Banking and Money
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Banking 1
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Banking 2: A bank's income statement
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Banking 3: Fractional Reserve Banking
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Banking 4: Multiplier effect and the money supply
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Banking 5: Introduction to Bank Notes
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Banking 6: Bank Notes and Checks
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Banking 7: Giving out loans without giving out gold
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Banking 8: Reserve Ratios
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Banking 9: More on Reserve Ratios (Bad sound)
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Banking 10: Introduction to leverage (bad sound)
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Banking 11: A reserve bank
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Banking 12: Treasuries (government debt)
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Banking 13: Open Market Operations
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Banking 14: Fed Funds Rate
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Banking 15: More on the Fed Funds Rate
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Banking 16: Why target rates vs. money supply
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Banking 17: What happened to the gold?
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Banking 18: Big Picture Discussion
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The Discount Rate
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Repurchase Agreements (Repo transactions)
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Federal Reserve Balance Sheet
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Fractional Reserve Banking Commentary 1
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FRB Commentary 2: Deposit Insurance
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FRB Commentary 3: Big Picture
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LIBOR
Banking 6: Bank Notes and Checks More on how bank notes and checks can be used.
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- Let's explore this notion of using something
- other than actual physical gold as a unit of exchange.
- So let me draw my balance sheet.
- I'll draw it a little bit neater this time.
- So I built my building,
- my bank, my vault, whatever you want to call it.
- And I used 100 gold pieces to build it.
- This is just my bank's balance sheet - Bank of Sal.
- So it's 100 gold pieces.
- When I say 100 gold pieces, this is equity.
- Hopefully you're familiar with it by now.
- But it's not like there're actually 100 gold pieces anywhere anymore.
- I took these 100 gold pieces,
- paid the builders of my vault-looking, temple-looking bank
- and maybe they live someplace else
- and they just took that gold with them.
- So I'm just saying I have 100-gold-pieces worth of a building.
- Maybe if I had to sell this,
- someone else would give me 100 gold pieces for them.
- And that's why I say I have 100-gold-pieces worth of equity.
- Anyway, that's not the point of this video.
- So I go, I tell everyone, hey, you can keep your money,
- safe for your gold, safe with me.
- So let's say that - I don't know - Citizen A says, “well,
- this looks like a good bank,
- and Sal, you've lived in this village all your life,
- and I trust you and your ancestors.
- So I'm going to deposit 500 gold pieces with you.”
- So that becomes an asset in the bank.
- 500 gold pieces. I’m trying to draw it as neatly as possible.
- Got the width off a little bit, but I think you get the idea.
- The width shouldn't matter.
- The height kind of represents the quantity.
- So this guy - maybe it's my uncle -
- - 500 gold pieces - deposits in my bank
- because of this vault that I built seems a lot safer.
- And I say, “well, do you want it all in your checking account, sir,
- or would you like some cash back?” And he says, “oh, well,
- I need some cash to just transact every day
- and to buy, you know, supplies or food, et cetera.
- So why don't you put 400 equivalent
- in my checking account. ”
- So let me draw that.
- Let me do the cash back first.
- Let's say I do 100 cash back first.
- So then I have this liability here, of 100.
- So it's 100 gold pieces’ equivalent of notes outstanding.
- “N.O.” for notes outstanding.
- And maybe I just hand him five 20s for that
- as most ATMs today do.
- But I just don't want to confuse things too much.
- Remember, this is in my fictional world.
- These aren't necessarily dollars just yet.
- These are bank notes from the Bank of Sal, saying that
- anyone who were to hand back one of these 20s to me
- will get 20 gold pieces.
- That's all it says.
- I've signed them and I've made them hard to forge,
- just because I don't want anyone printing these notes
- and then coming to me and getting my gold pieces.
- I only want the ones that I printed coming back to me.
- But anyway, that depositor -
- - so he got 100 gold pieces of notes
- and that's what I've drawn here
- and then the rest will just stay in his checking account.
- So… checking account.
- It's a liability for me, right?
- Because he can at any point withdraw that checking account
- and get back 400 gold pieces.
- So 400 gold pieces for A's checking account.
- A’s checking, called checking deposit -
- - there are a bunch of ways you can write it,
- but this is a liability for me.
- These are my assets.
- Fair enough.
- Someone else who trusts A says – call him Person B - says,
- “if it's good enough for A, it's good enough for B.
- So let me put my money in this bank account as well
- and I want to do similar type of transaction as A.”
- Although maybe they don't have as much money.
- So let's say that they have - I don't know -
- - let's say they have 200 gold pieces.
- So let me draw that on the left hand side first.
- 200 gold pieces from Person B.
- That looks like about 200.
- And they want to half of it in cash
- and half of it as a checking deposit account.
- Let me do it like that. So it seems about it.
- Half of will be 100 gold pieces for B's account.
- And then we also give him some cash,
- which are essentially bank notes in our current universe.
- And let’s say he wants it all in 10s. So we give him -
- - so let's say 100 gold pieces’ equivalent, notes outstanding,
- and I'm going to hand him - let's say he likes it all in 1s.
- I don't know. He likes the weight of the money; or
- he has to - I don't know what he does with the $1 bills.
