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right here we are recording so today we're going to begin we're going to begin trying to understand the issue of monetary policy okay so let me share the screen here for some reason today is chapter 13 in Mackrell let's see it appear okay we're going to begin to try to understand how money actually function in the economy we're going to try to understand the role that banks played in the economy we're going to try to understand how banks in turn in inter linked with the government to try to control the amount of money in economy how banks actually create money and then harmony actually multiplies in economy okay so specifically we're going to try to understand what is the role that money plays in the economy so let me begin by asking you a question if I was to ask you give me a definition of what money is what would you tell me if I was to ask you give me a definition of what money is what would be your answer what is money to you anybody I probably say currency that possesses economic value okay so you'll think that money is currency okay you ever gone to Walmart and pay with your debit card are you ever going to Walmart and pay Twitter check yes never paid someplace by doing a transfer you know why your transfer you know have you ever sent money to somebody else in another country you know by using one of these agencies I can actually transfer the money you money for you okay so what I'm trying to tell you is that money is more than what we think it is so money has a very simple definition this is what money is money is anything that is accepted as a form of payment anything of value that can be used as a form of payment you know you know is it serving the same functions of what money is if you remember in history in United States when our nation was actually created mostly did you used to pay each other with tobacco right they used to pay each other with specific I guess commodities right so that's what money is right so then what is money could create the money okay so today money is actually a tool that we have created a simplified market transactions so money is something that we have created the simplified market transactions now think about this probably the situation there was no money there was no money now let's assume for example you know I am a farmer and I have cows you know include Jones's son of the farmer that live next to my farm will he raise his chickens right and then I go to cliff and I say hey cliff you know I can give you a gallon of milk and you give me two dozen eggs and Cleve will come to me and say well actually I have a cow too so I don't need you milk but I need the eggs and cliff say well yeah I know you need my eggs but I don't need meal what i actually want is cucumbers so then i have to go and find somebody out there because you converse that will be willing to trade that cucumbers for my meal and then come back to cliff to be able to give him the cucumbers to be able to get my eggs so you can see in the past we used to do transactions like that by partnering with her harrowing to actually works they have to exist the double or incidence of ones which Inga means by coincidence you have to want what I have and I have a you have to have what I want but if you have something like one but you don't need what I have then that creates a problem so as you can see then by having money money has actually eliminate this so money actually helped us in actually have transactions because money is something of value that we can actually receive and I know that someone else might say is going to receive it as a form of payment so then the question is what gives value to money well forgive value timoni is the knowledge that we know that someone else is going to accept it as the form of payments think about this why you don't want Mexican pesos well you don't want Mexican pesos because you don't know who will be willing to accept those mexican pesos as a form of payment now people in Mexico have no problem they want Mexican pesos because they know somebody in Mexico is going to be willing to accept that currency as a form of payment right so that's what money is right again if there was no money transaction would be made using a power system right the direct exchange of something you know instead of money there was no money so then today morning act as a medium of exchange you know that sellers are going to accept payment for goods and services so then what is the definition of money see money is anything accepted as a medium of exchange anything that people are willing to accept that to me uses money you know in United States like I said we used to pay with tobacco it was not uncommon it was not uncommon at the beginning of the of our nations in the seventeen hundreds early 1800 to have a young man you know in Baltimore right there where the chips were coming from England with a lovefool tobacco to pay no because they had just delivered his wife from from England so they were paying for the transportation of families with tobacco to these captains the captain will bring the family to mingling in return the captain will go back to England or Europe quit tobacco you know so as you can see then monies anything except there's a form of payment so then what is the function that money actually serve okay put this in your notes oh this is important for you to know Murray serve as a medium of exchange in other words we can use that to payment money also serve as a store of value right you know what's I go and do something for you you pay me for my work in that money that you gave me I can save it and I don't have to spend it today I can use it in the future it's something of value that I can use in the future so then money serve as a store of value and also we can use money to measure things with in use money to measure so that y'all stick to make sure the price of things look if I was to ask your question for example what is more valuable a glass over okay I guess a a bottle of Jack Daniels or a Bible what is more valuable a bottle of Jack Daniels or a Bible tell me guys okay by the way I have both of them here and I'm sorry not a Jack Daniels I have a water yeah I don't like that a barrel of water that represented an Daniels and I have a real Bible and by the way the is my Bible is not only a Bible you get my joke anybody get my joke this is my Bible not just a Bible nobody gets my joke are you willing following the news what happened yesterday in Washington DC when the president was upset because they find out that he went into the into the shelter and he wanted to show that he was not afraid nobody has been following the news go he like went to some Church in the area and then he held up a Bible and took a bunch of photos with it okay he wanted to take a picture in front of our church and they were a couple of thousands of protesters there they were just there they were not making anything they were perfect passive protesters and to open the road for the president to walk they actually threw all those gases tear gases you know in some bullets to open for the president to go there to go take a crap a picture with a Bible right and they asked him you got your Bible and he says to us it's a Bible you know so it's a joke it's your by the way I'm saying this because this is a very controversial because many people are complaining that you know of that action was that at a photo opportunity or was he really wanted to show there that he's going to pray no so that's my job so coming