Basics of Central Banking Origins of Central Banking
Basics of Central Banking & Origins of Central Banking Dr. D. Foster – ECO 473 – Money & Banking
Free Banking & Inflation • • No government control. No government regulation. Entry and exit is free. Subject only to legal requirement to pay off debts. What limits excess bank note issue? • • Trust. Extent to which we use bank notes. Fear of a bank run. Limited clientele as a day-to-day restraint. Conclusion: Free banking non-inflationary
Central Banking • Government privilege or control. – – – Monopoly on note issue. Centralize holding of gold. Able to prevent individual bank collapse. Will expand the MS by expanding bank reserve deposits. Will contract the MS by contracting bank reserve deposits. Assuming banks are “fully loaned up” the MS is: Notes in circulation + (1/rr)*(Bank reserves) Since banks earn their profits by creating new money and lending it out, banks will keep fully loaned up unless highly unusual circumstances prevail. (136)
Free Banking vs. Central Banking With free banking what happens to the MS when depositors cash out some of their DD for banknotes? Nothing. Only the form of the MS changes; from DD to banknotes.
Free Banking vs. Central Banking With central banking what happens to the MS when depositors cash out some of their DD for banknotes? The bank loses liabilities to the CB. To restore reserve balance, loans, DD and MS must fall.
Free Banking vs. Central Banking With central banking what happens to the MS when depositors cash out some of their DD for banknotes? The bank loses liabilities to the CB. To restore reserve balance, loans, DD and MS must fall.
Basics of Central Banking & Origins of Central Banking Dr. D. Foster – ECO 473 – Money & Banking
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