4/2 Banking notes

Self regulation of private banking system
(1) consumers will redeem deposits and notes, imposing pressure on banks to be more prudent in their daily operations
(2) Other banks can redeem deposits and notes, either because of strategic or profit reason.
(3) To lower transaction costs, banks come up with the institution of clearinghouse, which functions like like central bank and imposes regulation among member banks.
(4) ownership. Typically the private banking the ownership is partnership. The bankers are the people that work there. And they share something in the bank. Doubly liable.

Why is it that the banks in the clearinghouses never thought it make sense to take all the golds that are each in their own bank, and deposit them in one larger bank and thus have on their balance sheet reserve credits?

Local bank                            Regional Bank
A      L
Gold   Notes & Checks

Local bank deposits some gold in the regional bank, in return it gets a reserve balance. Regional bank deposits some gold in the reserve bank in return for some reserve balance. The reason is to lower the reliance on gold in transaction.

What characteristics does a stylized freely evolved monetary system look like?
(1) Competition reduces natural monopoly in private banking sectors. There was a concentration in clearinghouse system.
(2) Inside money at that time was of good quality and reputation.
(3) Interest rate tended not to be paid on banknotes
(4) Commodity money is driven out of circulation. But international trades still need commodity money to make payments.
(5) Commodity money and bank reserve end up consisting of only a small fraction of the deposits. The reserve ratio is low. (2%)
(6) What assets does an unregulated bank hold? Short-term commercial paper, large amount in their balance sheets are bonds of governments and corporations, smaller loans that are collateralized.
(7) What liabilities does it hold? Deposits.
(8) Banks are involved in related business.

Why don't reserve disappear in the free banking system?
(1) Existence of liabilities presupposes something promised
(2) Banks have a competitive incentive to redeem others' liabilities
(3) reserves are scarce

There isn't much evidence showing that market forces will lead to the spontaneous emergence of a central bank.

How do banks today issue banknotes?

What is a Central Bank?
Functional definitions
(1) lender of last resort
Central bank                                                        Commercial bank
A                                L                                         A                                       L
                                                                           Gold 40                         M 10
                                                                          Long term 160              R 10
                                                                                                               notes 100
                                                                                                                capital 40
Now investors want to redeem 60$, the commercial bank doesn't have that many cashes.
The bank will turn to the central bank, the central bank will take gold 20, issue reserve note or reserve credit, and give it to the bank.

For the central bank, asset is loan to the bank,  and the liab is the deposit account for the bank
For commercial bank, gold 20 is added on their asset, and loan from Fed 20 is added on their liab. The equity is not changed. Later the commercial bank will return the money and interest to the Fed. The Fed will lend money at a penalty rate
(a) the only banks that can afford higher interest rate are good banks
(b) You don't want banks to come to Fed for daily borrowing. The Fed is an emergency window.

 (2) controller of money supply
Confused with positive and normative description of central banks' duty
Evidence shows that Fed fails to manage money supply and credit supply.

A structural definition:
A bank that enjoys government privileges, generally including a monopoly of paper currency.

Why is it good to have monopoly power on paper currency?
(1) central bank doesn't face the competition from other banks of note redemption.
(2) monetary policy
(3) Seiniorage
(4) short-run lending power

Central bank will suppress private inside money by either banning them or prohibiting payment of interest. Central bank can also tax the bank (reserve ratio)

Why do government favor central banks?
(1) For poor countries, central bank is the only way to generate the revenues.
(2) Fiscal reasons. To get senioriage and for government to gain loans of favorite terms that otherwise wouldn't be got naturally.

Banking let people escape risks of holding debased government coins.
Some banks were involved in debasement business too.
Banks took step to get profit from government debasement

The rest read the ppt