back to my class what is more valuable de bordo Jack Daniels or a Bible we as Christians of course a Bible is more valuable than Jack Daniels okay so if a Bible is more valuable than a check of Daniels how many you have ever received a burl Jack Daniels for free in the interest never right how many you have received Bibles for free many of you so then could determines the value of an either see we as a society working together make sure things and we say this is the value of this item so then we use money to assign values we use money as a yardstick right again so then the functions of money is to serve as a medium of exchange a store of value in as a standard I'm sorry store balance a standard of value okay so then the process so what is money how does money look like well you know what money is in a morning in for all this cash right in cash actually fills all these purposes we can use cash to make transactions we can use cash to measure and we use cash to save for trip for future consumptions now checking accounts serve almost like money they act like money right but they are not money so you think about David cars act like a check and a check is a check in the act like money but it is not money let me explain why this is not money for example with my debit card I came on board and make purchases but only if quark transaction will be approved only if I have won money in my taken account my checking my check is going to be paid only if I have money my actual checking account at the bank number see if I can write you a check for a million dollars that would be no problem I can write me a check for a million dollar today you want to write will you go to the bank and you know come to you're not gonna get a saint right well because house only has twenty nine dollars in his account are you with me so what I'm trying to tell you is just because something act like money does not mean that it is money so money something that we can actually use out there to do the actual transaction think about online payment the same story right so this is what money is so then in essence money is not a physical form now because when it can be a transfer of an electronic signal think about this let's say for example if I have a friend you know in South America and he say hey how so you know can you let me you know 200 bucks and say yeah that would be no problem let me go ahead and wire you 200 dollars now I can go to a bank say I want to Y you to my friend $200 today I don't even have to do that I can transfer $200 through my paper PayPal account I believe and the working transfer $200 sweet but it's somebody pay me the first on the obligation that you used to pay and cash tap okay cash out and pay more and all that stuff so as you can see this is electricity yeah I don't know what it is besides electronic signals you transfer your money from one person to the other okay in the United States we classify money in two categories right easy there we classify this one m1 or m2 okay so we classify money as m1 or m2 okay so let me explain the difference between one in the other you and again very very easy to understand in the United States money is classified in two different categories either as m1 or m2 m1 is actual cash or money that we have in checking accounts okay NORs is money that we can use to make immediate transactions we can use that to play m2 is money that we have in savings accounts it is money but we cannot use to make transactions for example you go and open a savings account no you have a certificate or you have a deposit you have a way you're saying yes this guy has let's say six hundred dollars on his savings account I mean I cannot go to Mangano's and say let me have a you know a Big Mac and a quarter pounder with an accordion which isn't can you please withdraw these from my savings accounts no once they are not going to accept the money my savings account as a payment they want to tell me go out and get cash or transfer your money from your savings account to your checking account so you'll be able to pay me with your debit card so then m2 is money but it's not money that we can use to don't do transactions right so then m1 is the actual cash or currency that we use to make transactions okay so again these two classifications of money by the way there are more classifications of money but for this class this is your introduction to economics we just gonna call it m1 and m2 actually we have like m1 money that we use to make transactions m2 money in savings account m3 money in main service accounts in more than $10,000 o2 I believe a million dollars and we have Pascal L money L like a loser L money is money that is in accounts of more than 10 billion dollars that people usually don't touch that okay but for this class will you simply call it m1 and m2 m1 is money that we use to make transactions and m2 is money that we that we cannot use to make transactions this money that we have but it's actually in savings accounts okay so coming back then this is what we understand it so m1 is cash in transaction accounts what is transaction accounts transaction accounts is checking accounts right it's money that we use to make transactions okay so m2 is actually in one plus savings accounts so then m2 is all the money that we have in m1 plus all the money we have in savings accounts now from an economic point of view we are more concerned about the amount of money in m1 so when we track money in the economy we are concerned about in one now right in one well because n1 is the money that we use to make transactions so if we look at the amount of money in the economy look at the composition of money in the economy about 1.2 billion dollars is the actual money in cash think about it this is very insignificant compared with the size of the economy with the sax with the money that we have in about 1.6 billion dollars is the amount of money that we have been checking errors so together is close to three billion dollars we have about three billion dollars in money that we can use to make transactions but look at the total composition of money we have buried eleven billion dollars in money in the economy and out of these about eight billion dollars in his savings accounts in about other five hundred and eighty two billion dollars this money that we have been invested in other type of investments such as money market accounts mutual funds and things like that so again when we follow money in the economy from an economic point of view economic point of view we are concerned about m1 ym1 because this is the money that we use to make transactions and remember in the economy we look in about what the economy's doing and how we can do or what we need to do to be able to stimulate the economy remember like if the economy's in a recession what do we do in fiscal policies when the economy is in a recession according to Kings what do we need to do when the economy's in a recession you will you're tested on that yesterday guys increase government purchases increase transfer payment and decrease taxes exactly so we do that so something else that we can do to stimulate the economy is to actually increase the amount of money in the economy so and we hope that this money that we give to individuals this in the videos I'm not going to put it in the seconds account we hope that these individuals are going to put their money in their checking accounts and they're going to spend it because by doing that what we trying to do is change the aggregate demand right remember aggregate demand