FIN 30220: Macroeconomic Analysis

1. FIN 30220: Macroeconomic Analysis Money, Output, and Prices

2. Why does this piece of paper (cloth, actually)have value?

3. In the early 1920’s, Germany experienced a period where the monthly inflation rate was 29,500% per month! Prices doubled roughly every four days!!! Money was more valuable as the paper it was printed on! Using money to stoke a furnace!

4. All time top inflation rates • Hungary (1946) • 13,600,000,000,000,000 %/mo. • Prices double every 15 hours • Zimbabwe (2008) • 79,000,000,000 %/mo. • Prices double every 24.7 hours • Yugoslavia (1994) • 313,000,000 %/mo. • Prices double every 34 hours

5. What is Money? • ANY commodity that satisfies three basic properties can be called money • Unit of Account • Store of Value • Medium of exchange “I can’t define it, but I know it when I see it!” Throughout history, many different commodities have been used as money

6. The earliest money was commodity money whose value comes from the commodity itself Cowrie Shells Cocoa Beans Animal Skins Salt Tobacco Leaves Precious Metals

7. Coinage began with King Sadyattes of Lydia, most commonly dated to 630-620 BC. While remaining a topic of debate by some, this type is now commonly considered to be the first official coin, meeting all of the requirements laid out in the dictionary definition: it is the first coin to have certified markings which signify a specific exchange value and be issued by a governmental authority for use as money.

8. The Chinese were also developing metal coins around 600BC

9. …and time marches on…. Leonidas I Sparta C. 480BC Alexander the Great C. 330BC Julius Caesar Romans C. 120AD Constantine I Byzantine Empire C. 330AD Charlemagne Franks C. 800AD Henry VIII England C. 1520AD

10. Can you guess who these people are? Cleopatra and Mark Antony Egypt. 80-77BC Elizabeth Taylor and Richard Burton from the 1963 film “Cleopatra”

11. The English Penny was introduced around 785AD by King Offa of Mercer. Originally, it was a coin of 1.3 - 1.5 grams of pure silver The penny was eventually standardized to 1/240 of a Tower pound (350g) of 92.5% silver (sterling silver)…this was later switched to 1/240 of a Troy pound (373g) Note: Avoirdupois LB = 453G From the time of King Offa, the penny was the only denomination of coin minted in England for 500 years, until the  gold coinage issue of King Henry III around 1257 AD.

12. Early on, the colonies (being British colonies) used British money Pound (20 shillings) Guineas or Sovereigns were gold coins with a value of one pound sterling Shilling (12 pence) All these coins are during the reign of Charles I (1625 – 1649). Inadequate supply of British money put commerce in jeopardy in the colonies. Pence (Penny)

13. Taking matters into their own hand, Boston authorities allowed John Hull and Robert Sanderson to set up a mint in 1652. “Pine Tree” shillings were minted until 1674 when the mint was shut down All the coins bear the date 1652. Why? Coinage was the sole prerogative of the king, but in 1652 there was no king (King Charles I had been beheaded three years earlier). They kept the date so they could deny any illegality if and when a monarchy was once again reestablished which it was in 1660.

14. Spain established a mint in what is now Mexico City in 1535. Spanish ships returning to Europe would stop off in the colonies to buy supplies. This made Spanish money widely available in the colonies. Spanish dollar = 8 Reals (.88 ounces of silver) Doubloon = 4 dollars (1/5 oz. of gold) 2 Bits is still considered slang for a quarter! Spanish coins remained legal tender until the coinage act of 1857!

15. The Constitution (1787) gives the congress the right to “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures” (Section 8, Clause 5) On April 2, 1792 Congress passed the coinage act which created the mint. The Coinage Act of 1792 defined a US Dollar as .0538 ounces of pure gold or .86 ounces of pure silver (15:1 ratio) – same (almost) as the Spanish dollar The US mint began production in 1793 US coins made in 1792 were not minted for circulation and are EXTEMELY valuable. This 1792 penny sold for $603,750!

16. Where does the dollar sign come from? U S Imagine a U and an S (for United States overlapping) P P S The dollar was fashioned after the Spanish peseta - the P stands for Peseta, the “s” makes it plural (what if the P and S overlap), the line indicates an abbreviation 8 The back of a Spanish peseta had two columns (the pillars of Hercules) wrapped with a scroll that reads “plus ultra”- beyond the pillars, there are other lands. Could this be the origin of the dollar sign?