- But 100 times a 1-gold-piece-denominated bank note, right?
- I give him 100 of these.
- Fair enough.
- So let's explore a little bit about
- how some transactions can occur with A and B.
- Let's say A needs to buy an apple from B.
- So let me draw this up here.
- I don't want to run out of space.
- I'll draw it actually down here.
- So let's say I have Person A and I have Person B.
- So B has an apple.
- That's my drawing of an apple.
- And Person A wants it and asks Person B,
- “How much does an apple cost?”
- And Person B says, “Well, an apple costs 2 gold pieces.”
- So Person A says, “Well, that's a little high, but I'm hungry,
- so I will give you two gold piece for it,
- but I'll tell you what -
- there's this new thing called a bank
- and I don't have gold pieces
- and I think you know what it's all about.
- Instead, let me just give you these pieces of paper that
- the bank says anytime I can go and trade for gold pieces.”
- So Person B says, “That's fair enough.
- I'm very familiar with that concept as well.”
- So Person A gives Person B - so Person A has -
- - maybe some of these weren't 20s,
- maybe some of these were $2 bills or something -
- Let me just say they were $1 bills.
- So 1-gold-piece note - actually let's just make it -
- - since he's got five 20s,
- let's say he gives him a 20-gold-piece note.
- I should draw it in green because that's the color that
- I originally drew the 20 gold-piece notes - one of these.
- He hands one of these over to Person B.
- B hands over the apple to Person A
- and he also hands over 18 of those $1 notes that he got.
- $1 notes.
- These were these notes here that Person B got.
- Hands over 18 of these $1 notes, so times 18.
- So as a matter of fact, you had two $1 notes switch hands
- and an apple was exchanged.
- And what's neat here are a couple of things.
- One, no gold ever had to exchange hands.
- Gold is heavy
- and you don't want to carry around a bunch of gold.
- You're able to do very exact change in this situation.
- You could imagine a world where gold is worth 20 times
- your smallest unit of exchange you want.
- So it would be very inconvenient to
- have to break up little gold coins.
- In this case, our smallest unit of exchange is
- a 1-gold-dollar bill or whatever you want to call it.
- But you could imagine - you could break these up -
- - this bank could issue notes that are
- a quarter of a gold piece or an eighth of a gold piece.
- And that's a lot easier than actually cutting up gold pieces
- and then having to put them all back together.
- And of course,
- these notes can then switch hands between people
- as the economy needs, as it functions,
- and the bank doesn't have to worry about anything
- and the gold doesn't have to be moved around.
- So everyone is happy.
- Let's say that that
- Person B actually wants to buy sth large from Person A.
- Let's say Person B wants to buy – Person A is richer,
- so let's say Person A is buying something from B.
- Let's say B is a home builder.
- Let me do that in blue.
- Let's say B is a home builder.
- And Person A is going to get him to build a house for him.
- So he's going to say,
- “Well, I'll pay you 200 gold pieces to build a house.
- That's a huge amount of money.
- I don't like walking around with that.
- How about I write you a check?”
- And Person B says, “Well, what is a check?”
- “Well, a check,” Person A says, “is I just write you a note
- and that essentially instructs the bank to transfer
- that amount of gold pieces in my name to
- it being in your name.”
- And Person B says, “Oh, that sounds reasonable enough.”
- So Person B gives Person A a home,
- works for weeks to build a house.
- And then Person A writes B a check.
- And now we're getting an introduction to checks
- and the check will look something like this.
- Person A will fill out - it'll have A's name there
- and it'll say “200 gold pieces please” and then A will sign it
- and A will probably date it – 10, I don't know, 2008 and
- then give it to B and then B can take it back to this bank.
- And the bank will do the transfer - all the bank has to do is
- take 200 gold pieces from here and put it there.
- So this is all the bank has to do really.
- Right now 400 gold pieces in A's name,
- just take 200 of those and put them in B's name.
- So now this is B's new share, which would be 100 plus 200,
- so it's 300 gold pieces.
- And then A's share has shrunk to just being this part right here.
- But notice, the bank didn't have to do anything
- except a little bit of paperwork.
- 200 gold pieces.
- And that was useful
- because you didn't have to exchange cash.
- We talked about gold being dangerous to keep at home
- because obviously someone could steal it.
- It's also inconvenient because it weighs a lot -
- it's hard to break up and carry around if you're doing a lot of it.
- But cash is the same thing -
- - these bank notes are also dangerous
- because someone can steal them
- and no one is keeping track of who has which bank notes,
- so they're still something that's very stealable.
- But a check was nice.
- Because one, you could write a very large amount
- and also, only if we're doing our authentication right,
- Person A can write the check.
- So it's not like someone could - in an ideal world,
- someone could not have stolen A's checkbook
- and signed for him
- because hopefully this bank has A's signature on record
- and can recognize when A has written a bad check;
- or maybe, they'll even check with A to say
- if something is a little bit suspicious.
- But anyway, that's an introduction to banks notes
- and checks. In the next video,
- I'll talk about how we can use all of these notions
- to actually lend money, also without giving out any gold.
Be specific, and indicate a time in the video:
At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
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