Chapter 14.

Money, Banking and Money Creation

Money
Money isanything that is
generally acceptable as a
payment in
exchange for goods andservices

↳
purchasing power liquidity
issaving accounts

Functions of money

Medium
1. of exchange
2. Measure of value

3. Standard of
unit account

4. Store of value

Evaluation of Characteristics of
Money good money

cattle, livestock 1. Durable

Commodity value
beads, beans, rocks
2. Portable

Ibasic, intrinsic value 3. Divisible

as a
commodity) metallic
c oins 4.
Easily recognizable
5.
Homogenous
Fiat /Token
paper/bills 6. Relatively
-> scarce
money
little/no value cheques 7. Hard
duplicate
as a
commodity to

↓
value only as
'legal bonder'
plastic

electronicat
'Face' value of coins, metallic value

Money supply
M1 Cast
=
in circulation Demand deposit
+

(Narrow) Ihequing account)

M2 M1
savings (notice deposits
+

(broader) Isavings account)

 Commercial / Chartered Bank
A financial
intermediary (getfrom give to s.0) which
acceptsposits giveswasa
-

so and a

Corporations owned by shareholders Interest- rate differential:spread

-

+
Goal:Max profit

unit
banking (USA):small, family owned banks with few branches

Banking structures

(Canadal:few,
branch banking big banks with
many
branches

Schedule I:Canadian ownedat least 75% shares are owned by Canadians

Schedule Foreign
1: banks with branches in Canada

safeguards to prevent "Run on the bank"

1. All deposits a maximum of

up to $100,000 are isured
by CDIC (Canadian depositinsurance corporation)
2. All banks are
regulatedby the federal
government.
3. All banks are supervised by Central Bank

4. All bank records are auditedregularly

5.There is (Office of the Superintendent of Financial Institutions)

a
watchdog:OSFI
6. All banks have to
keep a specified minimum to of deposits as cash reserves:CRR(cash reserve ratio

DRR (desired reserve ratio

Excess Reserve:over + above CRR

Multiple expansion of deposits

Account holder:creditor Account holder:debtor

Initial/primary deposits Derived/Secondary deposits

Bank:debtor Bank:creditor

Initial deposit $1,000

=
CRR/DRR 20% =

ID SD Cash Reserves

Round I 1,000 800 200 Ain deposits ID

=
teamplan
x

RoundII 800 640 160

RoundII 640 5/2

I
128
I
5,000 =
1,000 x
()
Round IV 5/2

Xin
money supply A in
=
deposits -

ID

4,000 5,000
=
-

1,000
 Factors

1. ID(t)

2. CRR/DRR) ->

3. Excess reserves (-)

4. Term/Demand deposit ratio (t)

borrow (t)
5. Willingness to

6. Control by Central Bank

Central Bank
1933:Mc Millan Committee

1934:Bank of Canada Act

1935:Bank Canada
of established

1938:Bank of Canada nationalized

Governor:appointedby PM for 7
years
Board of directors Deputy governor:appointedby PM for 7
years
Finance minister

12 outside directors

Central Bank chartered bank

1.
owned by Government owned by sharefolders

2. goal:regulatedsuper goals:max profit

3.

Functions of a CBIBOC

1. Monopoly of
issuing / replacing currency

Bills:directly issuedby Bank of Canada (BOC

Coins:issuedby Mint,
guided by Boc

handles government transactions

financial advisor to
government
2. Government's Bank buys/sells bonds for government
reserves for Government

S. Banker's Bank:every bank has an account with BOC:Settlement Balances

4. Lender of the last resort

Bank rate Set by Central Bank

prime rate
setby other bank

paid by other banks paid by "mostcreditworthy"customers

5. Bankof Canada:final settlement

clearing:CPA (Canadian payment agency)

Inter bank transactions

settlement:BoC

6. Responsible for stability in the Exchange rate

7. Responsible for domestic monetary policy