• Gold standard
  • Came before the federal reserve system (and existed during it as well)
  • People like gold for money because it is rare and durable
  • A dollars value is fixed to a quantity of Gold (or silver)
  • Bimetalic system would use two metals - typically silver and gold
    • Hard to keep in sync because the values fluctuate
  • Metals have industrial uses
  • Inherently deflationary if the value stays fixed
  • If it’s not fixed, how different is it than fiat currency?
• Federal Reserve
  • The Federal Reserve bank is more than a plot device in Die Hard 3
  • To understand it, you have to understand fractional reserve banking
  • At its simplest, the idea is that the bank takes some of the money it has on deposit and uses it to issue loans
  • These loans increase the money supply
    • Bank has $1,000,000 in deposits and can loan out 90%
      • First loan: $900,000
      • Then $810,000, $729,000, $656,100, $590,490, etc
      • Before the value gets to under one cent, it can be loan 182 times
      • The total amount of money from it becomes $10 Million
      • The reciprocal of fraction that is retained (i.e. 1/10th) becomes the multiplier (i.e. 10x)
      • This is called the money multiplier effect
  • Bank runs & reserve limits
  • Lender of last resort
  • Money creation (plus interest) tends to freak people out
  • Paying a loan undoes the money multiplier with the same multiplier effect
  • Interest growth means that the outstanding loans require more money but remember the economy is usually growing
  • The federal reserve sets an inflation target (2%) and uses lending rates and reserve percents to try to achieve that
  • They are also in charge of ordering money from the US Mint
  • It’s a public entity with a quasiprivte part
    • Congress charted it, oversees it and the president nominates the chair
    • To be a member bank, you must hold shares in your regional bank
    • Profits are spent on staff and dividends. Anything left over goes to the treasury (a very indirect tax!)

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References

• Functions of Money
• Zoo Economics
• US GDP Table
• Federal Reserve Ownership