CHAP 11

• Functions of Money

  • Medium of exchange
  • Store of Value
  • Unit of account
• Money need not have a physical presence to serve as a medium of exchange, a store of value, and a unit of account
• Most Canadians hold much more money in their bank accounts, and they can easily make a transaction with a debit card
• In the overall economy, there is much more money in the form of bank deposits than there is in the form of physical money
• Origins of Money

  • Metallic Money
  • Milling/Debasing the currency
  • Gresham’s Law
• Types of Paper Money

  • The role of goldsmiths
  • Banknotes – convertible on demand
  • Fractionally backed paper money
  • Fiat money
  • Gold standard
• Deposit Money

  Money held by the public in the form of deposits with commercial banks
• Bank deposits are considered money
• Banks create money by issuing more promises to pay (deposits) than they have cash reserves available to pay out
• Modern forms of money

  • Deposit money
  • Cryptocurrencies
• Types of institutions in a modern banking system

  • Central bank
  • Financial intermediaries
• Commercial banks

  Financial intermediaries that are deposit accepting and loan granting
• The Bank of Canada commenced operations

  March 11, 1935
• The organization of the Bank of Canada is designed to keep the operation of monetary policy free from day-to-day political influence
• The Bank of Canada has considerable autonomy, but the ultimate responsibility for the Bank’s actions rests with the government
• Joint responsibility

  The system where the ultimate responsibility for the Bank’s actions rests with the government
• Basic functions of the Bank of Canada

  • Banker to the commercial banks
  • Banker to the federal government
  • Regulator of the money supply
• The Bank of Canada serves as banker to the commercial banks and to the government of Canada, and as issuer of our currency
• The Bank’s holdings of Government of Canada securities arise from its operations designed to regulate the money supply
• The Government of Canada issued a massive amount of new securities to provide financial relief to unemployed workers and businesses during the COVID-19 pandemic
• The Bank of Canada played an important role by purchasing a large amount of these newly issued securities, thereby expanding the amount of money in the banking system
• It is expected that the Bank of Canada’s balance sheet will return to a more normal situation by 2022 or soon thereafter
• Commercial bank

  A privately owned, profit-seeking institution that provides a variety of financial services
• Services provided by commercial banks

  • Accepting deposits
  • Providing loans
  • Mortgages
  • Other financial products
• Fractional-reserve system

  A banking system where banks hold a fraction of deposits as reserves
• Kinds of deposits

  • Demand deposits
  • Savings deposits
  • Term deposit
  • Money market mutual funds
  • Money market deposit accounts
• The money supply is the total quantity of money that is in the economy at any time
• Demeasures of Money

  • M2
  • M2+
• M2


  Currency plus demand and notice deposits at the chartered banks
• M2+

  M2 plus similar deposits at other financial institutions
• Near money

  Liquid assets that are easily convertible into money without risk of significant loss of value
• Term deposits are an example of near money
• Money substitute

  Something that serves as a medium of exchange but is not a store of value - ie credit card
• An example of a money substitute is a credit card
• The reserves of the banking system are systematically related to the money supply
• Commercial banks

  – Essential intermediaries in the credit market.

  – Undertake interbank activities.

  – Multibank systems make use of a clearing house.

  – Commercial banks also act as profit seekers
• Commercial Bank Reserves

  • Fractional-reserve system
  • Reserve ratio
  • Target reserve ratio
  • Excess reserves.
  • At the core of any commercial banking system lies both confidence and risk.
• fill

  A) 200

  
• fill

  A) 300

  B) 1100

  
• fill

  A) 220

  B) 980