THE ECONOMICS OF MONEY AND BANKING

Fall 2004 Location Barnard Hall 304
Monday-Wednesday 4:10 - 5:25 pm

Professor Mark Skousen
Office telephone: 212 854-4369 (starting in September)
Office:  2 Lehman Hall, Barnard College
Office Hours: M, W 3-4 pm, and T 2-4 pm
Email:  ms2662@columbia.edu
Website:  www.mskousen.com

OVERVIEW:  Today more than ever, everyone wants to know what the Fed will do next, what will happen to interest rates and the dollar, the effect of inflation or deflation on the global economy, and whether there will be another financial/banking crisis.  These are the headliners of today’s macroeconomic debate.  "The Economics of Money and Banking" addresses these vital issues in a mix of history, theory, and real-world topics. 

This course is divided into four parts:  First, we will begin with a historical evolutionary approach, discussing the origin and history of money; banking and the international gold standard; the creation of the Federal Reserve and central banking; the problems of inflation, deflation, and the business cycle (with French, American and German inflations, Great Depression of the 1930s, and other case studies); Bretton Woods; inflation and the dollar crisis in the 1960s and 1970s; and modern Fed policy. 

Second, we analyze the current financial system:  banking, interest rates, financial markets and institutions, foreign exchange and the international economy, transparency and financial regulation, and weaknesses/crises in the worldwide financial system. 

Third, we discuss the role of government and monetary policy:  money supply creation, central banking and the Fed, the conduct and tools of central banking, international monetary policy, and how to respond to financial crises both here and abroad.  

Fourth, we examine and apply economic analysis to monetary issues.  In order to understand better the financial world and to anticipate future events, we will examine a variety of theories of saving, investing, interest rates, and business cycles, including the Hume-Ricardo-Fisher-Friedman Quantity Theory of Money, Wicksell’s Natural Rate of Interest Hypothesis, Keynes’s Liquidity Preference Theory, Minsky’s Financial Instability Hypothesis, and the Mises-Hayek theory of structural imbalance and asset bubbles. 

The course will also examine current events as they unfold in the Wall Street Journal, Business Week, The Economist, and other publications.
 
REQUIRED READINGS:

R. Glenn Hubbard, Money, the Financial System, and the Economy, 5th ed. (Addison Wesley, 2005). 

Andrew Dickson White, Fiat Money In France. (Foundation for Economic Education, 1996).  

Murray N. Rothbard, What Has Government Done to Our Money? (Ludwig von Mises Institute, 1999).

The Making of Modern Economics," by Mark Skousen (M. E. Sharpe, 2001).

These books are available for sale at Labyrinth Bookstore, 536 W 112th, between Amsterdam and Broadway. 

There will also be additional readings/handouts on money and banking distributed during the class. 

Students should either subscribe or read on a regular basis The Wall Street Journal, Business Week, and the Economist (available in the library). 

GRADING:  Grades will be determined as follows:

Attendance and participation:  20%
Paper (10 pages, double spaced): 20%
Midterm:  20%
Final (comprehensive):  40%

TA:  The teaching assistants for this course will be holding discussion sessions focused around the class material and readings at the following times and locations:  TBA

LECTURE SCHEDULE

Part I:  The Evolution of Money, Banking and Financial Institutions

1.  Introduction & origin of money
2.  Banking, financial institutions, and paper money
3.  National banking, currencies, and inflation
4.  International gold standard, 1810-1914
5.  Central banking and the Federal Reserve

Part II:  How Banking and the Financial System Works

6.  Interest rates, bonds, and the money market
7.  Theory of portfolio allocation
8.  The foreign exchange market and the international economy
9.  Options, futures and derivatives
10.  Transaction/information costs and the theory of market efficiency
11.  Banking, insurance, pensions, and other financial institutions
12.  Banking crises and regulations

Part III:  The Role of Government and Monetary Policy

13.  The money supply process
14.  Central banking: How the Fed works
15.  Monetary policy tools: open market operations, discount rate, Fed funds ` rate, etc.
16.  The international financial system, monetary policy coordination and monetary/financial/currency crises.

Part IV:  Economic Theory and Monetary Policy

17.  The demand for money, and Keynes’s liquidity preference theory
18.  Aggregate supply and demand, short run vs. long run. 
19.  Minsky’s financial instability hypothesis
20.  Inflation and the quantity theory of money
21.  Wicksell’s Natural Rate of Interest Hypothesis
22.  Mises-Hayek theory of the business cycle and asset bubbles