Money and Banking – Mystery of Banking
Subject: Economics / General Economics
Question
Money and Banking
Mystery of Banking, Chapters 1,3-7, Review Questions
1. According to Salerno, why is Rothbard’s book fresh and up to date?
2. What is the difference between Rothbard’s view of the Federal Reserve and the standard textbook view?
3. Explain Salerno’s statement that the Fed is a “cartelizing device that limits entry into and regulates competition within the lucrative fractional-reserve banking industry and stands ready to bail it out, thus guaranteeing its profits and socializing its losses.”
Ch. 1: Money: Its Importance and Origins and Forward
1. Can money “originate by order of the state?” What is Rothbard’s view of this notion?
2. Know the following terms: barter, indirect exchange, double coincidence of wants, indivisibilities, business calculation, medium of exchange, and debasement.
3. Why are economies limited to barter inefficient? What are the economic difficulties in such economies?
4. What is the difference between direct exchange and indirect exchange?
5. Describe the process by which a particular commodity becomes money. At what point does a commodity become money?
6. What are the benefits, according to Rothbard, of an economy having a monetary system?
7. What are the “proper qualities of money?”
8. What commodities, historically, tended to become money? What advantage is there of using silver as money instead of gold?
9. Would a gold standard currency tend to be inflationary? Would it be deflationary?
10. If the various national currencies are all based on the gold standard, what can we conclude about the exchange rates between these currencies?
11. Why do agents of the state have an incentive to debase the currency?
12. What effect does monetary debasement have on the price level?
Chapter 3: Money and Overall Prices:
1. What is a price? What is the “price” of money? What is the purchasing power of money (PPM)?
2. What is the relationship between the price level and the PPM?
3. Explain why the supply of money is represented by a vertical supply curve.
4. Explain why the demand for money is represented by a downward sloping demand curve.
5. What will happen to the PPM and the price level if there is a shortage of money?
6. What will happen to the PPM and the price level if there is a surplus of money?
7. Describe the process that occurs when there is an increase in the supply of money.
8. Describe the process that occurs when there is a decrease in the supply of money.
9. Describe the process that occurs when the demand for money increases.
10. Describe the process that occurs when the demand for money decreases.
11. What are the two reasons that could cause an overall change in prices?
Chapter 4: The Supply of Money
1. Explain Rothbard’s Angel Gabriel model. Why does the Angel’s gift turn to ashes? Who, if anyone, benefits from the Angel’s actions?
2. What is the optimal supply of money? Are there benefits to increasing or decreasing the supply of money?
3. Should the money supply be increased to keep up with population growth? Why or why not?
4. Explain Rothbard’s conclusion that the “supply of money can readily be left to the marketplace?”
5. Explain the process of counterfeiting. Who benefits and who loses in this process?How does counterfeiting affect the price level and the PPM (purchasing power of money)?
6. Can the government be a counterfeiter?
7. What are the origins of government paper money? Explain the process of moving from a gold standard to a system of government paper money. In what sense does a gold standard limit a government?
8. What historical examples, regarding monetary expansion, does Rothbard discuss?
9. What are the advantages of having a gold standard when the government engages in inflating the paper money supply?
Chapter 5: The Demand for Money
1. What is the difference between the transactions demand for money and the asset demand for money? Is there a difference between these two components of the demand for money?
2. List and describe the things that affect the demand for money.
3. Explain how an increase in the supply of goods and services affects the demand for money and the purchasing power of money.
4. If businesses begin paying their employees more frequently, how will that affect the demand for money?
5. What are “clearing systems?” How do clearing systems affect the demand for money?
6. Explain how confidence in the money itself affects the demand for money.
7. Explain how price level expectations affect the demand for money. Is this the “most important single influence on the demand for money?”
8. Explain in detail Phase I, Phase II, and Phase IIIof a monetary inflation. What is hyperinflation?
The Purchasing Power of Money
1. Distinguish between the use value of money (the value in production and consumption) and the exchange value of money.
2. What is the purchasing power of money?
3. What is the basic problem in determining the purchasing power of money? In other words, why do critics say that the determination of the purchasing power of money creates a “vicious circle?”
4. Does the purchasing power of money determine the demand for money?
5. Does the demand for money determine the purchasing power of money?
6. Explain what Ludwig von Mises calls the “regression theorem.”
Chapter 6: Loan Banking
1. What is a bank? Explain the two main banking operations. How does a bank profit from loan banking?
2. What is a T-account (also called a T-table or a balance sheet)?
a. Consider an entrepreneur that opens up a bank by investing $110,000 into the bank.
b. Consider this bank’s balance sheet if the bank loans out $100,000 at 10% interest.
c. Consider this bank’s balance sheet once this $100,000 loan is repaid.
d. Assume that the bank wants to expand its lending capabilities so a partner invests $100,000 into the bank and the bank sells $200,000 of bank shares (stock).
e. Consider this bank’s balance sheet once it accepts a certificate of deposit of $100,000 at 5% interest (a debenture is a certificate of indebtedness).
f. Consider this bank’s balance sheet once it loans out $300,000 at 10% interest. Note the profit generated by the interest rate differential.
g. Finally, explain what happens once this loan gets repaid.
3. What effect does bank lending in the situations described in this chapter have on the money supply?
4. Are these loans productive? Do they benefit the lender? Do they benefit the borrower?
5. If the bank makes unsound loans and goes bankrupt, is anyone harmed, other than the bank owners and its creditors?
6. Explain why/how loan banking is non-inflationary.
7. Explain why/how loan banking is productive.
Chapter 7: Deposit Banking
1. What is deposit banking? How does a bank profit from deposit banking?
2. Explain the origins of paper money.
3. How do deposits affect the bank’s balance sheet?
4. What is a bailment? Is deposit banking equivalent to a bailment? Is the deposit banker “truly a bailee?”
5. Understand the difference between a loan and a deposit (in both cases, money is owed to someone).
6. What is embezzlement? What is embezzlement in terms of deposit banking?
7. What are reserves?
8. Define the reserve ratio.
9. Explain what happens when (a) somebody deposits $100,000 in gold in exchange for $100,000 bank notes, and then (b) the bank loans out $100,000 in bank notes.
10. Could deposit banking be inflationary? Could it be deflationary?
11. Explain the Carr v. Carr and the Devaynes v. Noble decisions.
12. Explain and discuss the Foley decision.
13. What is fractional reserve banking? What is 100% reserve banking? Is modern fractional reserve banking “a shell game, a Ponzi scheme, a fraud?” Why does Rothbard make this claim?
14. In what sense, according to Rothbard, are fractional reserve banks “inherently bankrupt?”
15. Explain Spahr’s defense of fractional reserve banking. What is Rothbard’s position on Spahr’s argument?
16. What are the differences and similarities between bank notes and demand deposits? What are the advantages of bank notes? What are the advantages of demand deposits?