Monday 907

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 10 Money and Prices in the Long Run
Chapter 29 of 36 The Monetary System
Section 10 of 22
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The Federal Open Market Committee (FOMC) is comprised of
· the seven members of the Federal Reserve Bank (Fed) board of governors
· five of the twelve Fed regional bank presidents
At each FOMC meeting held every six weeks in D.C. all twelve Fed regional bank presidents attend but only five get to vote.
The five with voting rights rotate among the twelve regional presidents.
The president of the New York Fed always gets a vote, because
· New York is the traditional financial center of the U.S. economy
· all Fed purchases and sales of government bonds are conducted at the New York branch
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The FOMC has the power to increase or decrease the number of dollars circulating in the economy.
The Fed's primary tool of money supply control is the open-market operation, which is the purchase and sale of U.S. government bonds.
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When the FOMC decides to increase the money supply the Fed buys government bonds from the public.
The Fed simply creates the dollars to buy the bonds.
After the FOMC purchase of bonds the additional dollars paid for the bonds are circulating in the economy, the money supply has increased.
Increasing the money supply gives banks more funds to lend, which pushes interest rates down.
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When the FOMC decides to decrease the money supply the Fed sells government bonds to the public.
The Fed then destroys the dollars they receive from the sale, by wiping them off their books.
After the FOMC sale of bonds and destruction of the dollars fewer dollars are circulating in the economy, the money supply has decreased.
Decreasing the money supply results in banks having less funds to lend, which pushes interest rates up.
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Restated from Chapter 1, the ten principles of Economics:
1: people face trade-offs
2: the cost of something is what you give up to get it
3: rational people think at the margin
4: people respond to incentives
5: trade can make everyone better off
6: markets are usually a good way to organize economic activity
7: governments can sometimes improve market outcomes
8: a country's standard of living depends on its ability to produce goods and services
9: prices rise when the government issues (creates) too much money
10: society faces a short-run trade-off between inflation and unemployment
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The power of the Fed rests on these two principles
· #9: prices rise when the government issues (creates) too much money
· #10: society faces a short-run trade-off between inflation and unemployment
The Fed's policy decisions have an important influence on the economy's
· inflation rate in the long run
· employment and production level in the short run
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traditional financial center
dentō-tekina kinyū sentā
伝統的な金融センター
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How was the money supply controlled before the Federal Reserve Bank began to operate in 1914? ChatGPT:
Before the Federal Reserve began operating in 1914, the United States had no single institution deliberately controlling the money supply.
Under the National Banking System, banks created much of the money through deposits and loans, while national banks could issue their own banknotes (cash currency) backed by U.S. government bonds.
The U.S. Treasury also issued currency and managed government gold reserves.
Because the country was on the gold standard, the amount of gold entering or leaving the United States strongly influenced how much money and credit could be created.
The system therefore adjusted largely through banks, gold flows, and Treasury actions rather than through a central bank conducting monetary policy.
This arrangement helped make financial panics such as the Panic of 1907 especially difficult to manage.
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What was the difference between state-chartered banks and national banks? CGPT:
A state-chartered bank received its charter and was primarily regulated by a state government.
A national bank received a federal charter under the National Banking Acts of 1863–64 and was regulated by the federal government.
National banks had to meet federal capital and reserve rules and could issue standardized National Bank Notes backed by U.S. government bonds.
State banks had more varied rules and, before the Civil War, often issued their own less-uniform banknotes.
After 1865, a federal tax on state-bank notes largely pushed state banks out of issuing their own paper currency, though they continued operating as deposit-and-loan institutions.
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Banks could create their own cash currency - did this make it difficult to make cash purchases when traveling? CGPT:
Before the Civil War, yes — travel could be inconvenient because state-chartered banks issued many different banknotes, and merchants might discount or refuse notes from distant or unfamiliar banks because of uncertainty about whether they were genuine or redeemable.
After the National Banking Acts of 1863–64, this problem was greatly reduced. National Bank Notes were federally standardized, backed by U.S. government bonds, and generally accepted at face value nationwide, even though the issuing bank’s name appeared on the note.
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Current national and state banks situation. CGPT:
The United States still has both national banks and state-chartered banks.
National banks are chartered and supervised by the Office of the Comptroller of the Currency (OCC) - a federal government agency within the U.S. Department of the Treasury.
State banks are chartered by their state banking authority.
Both types can take deposits and make loans, and today the practical differences for customers are usually small.