equals to C plus I plus G so what we want to do is consumption to go oh okay so again so then the amount of money available in the economy affects consumers ability to buy so then money directly directly affects the aggregate demand okay so now let's try to think figure out the relationship in actual money in banks okay so in United States we have a very unique banking system we call it a trick frictional banking system and what that means is that in the United States banks play a big role on how money you know affects economic outcomes because banks have the ability to create money now think of a nice on a typical bank I don't care which bank it is let's call it Bank of Cleveland on the Bank of Cleveland let's assume that you let's assume that you receive a $1,000 check so you're gonna go ahead and put that on your account I don't care if it's your savings account or your checking account you're going to put your money in your in the bag so you go ahead and put $1,000 as you can see we want to put those $1,000 at the bank that becomes a liability to a bank a liability him so then the bank of Cleveland has a liability of $1,000 that they own to somebody else so total liabilities for the bank at least one is a thousand dollars l
t's assume that that's all they have now what does the bank do with money that you put at bank how do banks make money the banks make money by storing your money in our warehouse and the answer is no banks make money by making loans and they make loans from the amount of money they have received in deposits right so then what in mind we'll do as soon as you deposit you monitor man I love the bank has to keep a require we serve they have to keep excellent money on research they cannot touch it so for simplicity let's say is 10% so then the bank has to keep $100 in required reserves so at this point the bank has $900 in excess research notes they have not handed those in excess of a day and require so that as you can see that total assets for the bank now they're also a thousand dollars like businesses are the same now a bang is going to try to change these excess reserves into loans because that's where banks make money right so sack goes to the bank and say okay I wanna borrow $900 because I'm gonna buy me a top-of-the-line mountain bike right so the bank lane sack a loan for $900 so you can see that the assets have no change that appeases have no changed so sack goes out there and purchase a mountain bike I don't know I use one or a new one does only matter but the seller of this bike now he has $900 and most people go to the bank and deposit their money so then this guy is going to come to the bank and deposit now he's $900 hold on a second my apologies I thought they were somebody was asking me a question okay so then the bank received this deposit for $900 right it can be this bank or it can be another bank it doesn't really matter so now that I do this for this Bank increase the 1900 owes now what the bank has to do out of this new deposit well I love this Bank have to now keep now ninety dollars in reserves they just received England and without the process so then they have a hundred and ten dollars to length and then they go out and make these loads so now look at the power of banks look at the power of banks you go to the bank because it a thousand dollars by loud the required reserve ratio they say it's ten percent but I mean that the bank has to keep ten percent of that in reserve they cannot torture so the bank will keep a hundred dollars in research and now they have nine hundred dollars they will be able to lend they laying this money because are in economy eventually this money comes to a bank I love the bank has to keep 10% of that $90 so now they have eight hundred and ten dollars to lainey right the bank lend a hand and ten dollars he goes back into the economy eventually come to the bank once the deposit is made the bank has to keep 10% of that which would be quite any $1 right somebody has a calculator they will help me okay so 18 minus 81 now the bank has 7720 work how to hear you 7:29 ok 729 so then that money goes into the economy come to the bank then the man had to keep 70 to 90 10% of that and the bank and I has how much money in excess reserves what is 90% of 729 you go ahead okay you see parties 90% of 729 650 sixth 10 650 16 right and then the bank has that around the money makes a loan another Bank had to beats had to be put 65 60 on research another bank has how much is 90% of that five ninety 49 by 90 49 and so as you can see ran after round after round after round after run look at the amount of loans the bank was able to generate with a $1,000 deposit look at the amount of loans 918 729 659 590 you know another 545 420 blah blah blah blah how much how much loans was this bank able to generate how much money do they create it it's a very simple formula this is the money multiplier it is 1 divided by the required reserve ratio so in this case one which is a record reserve ratio 10% so b1 the other point 10 equals to 10 so it's 10 times the bank and make 10 times in loans on the amount they receive in deposits so then this Bank is going to be able to generate ten thousand dollars in loans now do you know why Bank slow for you to open a checking account or savings accounts right and that's why banks try to to motivate you to make deposits because every time you put your money in the bank the bank is very happy because they want to be able to lend that money to someone else right and then they're going to make interest based on that what they want to make money so as you can see the banks have a power or creating money now think about this I go to the bank and I say I want to borrow nine hundred dollars the bank say okay let me go ahead in do you have an account with us and if you don't have an account with them that's going to say we want you to open an account gross and you open an account with them and then when the bank is going to say is kiss you $900 no don't know what the bank will say the bank say let me go ahead and deposit this money on your account boom by a click of a mouse click they put that handles on your account right then you go out and spend the money nobody come back to the bank then the banks say to somebody else oh okay let me give you another loaning click buy a month away my click of a mouse the bank is able to generate another loan so the question is how many how much money to the bank d'Alene after this initial deposit of $1000 $10,000 they linked in power so those were what is the money came from I mean where's the actual cash where is the money and as you can see this is nothing more than more or less what we call it a phantom money is money that we created out of a click of a mouse so then banks have a humongous amount of power in the economy and that's they have the power to create money so now how many we change the require research that instead of 10% the Ricardo share will be 5% so B 1 divided of 5 so now bank will be able to generate loans or 20 times the amount of money that they'd receive in the process okay so if somebody goes to the bank and deposit $10,000 and that requires reserve is point of five will be one divided of five equals to 20 so 20 times staying swap 200,000 all right ten thousand times 20 okay so that I will be able to generate two hundred thousand dollars in loans with a simple deposit of ten thousand dollars would you like to guess what is the actual required reserve ratio how most banks have to keep Reserves out of every money that