. MONEY and BANKING An Introduction By Richard W. Lindholm Cmmr "* "?* '""» »* Aov. or ECOW, EP° "-93 UNIV. UC OP ODNN . -Arbout tlie ^rutkor 1. Present position: Dean of the School of Business, University of Oregon. 2. Former Federal Reserve Board Economist and Economic Advisor to the Governments of Vietnam and Pakistan. 3. Author of eight books in the area of finance. ^roout the vDook 1 For typical discussion type examination questions with com- plete answers, see the end of each chapter. 2. For a typical objective type final examination in money and banking with answers, see pages 193-204. 3. For a quick review of the basic facts about the American money and banking system and monetary theory and bank- ing policy, read Chapters 1-10. 4. For a clear, simple and complete explanation of how the banking system expands and contracts the money supply, read Chapter 6. 5. For a complete and authoritative summary of all policy actions of the Federal Reserve System since its establish- ment, read Chapter 5. 6. For a list of reproduced charts and graphs prepared by the Federal Reserve Board, see Table of Contents. These are very helpful in forecasting and summarizing economic developments. 7. For definitions of over 300 technical terms, see Glossary. S3S \ MONEY and BANKING An Introduction By Richard W. Lindholm Dean, School ofBusiness University of Oregon 1962 LITTLEFIELD, ADAMS k CO. Paterson, New Jersey Copyright, 1958 By Littlefield, Adams & Co. First Edition, 1950 Reprinted 1962 Library of Congress Catalog Card Number: 58-12749 Printed in the United States of America Preface This Outline has been prepared for students and interested laymen who desire to understand the basic facts about the money and banking system of the United States. It emphasizes the underlying theories and policies which are studied in the first year college courses. In ten brief chapters the fundamental principles, the organ- ization, the framework, and all the important Federal Reserve and Treasury policy decisions are described and analyzed. In addition, at the end of each chapter, through the use of dis- cussion type questions and answers, it is possible to go more deeply into continuing problems of lesser importance. In this way both vexing details and broad principles may be covered in the briefest possible space and in a way best suited to student needs. Others interested in our monetary and banking system will also find this approach more helpful than the conventional method. The Outline includes an objective-type final examination with answers which provides the reader an opportunity to check his knowledge of the subject. An extensive glossary defines all technical terms not pre- viously defined, as well as additional terms related to money and banking and economics. The Outline will be found very helpful when studying or writing in these fields as well as when preparing for an objective type examination. R. W. L. CONTENTS Chapter page Preface v 1 Money 1 Definition of Money. Functions of Money. Gen- eral Economic Function of Money. General Cate- gories of Monetary Standards. The Gold Standard. The Bimetallic Standard. Composite Commodity Standard. The Paper Standard. The Currency and Banking Principles. Questions and Answers. 2 History of Money in The United States 19 Colonial Experience. First Bank of the United States, 1791-1811. Second Bank of the United States, 1816-1836. State Banking, 1836-1863. Greenbacks or United States Notes, 1862-1866. National Bank Notes, 1863-1935. Silver Certifi- cates, 1878-19—. Federal Reserve Notes, 1913- 19—. Federal Reserve Bank Notes, 1913-1945. Additional Paper Money Experience. The Silver Dollar. The Gold Dollar. Subsidiary Coinage. Questions and Answers. 3 Basic Characteristics of The United States Banking and Monetary System 34 Effects of Liquidity Changes on Economic An- alyses. Questions and Answers. 4 Commercial Banking 47 Deposits by Origin. Deposits by Withdrawal Right. Deposit by Ownership. Development Prior to 1930's. Bank Legislation of 1933 and 1935. After 1935. Effect on Economic Power of Commercial Banks. Specialized Spending Institu- tions. Credit Instruments. Clearing and Collec- tion of Checks. Loans and Discounts. Legal Limitations on Bank Lending Power. Actual Totals of Member Bank Loans. The Bank State- ment. Questions and Answers. vii viii CONTENTS Chapter page 5 The Federal Reserve System 76 Organization. Administration and Control. Rou- tine Work. Discount Rate. Discount Rate Policy. Open-Market Policy. Purchases and Sales (1920- 1923). Purchases and Sales (1923-1933). Two- fold Purpose of Open-Market Activity. Purchases and Sales (1942-1949). Short-Term and Long- Term Interest Rates. Reserve Requirements. Re- serve Requirements 1936-1950. Developing Central-Bank Policy. Additional Tools. During World War I and the 1920's. During the 1930's. During World War II and the Postwar Period. Relationship with the Treasury. Supply of Loan- able Funds. Demand for Loanable Funds. Related to Federal Reserve Policy. Question and Answers. 