Banking In the United States

The Federal Reserve, Commercial Banking, and the Supply of Money Done_Abdujalilov Jakhongir

• Remember the story of Goldilocks and the three bears?

• “ Papa bear’s bed was too hard…..Mama bear’s bed was too soft…..but baby bear’s bed was just right!

• Baby bear’s bed and the supply of money…

• Without enough money, it becomes difficult to conduct commerce…transactions slow down and the economy falls into recession

• Like any commodity, excess supply lowers the value of money….too much money creates inflation.

• We need to find a balance between the two…

• The Constitution grants the federal government the power "to coin Money, regulate the Value thereof...”

• The US began minting US coins shortly after the constitution was ratified

• Half Cent (Copper)

• One Cent (Copper)

• Two Cents (Copper)

• Three Cents (Nickel/Copper)

• Nickel/Half Dime (Silver/Copper)

• Twenty Cents (Silver)

• Quarter Dollar (Silver)

• Dime (Silver/Copper

• One Dollar (Silver)

• One Dollar (Gold)

• 2 ½ Dollar (Quarter Eagle)

• Three Dollar

• Five Dollar (Half Eagle)

• Ten Dollar (Eagle)

• Twenty Dollar (Double Eagle)

• Half Dollar (Silver)

• Production of gold coins ceased in 1934. Silver coins were minted until 1964.

Current US Coins

• 99% Zinc, 1%Copper
• Annual Production: 6.8M

• 75% Copper, 25% Nickel
• Annual Production: 1.4B

• 75% Copper, 25% Nickel
• Annual Production: 2.5B

• 75% Copper, 25% Nickel
• Annual Production: 2.4B

• 75% Copper, 25% Nickel
• Annual Production: 5.8M

• 88% Copper, 6% Zinc, 3% Magnesium, 3% Nickel
• Annual Production: 5.3M

• Paper money was initially issued by commercial banks as claims to their deposits of gold and silver (coins or bars)

• Assets

• Liabilities

• $500 (Gold)

• $1,000 (Loans)

• $300 (Deposits)

• $1,000 (Notes)

• $200 (Equity)

• The supply of money was determined by the individual bank’s profit motive - they created loans by issuing bank notes

• Bank notes were only redeemable (for gold/silver) at the issuing bank

• Northampton Bank

• Assets

• Liabilities

• $1,000 (Gold)

• $10,000 (T-Bills)

• $20,000 (US Notes)

• United States notes were printed until 1963, but were a small fraction of total money
• 1910: one tenth 1960: one hundredth

• The US began issuing Greenbacks in 1862 after passing the legal tender act. US Notes were fractionally backed by gold, but were “legal tender for all debts public and private

• US Treasury

• Assets

• Liabilities

• $1,000 (Gold)

• $1,000 (Gold Notes)

• $10,000 (Silver Notes)

• Gold notes were printed until 1934.
• All $1 bills in the US were silver certificates until 1963 and were still convertible to silver until 1968

• Gold/Silver Certificates were 100% backed by gold/silver reserves at the US Treasury, but were not legal tender

• US Treasury

• $10,000 (Silver)

• National notes were convertible to T-Bills at any national bank
• National Bank notes were issued until 1934

• The National Banking Act of 1863 allowed Nationally chartered banks to distribute bank notes (deemed legal tender) secured by US Debt (banks could issue notes equal to 90% of their US debt holdings)

• Assets

• Liabilities

• $50,000 (T-Bills)

• $50,000 (Loans)

• $25,000 (Deposits)

• $45,000 (Notes)

• $30,000 (Equity)

• 1st National Bank of Forest City

• The Federal Reserve could issue new currency by purchasing US Debt either in private markets or directly from the Treasury
• Federal Reserve notes were convertible to gold until 1934 (individuals) 1971 (Central Banks)

• The Federal Reserve was created in 1913 to essentially take over the money supply role of national banks.

• Assets

• Liabilities

• $50,000 (T-Bills)

• $60,000 (Notes)

• Federal Reserve Bank

• $10,000 (Gold)

• Denominations of $500, $1,000, $5,000, and $10,000 were no longer printed after 1946 for fear of German counterfeiting

• The Largest denomination ever printed was a $100,000 gold certificate. It was never circulated, but was used for inter-bank transfers

• Credit Channels under the National/State Banking System

• Small State banks who were short of funds would borrow from larger state banks

• Larger State banks who were short of funds would borrow from National banks

• National banks who were short of funds would borrow from money center banks

• Money center banks were the “root source” of credit

• Credit Channels under the National/State Banking System