individuals foot is actually represent from the average so how much is the multiplier 33 times so if you go to the bank and deposit your stimulus check sort $100 the bank is very happy because without $1200 somebody help me with a calculator so 100 times 33 the bank will be able to generate thirty nine thousand six hundred they can lend you well not you but different groups of people up to amount of thirty nine thousand six hundred dollars in loans okay but now think about these guys now let's go the other way around I went to the bank and I put $1,000 in the original 10% requirement the bank put a hundred watts in reserve that's my money then somebody came to the bank and deposit $900 and the bank only has 94 noddies on us with that 18 the bank only have 81 729 the bank only have 72 dollars out of 656 the bank only have $65 so what happening me you the other guy and the other guy we bought at the bank at the same time and we say hey I want my money you what do things that happen the bank is going to be in real trouble because the money is not there so in the United States we have a track fractional banking system we simply mean we have a class in a structure made of glass there as long as nobody throws a rock we'll be okay but if somebody throws the rock the building is going to collapse in the 1929 1930 - the Great Depression people became afraid of bank and they go into the bank say I want to withdraw my money and in somebody else win in that create the bank to all the people but I don't have your money come back tomorrow and that created panic among people and when you create a panic among people that created a run which means that everybody run to the bank say I want to withdraw my money in bank did not have the money in people did like what every normal person will do they will burn the banks literally they burned the banks I want my money I want my money you cannot keep my money in the bank they don't have the money so they literally begin to burn the buildings so now in the United States that's why we have full people by putting a big sign at the entrance on every bank to say your money is insured by the FDIC up to what is it now two hundred and fifty thousand dollars your money's insured up to $250,000 Kushi ensuring that said government agency did that agency actually had the money to pay the money for the depositors and the answer is not what do you simply based on the faith that hey don't worry about it right your money is insured the government is going to pay back your money if for some reason the bank cannot pay you your money okay and again this is the system that we have in the United States questions okay so let's continue quit a bank okay so every time a bank makes a loan right actually what the bank is doing as you can see right here is creating money so then put a few keystrokes the bank can actually increase the amount of money in the economy now this ability to create money is limited by the Fed the Fed is the fellow the federal system there be better sir bank the Federal Bank controls the Rd the banks so then by controlling the required reserves you know controlling the how much money a bank has to keep a hand and then the bank ability to make loans is actually altered because for example if the feds say let's increase the required reserve to fifty percent then banks only have 2% to land or whatever they receive right so then by increasing the required reserve bank have less power to make money and again you know what a reserve is each bank must maintain a required reserve is the minimum amount of money that you have to hold you cannot touch this right and again the required reserve ratio is the is the ratio of the banks required reserves to external deposits and that's established by the fail right so then if I go to a bank and deposit $100 and the required reserve is 10% then by law that man has to keep one hundred and thirteen dollars in required reserves and then the extra becomes excess reserves and like I told you banks don't make money by keeping excess reserves so banks will always try to change these excess reserves into loans as soon as possible okay so then if banks makes a loan and they actually created money the borrower's spend the money the seller deposit it into a company's bank and then this bank has now more excess reserves then the bank may it's another loan you know when they borrow or spend this money eventually this money calculate Bank and then this begin to repeat again over and over again it's a multiplier effects by it's a process that takes place right again so then money multiplier is the amount of deposit dollars that a bank system can create from a guan dollar accessing resource so keep in mind banks can only make loans from excess resource only from excess reserves not from require your research so again excess reserves that the money multiplier is a potential deposit creation so then let me make a correction on part of our dystonia you so I was telling you this when I went to the bank and deposit $1,000 and the required reserve ratio is 10% I told you that bank will be able to generate 10,000 euros in loans right in actually that is wrong because the bank will only be able to lend money out of the excess reserves so then what is the initial excess reserve out of the $1,000 in each NHS return is 900 okay so will be 900 times 10 will be $9,000 okay again money will multiply based on the multiplier times the excess reserves okay so coming back to this then let's continue with the chapter so then is the recovery ratio is 20 then the money multiplier is 5 I already told you how do we do that very simple right it just simply 1 divided by the required reserve so in the bank has no excess reserve then the bank cannot make any loans again we already discuss this alright so then the except D is the essential functions of a bank it's actually the ability to be able to create loans based on the deposit rate receipt so then every time a bank makes a loan but they actually doing they actually changing the money supply in the economy and the multiplying the economy is going to increase the amount of money in the hands of individuals right in these individuals I'm going to now consume more okay and again you don't have to know this and the question is okay so what is some of the things that can actually take some of these power out of banks well how about if people don't deposit money attracts right if people don't deposit money the band's name Bank have no power to be able to make loans right what else can constrain the power of a bank how about if banks simply decide not to lend they are afraid that individuals are not going to be able to pay them back right so then that has a constraint on the amount of money in the economy or how about it banks want to leave a lot of money but people don't want to borrow money laughs but is happening today the banks have excess reserves north of people now are saving money because they are afraid of what's gonna happen now every time you open a savings account the bank is gonna have to pay you interest rate on that deposit so there's no way the bank will be able to continue paying your interest rates without them receiving some type of revenue so they are desperately trying to lend your money to someone else now with there's not a lot of people in the market to borrow money to buy houses or to buy cars so social duties then that's why the money supply have not expanded in the economy because people are not borrowing in addition to that then the power or the banks