6 Commercial Bank Deposit Expansion and Contraction 119 Deposit Expansion as a Result of an Increase of Reserves. Deposit Contraction as a Result of a Reduction of Reserves. Introduction of a Central Bank. Questions and Answers. 7 Theory of Money, Prices and Employment .... 129 Variation in Price Movements. The Unweighted Index Number. The Weighted Index Number. Index Numbers and Value of Money. Usefulness. Money Flows. Levels of Personal Income. Source of Savings. Source of Investment. Levels of In- vestment. Transaction Theory. Cash Balance Theory. Income-Expenditure Theory. Summary. Questions and Answers. 8 Private Credit Institutions Other Than Commercial Banks 147 Savings Banks. Mutual Savings Banks. Postal Savings System. Consumer Credit Institutions. Investment Banks. Stockbrokers and Dealers. New York Stock Exchange. Trust Companies and Bank Fiduciary Services. Savings and Loan As- sociations. Life Insurance. Life Insurance Com- panies. Savings Bank Life Insurance. Questions and Answers. CONTENTS ix Chapter page 9 Federal Government Loan and Credit Agencies 163 Agricultural Lending. House Lending. Business Lending. Small Business Administration. Inter- national Lending. Questions and Answers. 10 International Monetary Institutions and Practices 176 Definition of International Finance Terms. Foreign Exchange Operations. The Problem of Interna- tional Exchange. The International Monetary Fund. The International Bank for Reconstruction and Development. Glossary of Technical Terms 203 Final Examination Answers 219 Index 223 TABLES Number page 1-A. Deposits and Currency: All Banks in the United States, 1893-1926 3 1-B. Deposits and Currency: All Banks in the United States, 1925-1956 4 2. Liquid Asset Ownership by Individuals and Businesses 44 3. Principal Assets of All Commercial Banks 55 4. Loans of Member BanKs: All Member Banks .... 62 5-A. Short-Term Interest Rates 81 5-B. Short-Term Interest Rates 82 6-A. Reserve Bank Credit 88 6-B. Reserve Bank Credit 89 7. Personal Income, Consumption, and Savings .... 135 . x CONTENTS Number page 8. Private Domestic and Foreign Investment 136 9-A. Consumer Prices 139 9-B. Consumer Prices 140 10. Consumer Instalment Credit Outstanding by Major Parts 152 CHARTS Number page 1 Quantities and Types of Money of the United States in November, 1957 1 2. Kinds of United States Currency Oustanding and in Circulation 23 3. Classification of Credit Instruments 56 4. Clearing of Checks Used Outside of a Trading Area but Within One Federal Reserve District 58 5. Clearing of Checks Used Outside of a Trading Area and Involving Different Federal Reserve Districts 58 6. A Simplified Bank Statement 66-67 7. Member Bank Reserve Requirements 96 8. Deposit Expansion as Reserves Become Distributed Among the Different Banks of the Banking System 122 9. Deposit Contraction as Other Commercial Banks Share in the Original Loss of Bank Reserves 125 VALUABLE TO IMPORT,MPORTANT TEXTBOOKS Chandler, Lester V., The Economics of Money and Banking, Harper & Bros., 1953. Halm, George N., Economics of Money and Banking, Richard O. Irwin, Inc., 1956. Hanks, J. W., and Roland Stucki, Money, Banking and Na- tional Income, Knopf, 1956. Hart, Albert Gailord, Money, Debt and Economic Activity, Prentice-Hall, Inc., 1953. Kent, Raymond P., Money and Banking, Rinehart & Co., Inc., 1951. Klise, Eugene S., Money and Banking, South West Publishing Co., 1955. Lindholm, R. W., John Balles and John Hunter, Principles of Money and Banking, Norton, 1954. Mueller, F. W., Money and Banking, McGraw-Hill, 1951. Prather, Charles L., Money and Banking, Richard D. Irwin, Inc., 5th ed., 1953. Steiner, William Howard, and Eli Shapiro, Money and Banking, Henry Holt and Co., Rev., 1958. Stokes, M. L., and Carl T. Arlt, Money, Banking and the Financial System, Ronald Press, 1955. Thomas, Rollin G., Our Modern Banking and Monetary Sys- tem, Prentice-Hall, Inc., 3d ed., 1957. Whittlesey, Charles R., Principles and Practices of Money and Banking, The Macmillan Co., 1954. Woodworth, G. W., The Monetary and Banking System, McGraw-Hill, 1950. 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