excess reserves, banks
measured money (M1). TR=Total Reserves= RR+ER RR=Req. Res.=rr
=required reserve ratio, D=level of
transactions deposits). ER=ER*+ERu (Desired+Undesired) ER*=Desired=excess reserve ratio*D. With any value of ER, ΔD=1/
)*ERu. Deposit expansion multiplier=1/(rr
+e)*D] c=currency ratio e=excess reserve ratio.
Fed can change TR, C, rr
. Banks determine e, public det c. ΔM1=[(1+c)/(c+rrD+e)]*ΔMB (MB=[(c+rr
+e)*D]) If system in
disequalib, ERu can replace ΔMB. ΔD=[1/(1+c)]*ΔM1 ΔC=c+ΔD ΔTR=-ΔC ΔLoans=ΔM1=ΔD+ ΔC. Money multipliers from
Fed targets for money depend on which multip. is more stable and which M is best predict of
GDP. Digital cash new component of M1. Fed cant control.
Origins of US Central Banking.
1791-1836. Bank fo England. The Bank of North America (1781) The First Bank of the United States (1791)
The Second Bank of the United States (1816). 1837-1865 Free-Banking period. The Civil War and Greenbacks-flat money. Not backed by gold
made during the civil war. Supposed to be temporary. 1865-1912. Gold Standard (1875). Brief bimetallism. Panics of 1873, 1893, 1907. Fed
Reserve Act of 1913.
Created Fed Reserve.
Purpose: Develop, supervise, & control nation’s money, serve as nat. chec-clring sys, serve as
depository for fed gov’t funds. Board of Governers of the FRS. 7 ppl, equal standing. Includes secretary treasury and comptroller of currency.
Problems: only use discount window, each district bank sets own policy.
1913-1935. Accom tresur. Dept. Buys bonds during WWI to
keep prices up and int down. From 1916 to 1918 increases MS by 70%. Huge risk of inflation. Following WWI, District banks reassert power.
NY bank pres engages in OMO. Great Depression, failure of fed. Init. Increased liquidity, but pulled back. By 1933, 33% banks fail, MS fallen
Fed version 2
. 1935. Serves as lender of last resort. Board of governers reconsitituted. Does not include treas. Sec. or comp. of currency.
Members serve 14yrs staggered. Pol party diver. Office of chairman and vice chrmn created. Authority of dist. banks. Fed Open Market