to make money can be constrained by regulation the question is who controls the amount of money in the economy who controls the banks and that's the Federal Reserve Bank and that's the next chapter that we're going to be covering by the way today we're going to be covering two chapters because the only lecture that we have is actually today today's Tuesday into Wednesday because we have presentations on Thursday right so we're gonna be covering two chapters by the way this is the end of the chapter C application so we have finished chapter 13 at least one which is banks so now we're going to begin and try to distill who controls the bank's coupon trota banks and that's chapter 14 they actually together in the past these chapters used to be one chapter now we develop in two chapters so any questions any questions about banks No okay perfect so let's stop right here with a finished chapter 13 les recording okay so now we're going to jump into chapter 14 and we're going to try to understand who regulates the banks in United States in the early States we have a Federal Reserve banking system and let me explain this in in different ways most nations of the world have a National Bank that controls all the banking activities you go for England for example got the National Bank of England the actual bank of france german national bank Banco Nacional de Mexico and connection Argentina national bank of the Bahama National Bank of India Exim Bank of China which means we have a one bank that is imposed by the government in this bank controls all the amount of money in the economy okay one natural by the United States is the only nation of the world that do not have a National Bank United States we have a system of banks that act like a National Bank and we call this the Federal Reserve banking system the Federal Reserve banking systems now I'm gonna give you a little about history about how all this begin and then jump into what they do now okay as you already know historically when this nation was created the states or the colonies one autonomy they wanted to make their own decisions and they did not wanted a government to be over them right so some of these they were afraid that if we create a National Bank this National Bank was going to control all the economic activities of the colonies so the colony said forget about it we don't need a National Bank we're going to have only two banks in each colony in each stat
's so for many years you know this is the way we used to be we used to have a system what we have estate banking state banking state banking and we do not allow banks to actually move into in front of the place okay so we were working like that however by the 1930s something begin to happen urination ever happen in our nation was for the first time in the videos were actually beginning to move from one place to the other no words geographical move mobility in the United States inner occur until the beginning of the century right it wasn't in the 1904-1905 when people begin to move to other places in large numbers of course we have migrations you know before that no people go into the waste you know to Montana to California but it was not like the number that begin to happen in the 1905 1906 and that was as a result of now having armadillos and a train system and things like that so people were beginning to move so this was creating some problems for banks because this won't happen think about this let's assume that a bank or an individual in Baltimore know he has been working in Baltimore rocky you know are the chips right there he has six hundred dollars so let's go back to 1900 so he had six hundred dollars when he said his account so now he was going to move let's say to San Francisco because somebody told him hey you can find a job over here that face better so the guys had two choices they got can go to the bank and say I want my money but during those terms you know individuals prefer in many cases to have goal in silver as a form of payment we still pay with gold and silver so the individual would say okay I don't want to carry all these cash all this coal in silver with me because I'm afraid somebody's going to steal it so they'll come to the bank and say can you just give me a note that say that I have $600 worth of all in this thing so the bank will write them a note and then in DVD you will get a note and it will be easy but this individual due simply to hide the note you know or his pocket and travel to California and once he arrived in California he will go and try to buy a say a little store or something and say I want to pay you and this is a check that I have from a bank of Baltimore well the banker in San Francisco said well how do I know that this is actually crap it's actually true right so it was difficult for a bank to know if that money actually system remember we still you know the mode so communications were still in their infancy so we have to go with a little taking a name personally the come buddy help me Cassie was it Kong the way we used to communicate before the phone like the telegram or yeah with the telegram trying to check the bank you know to see this bank actually had the body that this guy say he actually heard so it was a night near for banks and for individuals to be able to move from one place to the other in paper checks so then then that was in like in the nineteen nineteen hundred same by 1907 1909 there was a fear in our nation in which people became afraid of banks it was before the Great Depression and people begin to go to banks and say I want to withdraw my money I want to withdraw my money so banks did not have the money because they have lend the money to somebody else so the bankers were having difficulties so bankers came up with the ideas I wouldn't be nice if we can create a National Bank a bank that will lend money to banks i inversa wait the government claimed money to the banks so they come up with the scheme in all the bankers actually the seven most powerful families the United States our own most of the banks at that point decide to have a meeting integral Iceland Georgia right the ice illogical isin in Georgia in seven individuals this is the seven most powerful families the Baltimore's the Rockefellers the a gimme name so families that you know at the begin of the same tree they may loans they are the videos Rockefellers melons Baltimore any other family that you can think is me hacking Gangrel Vanderbilt so all these families are all most of the bank's decide to have a meeting in Georgia in in that meeting they embodied a couple of individuals from Congress they actually meet there and they we are there for a hunting meeting nobody want people to know about what's going on so they all be there on their hunting season they were going to be hunting for talks to this meeting they've added a couple of congressmen and you know a couple of bonus of wines and they've all got from they all came up with the idea that it would be a great idea if we can create a national bank or a bank that will be able to help the banks so they solve the idea to this congressman that were there in the middle indeed this country minhwan no to Washington and they begin the percent the idea that it would be a good idea to divide the nation's into a region and create a bank in that region in that bank was with the only purpose or being able to tell banks in case of need so then this is what they end up with okay decide to divide the nation's geographically and they divided the nation's into regions and in