • Money created directly by the central bank is only a small fraction of the monetary
orthodox econ.? base (money supply) as a whole
WI CB money? • Central bank money = cash + reserves (=electronic money created by the CB, risk-free)
• What is not central bank money is commercial bank money
Banking Page 2
, • What is not central bank money is commercial bank money
WI money supply? • Money supply: cash and commercial bank money
• BoE's definition of money supply is M4 and has only ~3% cash. The rest (~97.4%)
is bank/demand deposits
WI the money • Textbooks argue that money is created through the Multiplier model: a bank receives
multiplier model?
a deposit. Then keeps a required reserve and lends out the rest. This happens over
and over with the subsequent bank keeping a smaller reserve, until the original
deposit is divided by the required reserve ratio.
•
WI the money
multiplier (supply) • Money supply as a pyramid, in which CB controls the width of the base
pyramid? (monetary base) and the steepness of the sides (reserves ratio)
○
W makes the money
multiplier model • Untrue implications of the money multiplier model that makes it inaccurate
inaccurate? 1. Banks cannot start lending without first having money deposited with them
(banks as mere intermediaries)
a. Banks usually lend without waiting to get deposits with the sole guarantee
of the borrower's soundness and ability to pay
i. BoE currently does not have reserve requirements but only liquidity
requirements for banks to meet their everyday obligations
2. By altering the reserve ratio or monetary base (cash + CB reserves), the state can
control the amount of credit issued into the economy by controlling bank
reserves
a. The CB generally has little control over the amount of money in the
economy as a whole
3. The growth in the money supply in the economy is mathematically limited
(monetary base is always under the CB's control)
YR bank reserves at • Bank reserves at the CB are not very meaningful measures of money: even though the
the CB unmeaningful BoE pumped during the crisis over 200 pounds into the economy through quantitative
measures of money?? easing, this money never arrived to the real economy but only shrank the differential
between CB money and commercial bank money
WD the money supply • The size of the commercial bank credit balloon (=money supply of a nation)
of a nation depend
Banking Page 3
, • The size of the commercial bank credit balloon (=money supply of a nation)
of a nation depend depends mainly on the confidence and incentives of the banks
on?
Ryan-Collins, 2011. Ch 3: 'The Nature and History of Money and Banking'
• …This book is written from a British perspective
WR the 4 key roles • 4 key roles of money
of money?
• Store of value
• Medium of exchange
• Unit of account
• Common means of settlement
WI the commodity • Commodity theory of money: money as natural and neutral
theory of money? • Classical economics view (Smith, Mill, Ricardo, Marx): real economic value is not
in money but in land, labour and process of production. Money is just a symbol
representing that value
○ Commodities with the most money-like properties (intrinsic value,
portability, divisibility and homogeneity), like gold, naturally become
adopted as money over time
▪ When these commodities are not available, alternative instruments
(i.e.: cigarettes) appear
YI it called • The centrality of the commodity in this view gave it the name 'commodity
'commodity' theory?
theory of money' (or 'metallist theory of money')
Is money neutral • Neoclassical economics view: real transactions (goods and services) are just
according to facilitated by money, though this is neutral and has itself no significant role
'commodity theory'? ○ More mathematical models of 'general equilibria' based on supply and
demand, perfect information, marginal utility, etc…
○ Due to its high velocity (speed at which it circulates through the economy
in transactions), it had a relative production costs near to zero
HD orthodox econ.
Explain the marginal ○ Orthodox economics claims that the demand for money is explained by its
utility of money? marginal utility, which is assumed to be relatively constant as it represents
the value of other 'real' commodities.
Y is this story ▪ This orthodox story is wrong because:
wrong?
□ it assumes perfect information, which would make redundant
any type of money and would result in barter-like economies
□ In the capitalist system, money (financing/capital) is required
prior to production, rather than naturally arising after
production to make the exchange more convenient
□ It does not explain how, why or how much money is injected
into the economy (or hoarded as store of wealth)
□ It does not explain the current existence of 'fiat' money
WI credit theory of • Credit theory of money:
money? • Historical evidence (code of Hammurabi in ancient Babylon) shows that banks
preceded money, and that before the existence of currencies debts (monetary
Do debts precede or not) were recorded by other means
money? • Money might have originated from the need of states to levy taxes
• Historian Niall Ferguson: 'Money is not metal. It is trust inscribed'
WR 3 historical
developments of • 3 key historical developments:
money? • Promissory notes: emergence of private media of exchange (i.e.: Bills of
exchange) circulating independently from state money
• Fractional reserve banking: custodians of precious metals and coinage issuing
deposit receipts larger to their actual stocks in metals
• Bond issuance: perceived need for a stable source of long-term borrowing
(usually by gov'ts) gave origin to bond issuance in city states in Northern Italy.
They were increasingly popular among other states
• Early monetary policy - Bullionist debates: Since the creation of central banks, there is
an ongoing debate between the 'Bullionist' (a.k.a. Currency) school and the Banking
WI bullionists' school about the role of banking on inflation and crises
perspective about
inflation? • Bullionist school thinks that inflation is caused by an irresponsible money
creation and discounting of bills issued by private banks and advocate for
Banking Page 4
