Principle of Money and Banking

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MSc(Econ) International Economics, Banking, and Finance

Principles of Money & Banking
Lecture Notes 1

The Definition of Money

The definition of anything follows one of two procedures

1) Attach labels to real world objects – Nominalist

(2) Attach labels concepts and then search for the corresponding real world entity - Empiricist

Characteristics of Money

1) Medium of Exchange
2) Unit of Account
3) Store of Value

Money has two meanings. As an abstract notion it is a unit of account. As a concrete notion it is a medium of exchange

“ Nothing is more ultimate than money. Instead of going out of existence, unwanted money gets passed around until ceases to be unwanted” Yeager

1) Commodity Money – problem of jointness
2) Localised issue – reputation
3) Government issue – legal tender

Why is private debt not money?
- No market for private bills (Paul Davidson)
- Legal restrictions (Neil Wallace)
Money is a means of final payment – (Charles Goodhart)

The separation of money from other financial assets is its superiority in liquidity. Liquidity - assert money is perfectly liquid
– potential to liquidate and use in transactions
- term to maturity (capital risk)

Yeager distinguishes money in terms of the adjustment to market disequilibrium. A holder of unwanted money adjusts his/her holding for whatever he/she does want. So instead of going out of existence, unwanted money gets passed around until it ceases to be unwanted. So in a way a kind of Say’s Law operates with money – “Supply creates its Own Demand”

Pesek and Saving

- Money is contrasted with debt
- Debt pays interest while money does not
- Debt is inside money

1) Non-interest bearing deposits are an asset to the holder but a liability to no one, while interest bearing deposits are a debt like a bond 2) Interest payments on deposits means that deposits loses its property of “moneyness” 3) Demarcation between money and debt...
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