each region they decide to put a bank and as you can see most of the banks that we have now these are the twelve Federal Bank banks the members are federal banks and they put one in Boston over to New York number three Philadelphia number four Cleveland Ohio five issue in Virginia six is Atlanta Georgia number seven is Chicago eight is a Louis Missouri nine is Minneapolis and then we have a team can April at Kansas City and Dallas Texas number eleven in San Francisco number twelve so as you can see most of the banks that were created they actually in the eastern part of the United States and you have to the state is because most of the economic activity of our nation at that point was actually in the eastern part of the country as a matter of fact things have not changed now nice things have not changed let me sling but what I mean by things have no change if you go to Cleveland Tennessee and you do go around create a circle of 600 Mallos around Cleveland from Cleveland 366 and revolves around seventy percent of the US population live within 600 miles of Cleveland seven like 210 million people live in this part of the country most of the people live over here think about is how many people live in y-you mean how many people live in North Dakota South Dakota like seven I guess you know I mean how many people live in those in those in those in those states when they have more cows you know them people you know some of these states like by you mean North Dakota South Dakota they have a population of four hundred thousand five hundred thousand which is even smaller than the city of you know let's say you're Chattanooga so things have no change so most of the people came over here so then when the banks were created in 1913 we create the federal banking system it's a system of banks that they actually act they have out told me when they actually act in conjunction to try to help the economy to deal with monetary policy so remember this when the bank was first created it has a very simple simple easy beginning a very humble beginning in the beginning of the first Bank were simply not in more than a bank that was going to help banks in case of need to facilitate the exchange of payments now throughout the years for the last 100 years this system the Kuroshio banking system has actually Avella developed it has become the most powerful agency of the United States so today the United States terrorsaur banking system is the most powerful agency that the government has he has the power to create money it has the power to make an economy to function good and he has the power to destroy an economy right the most to me this is the most powerful agency that we have in Denali States cover me and I'm going to try to explain to these how this works ok so let me go now into the chapter and we are trying to understand the future since system ok the bank was created in 1913 as I mentioned to you it is made of 12 banks an East Bank has a central bank for private banks number 4 temple all the banks in region number 6 in the region of Atlanta did they have a knee or a problem they communicate with that Bank so II for example if I am let me see right here for example let's assume that you know our a friend of mine sends me a check you know a payment for something and he these people is located in Boston so he sent me the check to me and I take my check to the bank in Cleveland the bank in Cleveland is going to give me that payment gonna give me that money then the Bank of Cleveland was send that check to the Bank of Atlanta that's in that region and the Bank of Atlanta will give credit the Bank of Cleveland then the Bank of Atlanta will be in contact with the Bank of Boston the Bank of Boston will give credit to the bank rat Lanka then the Bank of Boston will contact the bank from which this cheque was issue and will debit the amount from that bank and then that bank will debit the amount from the actual video that owns the account so as you can see this is what the ferrozzo bank actually does he facilitate so you don't have to go directly to the bank you just go to the time in which you operate it and talking about a bank the bank only has to go there okay so coming back to this then hold on for a second this is a rolling chapter so the structure of the cursor Bank as you can see it was created in 1913 is made of 12 banks they serve as a central bank or those banks in that region what do they do they clear checks they hold bank reserves and they provide currency remember what I told you in the last chapter if I go to the bank and I deposit money by Lao the bank has to keep a required reserve well sometimes is very expensive for banks to build a boat to put the money so then when banks do they actually transfer the money to the bank in which they are located so then the Bank of Atlanta one day you have time or whatever you leave right go to the federal bank in Paris your banks have a tool so the bank and you can go and see what they actually do and in many cases they actually take you to the warehouse in the warehouse is the pole where they store all the money of all the banks in that region for example I have been to the vault in the bank of Atlanta in a typical day they have about eight hundred million dollars in cash right I mean you go there and they have it you'll see be almost like a first column pallets they have the money in pallets all right and that's what they do so then for example if a bank needs money a bank can actually borrow money from the faith right so again they clear checks they hold bank reserves and they provide currency think about these for example it's a sack you know has a thousand dollars on his local bank in Cleveland and then one day he become addicted to our vending machines you know he wants all his $1,000 in quarters so that will go to his bank and say I won $1,000 in orders well the bank does don't have $1,000 in quarters but the bank was okay no problem let me find the money for you a bank will contact all the banks in the region and say hey I have a crazy guy here that one's about endorsing orders right in the ER he wants new orders because you can actually I want new bills right in in the Penguins well I don't have it then the bank can actually contact the Bank of Atlanta in the back of Atlanta say we have these factors once a thousand dollars in new quarters he the bank does not have it in the bank will contact the mint and the mean will print brand new quarters use force acts or it can be happy so that's what the banks do okay so they provide currency and these page also provides loans now these days provide loans not to individuals the Fed provide loans to banks to banks think about for example if a company in let's say in Cleveland you know a construction company has let say 10 million dollars at a local bank for a big project and then the company decided to move let's say to Boston and they want to transfer the money that they have to another bank in Boston to operate over there well chances are the bank on Cleveland has already laid that money to someone else in loans where the bank Oh Cleveland would call the Bank of Atlanta and say I need a loan for 10 million dollars so I can pay these guys deposits so that's what the bank will do okay so the teller shebang make loans to banks now these 12 banks are regulated by a Board of Governors by a Board of Governors now the Board of Governors is 12 individuals appointed by the President of the United States and these individuals have to be are clear by the Senate okay they are 12 