17. All American coins must have “an impression emblematic of liberty and the word liberty as well as the year. On the reverse of copper coins was required the denomination. The first circulated penny was released in 1793 The “Chain link penny” caused a lot of controversy..many believed that the chains represented slavery! The chain was immediately replaced with a victory wreath. Note that from 1793 to 1857, the cent was larger than a modern quarter Half penny 1793

18. On the reverse of gold and silver coins will be an eagle and “United states of America” . Denominations didn’t begin showing up on silver coins until 1804 Half dime introduced in 1794 The dime was first issued in 1796 Quarter: 1796 1794: US dollar (A gold dollar was released in 1849) 1794: US Half dollar Production of silver coins ceased in 1964

19. On the reverse of gold and silver coins will be an eagle an “United states of America” . Denominations didn’t begin showing up on gold coins until 1807 1796: Quarter Eagle ($2.50) US Half eagle ($5) - 1796 US eagle ($10) - 1795 US double eagle ($20) - 1849 Production of gold coins ceased in 1934

20. 1909: Lincoln appeared on the cent to commemorate the 100 anniversary of his birth 1932, George Washington appears on the quarter 1938: Jefferson appears on the nickel 1946: FDR appears on the dime due to his big support for the march of dimes 1964: JFK appears on the half dollar

21. Women finally made it onto US coins! Susan B. Anthony was the first non-mythical woman to appear on a US coin in 1978 Sacagawea followed in Susan’s footsteps in 2000 Currently, the US mint produces between 4B and 10B coins annually. As a self funded agency, the mint generated 3.89B dollars of revenues in 2010. The US mint has facilities in Washington DC, Philadelphia, West Point, Denver , San Francisco, and the bullion depository at Fort Knox.

22. None of our coins has any precious metal content 99% Zinc, 1%Copper Annual Production: 6.8M 75% Copper, 25% Nickel Annual Production: 1.4B 75% Copper, 25% Nickel Annual Production: 2.5B 88% Copper, 6% Zinc, 3% Magnesium, 3% Nickel Annual Production: 5.3M 75% Copper, 25% Nickel Annual Production: 2.4B 75% Copper, 25% Nickel Annual Production: 5.8M

23. Paper money first makes an appearance in China around 900AD Due to a severe copper shortage, the Chinese begin issuing paper currency. Frequent reissues fuel inflation

24. Each of the colonies issued currency. Most of these were “bills of credit”

25. Beginning in 1775, the Continental congress issued currency to finance the revolutionary war. Continentals were bills of credit – not backed by gold or silver. Easily counterfeited, the notes quickly devalued, giving rise to the phrase “not worth a continental!”

26. The founding fathers feared fiat money (for good reason with the failure of the continental). In fact, the constitution forbids states from issuing paper fiat money. A private business chartered by the confederation congress. Was the first IPO in the United States and the first Private Commercial bank. Later re-chartered as the Bank of Pennsylvania. Eventually acquired by Wells Fargo Bank of North America (1782 – 1786)

27. The founding fathers feared fiat money (for good reason with the failure of the continental). In fact, the constitution forbids states from issuing paper fiat money. The First bank of the US was chartered in 1791. While officially a private bank, the US government controlled 25%. The charter was not renewed in 1811. The Second Bank of the US was chartered in 1816. Its charter renewal was vetoed by Andrew Jackson in 1836 The second bank of the US existed for five more years until going bankrupt in 1841

28. Prior to 1838, a bank charter could be obtained only by a specific legislative act. However laws passes by various states after 1838 allowed the automatic chartering of banks by the states without any special legislative consent. From 1840 – 1863 all banking business was done by state banks

29. Anyone who satisfied the chartering requirements could become a bank and issue currency! 1837 – 1863 over 8,000 “brands of currency issued by banks, state governments, private individuals, and private companies

30. The US began issuing United States Notes in 1862 after passing the legal tender act. US Notes were not backed by gold, but were “legal tender for all debts public and private” US Notes were nicknamed “greenbacks” US notes were last placed into circulation in 1971

31. The National Banking Act of 1863 allowed Nationally chartered banks to distribute bank notes (deemed legal tender) backed by US Treasuries. National banknotes were printed by the US Treasury State bank notes were subject to very high taxes and soon disappeared

32. The Federal Reserve was created in 1913 to as a solution to bank panics (particularly, the banking panic of 1907)

33. William McKinley - $500 Grover Cleveland- $1,000 Salmon P. Chase - $10,000 (Treasury Secretary under Lincoln) James Madison- $5,000 Denominations of $500, $1,000, $5,000, and $10,000 were no longer printed after 1946 for fear of German counterfeiting!!

34. The largest denomination ever printed was a $100,000 gold certificate. It was never circulated, but was used for inter-bank transfers

35. The beginning of the end: 1934 During the great depression, US citizens were converting paper currency into gold in large quantities. The government didn’t have enough gold to back up the currency, so FDR passed an executive order that made it illegal for US citizens to hold gold. Only foreign central banks could convert paper dollars into gold This coin sold at auction in 1996 for $7.5M!!

36. FDR put the Great Seal on US Currency in 1935 Old Version (prior to 1935) New version (began in 1935) Secretary of Agriculture (and later, vice president) Henry Wallace saw the Latin phrase “Novus Ordo Seclorum” which means a new order of the ages and thought it meant “The new deal of the ages” both were freemasons and saw the symbol above the pyramid as the “all seeing eye” – the Masonic symbol for the great architect of the universe.

