The Economics of Money and Banking

Introduction to the principles of money and banking, the intermediary institutions of the American economy and their historical development, current issues in monetary and financial reform.

Readings: The required texts are Marcia Stigum, The Money Market, 3rd edition (Irwin Professional Publishing, 1990), Henry Kaufman, On Money and Markets (McGraw Hill, 2000). Both are available at the Columbia Bookstore. A packet of supplemental readings is available at Village Copier on 115th St. Regular reading of the financial press (for example, The Financial Times) is recommended as an invaluable aid for developing familiarity with the structure and function of modern banking institutions.

Prerequisite: Intermediate Macroeconomics (BC3033 or W3213)

Grading: Work will be assessed by means of two exams with the following weights

Midterm 40%
Final 60%

TA: The teaching assistants for this course--Goetz von Peter and Paul Sengmueller--will be holding weekly discussion sessions focused around the supplemental readings: Tuesday 6-7, 8-9 in Milbank 328. They will also be available in office hours for help with the lecture material.

Goetz von Peter, gv43@columbia.edu Th 9:30-10:30 Lehman 1
Paul Sengmueller, pfs11@columbia.edu Th 2-3 Lehman 1

Bulletin Board: On an experimental basis, we'll be using an electronic bulletin board, www1.columbia.edu/sec/bboard/003/econ3265-001. Post questions and receive answers. Carry on discussions with other class members. It's an experiment.

Reading Period Assignment: The final exam will give the opportunity to write an essay on the book by Kaufman.

Lecture Schedule

Introduction
1. First Day Overview
2. Natural Hierarchy of Money
3. US Monetary History   [Young]
4. Dialectic of Finance: Accounting
5. Central Banking: Four Prices of Money   [Volcker]

Banking as a Clearing System
6. Final Settlement   [Stigum 12 on Fed Funds]
7. Postponing Settlement   [Stigum 13 on Repo Black]
8. Reserves and the Money Standard   [Stigum 21 on BA]
9. International Money   [Stigum 18 on Euro, Mundell]

Banking as Market Making
10. Dealers: Liquid Security Markets   [Stigum 10 on Dealers]
11. Banks: The Market for Liquidity   [Stigum 6 on Banks, LTCM [Drop]]
12. The Fed: Foreign Exchange   [Stigum 7 on Banks]
13. Liquidity Crises and Discount Policy   [Stigum 9 on Fed, Minsky]
14. 19th Century London Money Market

15. MIDTERM, October 24

Banking as Market Integration
16. Time   [Stigum 15 on Futures, Hull 2-4]
17. Risk   [Stigum 17 on Options, Hull 6]
18. Cross-market   [Stigum 19 on Swaps, Hull 5]
Election Day Holiday

Banking as Intermediation
19. Financial Intermediation   [Stigum 2]
20. Banks as Intermediaries   [Stigum 22 & 26, Gurley and Shaw]
21. Guest Lecture: Henry Kaufman
22. Bank Lending   [Stigum 23]
Thanksgiving Holiday

Banking, Economics, and Finance
23. Micro: Bank Regulation, Moral Hazard  [Irving Fisher [PDF]]
24. Macro: Monetary Policy
25. Money in a Theory of Finance   [Kaufman]
26. Conclusion and Review

FINAL EXAM (Tuesday December 19, 9-12)

Supplemental Readings:

Young = Chaps. 31-34 in "Commerce: The Marketplace of the World", 1924. Reprinted as pp. 265-321 in Mehrling and Sandilands, ed. Money and Growth, Routledge 1999.

Volcker = "An Interview with Paul Volcker" by Mehrling, unpublished mimeo.

Black = "Banking and Interest Rates in a World Without Money: the Effects of Uncontrolled Banking." Journal of Bank Research 1 (Autumn 1970): 8-20. Reprinted as chapter 1 in Fischer Black, Business Cycles and Equilibrium, Blackwell 1989.

Mundell = "A Reconsideration of the Twentieth Century." American Economic Review (June 2000): 327-340.

Minsky = "The Vision of Hyman P. Minsky" by Mehrling, Journal of Economic Behavior and Organization 39 (1999): 129-158.

LTCM = "Minsky and Modern Finance, The Case of Long Term Capital Management", by Mehrling. Journal of Portfolio Management 26 No. 2 (Winter 2000): 81-88.

Hull = Options, Futures, and other Derivatives by John C. Hull, Prentice Hall 1997.

Gurley and Shaw = "The Growth of Debt and Money in the United States, 1800-1950: A Suggested Interpretation", Review of Economics and Statistics 39 No. 3 (August 1957): 250-62.

Irving Fisher = "Love and Death: The Wealth of Irving Fisher" by Mehrling, unpublished mimeo.