individuals appointed by the president stays and all these 12 individuals have to be approved by the Senate and these guys become the members of the Board of Governors again the bottom bar the board members once they appointed they serve for 14 years there are communists for 14 years so every two years one of the members time expire and then the president can appoint another individual you can only serve one time during your lifetime notice our appointment of 14 years and the idea is this now once I appoint someone into this board of governors this board of governors don't have to be concerned about losing their jobs or me the president being upset with him and try to fire them the or the united states do not have the power to fire the Board of Governors the Board of Governors have the autonomy to make monetary decisions without the influence of the government remember I told you that is a very powerful agency it's a very powerful agency and those individuals don't have to worry about what you think what I think about the government things they make their own decisions now the responsibility is to try to help the economy to achieve macroeconomic goals no remember the the economic growth process ability in full employment so by changing the amount of money in the economy they can actually achieve those goals okay so again this is the Board of Governors so then what we are saying is this let me come here so then the 12 banks I actually managed by the Board of Governors right by the governor governor's now in each Bank let's say for example as you already know the nation is divided into two graphical areas they said region number six radio number six that is actually Georgia parts of Alabama Florida and remember the other ones was a big region right now the Bank of Georgia the microbe Atlanta looks are all the economic activity that is taking place in that creature I mean I have been there many many times you know I now know how they operate for example in the bank of a trend that they have over 400 individuals young people like you that they actually working under the direction of very bright in the videos no say we have PhDs in economics in finance and this individuals are responsible for looking about all economic activity in that richer for example in Britain umber six we have divided the region into 21 industries we look at the banking industry the housing industry the communications industry the retail industry the agriculture industry and so on so what they do they appoint a group of about 20 individuals in fact you they have a college degree in business or finance right in together we neither have master's degree in fabric a PhD they look at that that industry they collect all the information for example and the auto industry they look at for example how many cars were made in this region what is the average number of times a car stay in the Lord what is the average price where's the number of people employed in that industry bla bla bla so they collect all the information in that industry so then they collect the information of all what is happening and based on that they get a picture of what's going on in that in in that region like people being hurt are people okay are people working are people will employ your people have money in their accounts and since like that so all the 12 banks collect that information and they send it to Washington DC and in Washington DC that's where the Board of Governors right actually me too what do we need to do with the economy right now each Bank has their own directors and that directors summarize what's going on right and then the informati
n is sent to Washington DC and then these individuals decide to figure out what do they need to do with the economy they get a picture for temple high levels of unemployment in California probably we need to stimulate the economy there right and we can do that by monetary policy now think about this look in the nation here in Washington DC we have the Congress the United States the Congress United States is in charge of fiscal policy fiscal policy is under the Congress monetary policy is on the dick Federal Reserve Bank right now for example it's assumed that for some reason the economy is going to a recession economic interpretation and Congress decide to push a lot of money into the economy they push a lot of money into the economy so now we have a lot of money into the economy everybody has the money everybody has money right so then the ferrozzo Bank can actually say I don't like what's going on in the economy and I can actually counter the activities that is taking place so in other words Congress in the federal banking have to agree on what they need to do sometimes they work together but they don't have to they don't have to for example think about freedom 40 school policy today the government is spending 3 trillion dollars will they get that money from they get that money by selling bonds are they selling bonds so a lot of individuals over here now have lent money to the government they have a lot of bonds now the question is what can you do with bonds nothing you cannot go to the store and buy is just a piece of paper it's an IOU so then the Federal Reserve Bank and say you know I need to put more into the economy I need to pull more into the economy so they have a couple of tools to increase the amount of money in the economy the tools is number one changing that require your reserves so then by lowering the required reserves I load the recovery source then the bank will be able to lend more money so as you can see we are putting more money into the economy another tool that they have which is the most powerful is open market operations in open market operations is that they have the power to buy bonds they had the power to buy or sell bones that had been previously issued by Congress so then the the Pharaoh sir bang the first man can come and say to this guy right here this guy purchased I do Stockman born that is really saying the year 2018 the federal bank say hey you don't need to wait to 2012 it's more than 2018 where are we now 20 we already in 2020 right yeah 2028 okay yeah so these phonies deal in 2028 the bank will come to this guy's and you don't have to wait for that I'll bite the bone from you so then the Fed buys the bone from this guy and automatically deposit his money or this money on his account so that once the Fed buys the bonds from individuals that money is directly deposited me individuals time so for the bank is a new deposit they have received and then the banks will be able to now start making loans okay so again we're trying to distend the power or the Pharos or Bank and how they actually work okay so again from the structure of the paddies b12 in the videos together with the other banks presidents they create a committee called the FOMC the Federal Open Market Committee okay so let me come right here okay we have the 12th Board of Governors and then here we have the 12 individual banks right so then these presidents in the 12 they need in Washington DC right in they are responsible for monetary policy they have a committee called e F or MC and the FOMC is made out of d12 Board of Governors plus five presidents or the twelve banks they select who's going to be there all right so is the 12 plus 5 by the way one of these have to be the president of the Bank on New York City at all times so I guess the right way to say is like this we have the 12 board of governors the president the macro name York City and for audio the president's