37. In God We Trust was adopted officially as the motto of the United States in 1956 as an alternative or replacement to E Pluribus Unum. In god we trust has appeared sporadically on coins since 1864 In God we trust has appeared on currency since 1957 Some atheists have been known to mark out the motto with a custom made stamp

38. On August 15, 1971, Nixon closes the gold window and the US dollar ceases to be convertible into gold by anyone. This marks the beginning of a truly anchorless system

39. The U.S. Department of the Treasury first issued paper currency of the United States in 1862 as a result of a shortage of coins and the need to finance the Civil War. • Today, the BEP has facilities in Washington DC and Fort Worth Texas • Currently, the BEP produces around 38 million notes per day with a face value of approximately $500M (mostly to replace worn out currency) • Average Lifetime • $ 1 ...............18 months • $ 5 ................ 2 Years • $ 10................ 3 Years • $ 20 .............. 4 Years • $ 50 ............... 9 Years • $100 ...............9 Years • The average cost of a note is 9.1 cents

40. The BEP has had a contract with the Crane paper company to supply the paper for our currency since 1879. • The “paper” is 75% cotton and 25% linen with blue and red silk threads running through it •  Have you ever wondered how many times you could fold a piece of currency before it would tear? About 4,000 double folds (first forward and then backwards) are required before a note will tear. All bills, regardless of denomination, utilize green on the backs. Faces use black ink, color shifting ink, and metallic ink. Inks are formulated and blended by the BEP US currency utilizes a combination of offset and Intaglio printing. In Intaglio printing, images are engraved on plates. Ink is applied to the plate and then pressed into the paper under great pressure.

41. Federal Reserve District Seal: A (1) = Boston, B (2) = New York, C (3) = Philadelphia, D (4) = Cleveland, E (5) = Richmond, F (6) = Atlanta, G (7) = Chicago, H (8) = St. Louis, I (9) = Minneapolis, J (10) = Kansas City, K (11) = Dallas, L (12) = San Francisco Seal of the US Treasury Federal Reserve District Number Series Date Signature of the Secretary of the Treasury Signature of the Treasurer of the US (Note: Every Treasurer of the US has been a woman since 1949 under Truman)

42. Each printing plate has 32 objects. The plate, therefore, is divided into 32 locations… One press run will be 200,000 sheets. The serial numbers are applied use skip numbering. The numbers are placed so that when the sheets are stacked and cut, the stacks of bills will be sequential. This would be the serial number locations for the first page of the first run of 200,000 sheets. After the first run of 200,000, the process is repeated starting with 06400001 After 15 runs of 200,000 (1 cycle) we are at serial number 96000000. At this point, we go back to 00000001

43. Given the numbering system, each serial number is guaranteed to come from one particular plate location. This gives currency an anti counterfeiting device… This letter identifies the number of “cycles”: Y = 25 Serial number Plate position Federal Reserve District Plate serial number

44. Can you find the owl on the $1 Bill?

45. See it now? Did you know that the owl is a Masonic symbol of wisdom?

46. Some argue that when looked at even closer, it’s a spider, not an owl.

47. The narrowest definition of money would be the Monetary Base (also called M0, Inside Money, or High Power Money). The monetary base is a direct liability of the Federal Reserve – that is, cash! Federal Reserve System (2006) In Millions Assets Liabilities $11,036 (Gold) $793,705 (Currency in Circulation) $792,581 (US Bonds) $12,346 (Reserve Deposits) $64 (Loans) $15,275 (US Treasury Deposits) $78,968 (Other) $61,323 (Other) Total: $882,649 Total: $882,649 Reserves Monetary Base = Cash in Circulation + Vault Cash + Reserve Deposits

48. Needless to say, we are living in interesting times. This can be seen in the Fed’s balance sheets Federal Reserve System (2006) Federal Reserve System (2015) In Millions In Millions Assets Liabilities Assets Liabilities $11,041 (Gold) $11,036 (Gold) $793,705 (Currency in Circulation) $1,392,478 (Currency in Circ.) $2,461,813 (US Bonds) $792,581 (US Bonds) $12,346 (Reserve Deposits) $2,657,762 (Reserve Deposits) $179 (Loans) $64 (Loans) $15,275 (US Treasury Deposits) $226 (US Treasury Deposits) $2,068,658 (Other) $78,968 (Other) $61,323 (Other) $491,225 (Other) Total: $882,649 Total: $882,649 Total: $4,541,691 Total: $4,541,691 Quantitative easing program QE1 (Nov. 2008): $2.1T in Bank Debt, Mortgage Backed Securities and Treasuries QE2 (Nov. 2010): $600B in Treasury Securities QE3 (Sept. 2012): $40B per month (increased to $85B/mo. In Dec. 2012)

49. Quantitative easing QE3 QE2 QE1 $4T Billions of dollars $2.7T $1.7T

50. Quantitative easing QE1 QE2 QE3 $4T Billions of dollars $2.3T $1.3T