right so then these guys are responsible for monetary policy they sit down and they say we need to increase the amount of money in the economy or do we need to decrease the amount of money in the economy okay so again the FOMC is responsible for the decision of what they going to do in the economy and they meet every month and then they decide if they need to increase or decrease the amount of money in the economy now what is the tools of monetary policy how does the Fed controls the amount of money in the economy okay the way the government controls the amount of money in the economy is in the following way they have three tools of monetary policy the three tools of monetary policy is all done right here changing the reserve requirement in oversee we want to have more money in the economy what we do we lower the required reserves the second tool is changing that this can great now what is the discount rate the discount rate is the interest rate okay yeah the discount rate is the interest rate that a bank has to pay to the Pharos or Bank in a want to borrow money let me explain how this works the Bank of Cleveland has this guy I decide to withdraw his money remember I told you about the guy moved to Boston and they occurred ten million dollars the bank of Cleveland can contact banks near to them like a bank of Chattanooga the bank in Knoxville and say can you make me a short-term loan so I can give this guy his money so then a bank him borrow from another bank or a bank and borrow money is straight from the federal banking system so then when a banks borrow money from the system we say that this Bank is borrowing money from the disking window and the interest rate he is going to pay scale that this country so then think release if the Fed lowers the discount rate then banks I'm going to be more inclined to borrow money to be able to make more loans so you want to ease monetary policy we want to put more money into the economy we lower the reserve requirements and then we lower also the disc and rates right in the discount rates again is the interest rate that a bank is going to have to pay to the system they want to borrow money now the discount rate is also the benchmark back which all interest rates are safe is the bass mark so every time the Fed lowers the discount rate all intro tracing economy actually decrease so then when interest rate decrease people are more inclined to borrow money to make consumption so we want people to buy we want to give them more money so how do we do it in fiscal policy how do we increase money in fiscal policy by increasing transfer payments or by decreasing taxes so now we have people have more money they're going to be able to buy but we could also do it by monetary policy we lower their required reserves now bank has more money to lane and we lower the discount rate right so which means that we lower all interest rates with the most powerful tool of monetary policy is open market operations in Weis open market operations buying or selling previously issued securities think about this how does the Congress United States racist money well my taxes or by borrowing the government revenue comes by taxes or by borrowing how does the government borrows money well the chorion borrows money by selling little pieces of paper I reduce bullets government bonds a bond is a piece of paper that let me simply say I'm going to give you your money in the future so then when individuals buy bonds of an individual lends money to the government what individuals have now is a piece of paper that simply say this guy is going to get pay X amount of money in the future there's nothing you can do with this piece of paper there's nothing you can do you cannot go buy right so then if individuals have a lot of bonds in the economy that means that people do not have a lot of cash because they lend the money to the government the government buddy spend this money I don't know the guy went out they made up bomb - you know - boom boom Iraq I don't know the money's already spending so the 15 come into the economy and say I want to push put more money into the economy so what they do they come to individuals and say hey I'll buy the bones you don't have to wait so then by buying bonds individuals automatically get their money now and now either they going to spend it or put the other Bank it doesn't really matter the money comes into the economy now think about this thing if we want to constrain the amount of money the economy what do we do if we want to constrain the amount to political recorder we do we increase the reserve requirements we increase the discount rate and we sell bonds but so by selling bonds we're putting worthless pieces of paper that you cannot use to do business and we take cash out of the economy on the other hand we want to increase the amount of money in the economy we lower the requirements we lower the disk and break in we buy government securities okay so this is this is the yeah so this is more or less the way the Fed actually controls the amount of money in the economy okay so again what are the tools of monetary policy changes in the required reserve ratio changes in the discount rate and open market operations what is open market operations the baggage me responds yeah I you know selling government bonds okay so as you can see then the Congress and the federal banking system they tried to work together but they don't have to they tried to work together to try to stimulate the economy so for example think about what is happening today fiscal policy the government increased transfer payments remember the check Christine shakes the lower taxes right and they increase government purchases we want to stimulate economy at the same time the parecer bank have lowered the discount rate have lower the required reserves in the terrace or banks actually now Emily Emily Emily more in upper market operations buying a lot of ones all right nothing they have purchased like a trillion dollars worth of bonds no but they have put about a trillion don't put the money in the checking accounts savings accounts of many individuals which now the banks have all these excess reserves that they're desperately trying to lend to someone else alright so remember this guys one day in the future when you go to the bank to borrow money the bank is not making you a favor by lending you money many people when they go to the bank to me it's kind of interesting many people put their bed closes oh ha I hope they give me the loan I'll give you the loan oh I hope they give me the loan the bank is not making your paper by giving you a loan you actually doing them a favor by going to them to ask for a loan so next time do like I do every time I go to a bank and say hey by the way this is the amount of money that I need and this is the interest rate that I know I can get it from this to the bank you can match it I'll get the money from you it no don't worry about it so now run away they know that ok this guy has other options well you don't even have to say you simply say hey I know that I can get this loan from this tank because this is how much they advertising so I need a loan so you actually do neck paper to them and today banks are desperately desperately trying to make loans because they have so much money in there know what to do with it ok so again this is monetary policy and this is the end of the chapter there's only like two more slides that we need to cover but we can wait to cover them tomorrow ok so we have finished chapter 14 - ok so
