- Bank runs
- The process by which people who have deposited money in
commercial banks all want to withdraw it at the same time. Because the banks lend the
money they receive, they never have enough cash on hand to fulfill all the demand for
withdrawal. A s the public knows this, as soon as rumors of a possible insolvency of a
particular bank spreads, everyone tries to get its money back first, precipitating the
bankruptcy of the bank.
- Banking System
- The sum of all the commercial banks of a country. These
banks take deposits from the public, and lend the money they received, keeping only a
small fraction of it (10-15%) in their vaults to satisfy withdrawal demands.
- Bimetallic Standard
- A monetary standard in which the monetary unit was defined
as consisting of either a certain quantity of silver or a certain quantity of gold.
Citizen could come to the Mint with one of both metals
and ask for coins in exchange.
- Bullion Market
- The market for gold and silver as a raw metal.
- Consumer Price Index, a measure designed to capture annual
price changes in general goods. Few people like inflation for its own sake today, but you
have to know that declining prices (deflation) is associated with recessions and
- The opposite of inflation,
deflation is the process through which prices decline. It is almost always a sign of a depression.
- The state of the economy when output of goods and services
is slowing sharply or even declining, unemployment rises and prices decline.
- Fiat money
- Bank notes used as money to finance transactions (pay for
things) which are not "backed" by a valuable commodity like gold or silver which
could be exchanged against the note at a bank. Fiat money is the only money used in the
world today, but in the 19th century it was printed mainly to finance wars, because people
didn't trust the government enough to forget the immense potential for abuse that this
system had. If a government wants to increase its expenditures without increasing taxes
and without borrowing, it can just print money and pay with it. This invariably leads to inflation.
- Gold Standard
- A monetary standard
which defines the monetary unit of a country as
consisting of a certain amount of gold. Every citizen could come to the Mint with a bar of
gold and ask for currency (for example dollars) in exchange, at the legal price.
- A weight unit often used in the 19th century Anglo-Saxon
world. It is equivalent to 0.065 grams.
- The process by which the prices of goods and services rise
in terms of money. Sometimes you will read gold or silver inflation, which means
that the price of goods in terms of silver rises, due to an increase in the quantity of
gold or silver used as money.
- Legal ratio
- In a bimetallic
system, this ratio states how many pounds of silver you get for one pound of gold when
you go at the Mint. For example, Before 1873 the
dollar was defined as either 371 grains of
silver or 22.5 grains of gold. So, the same
dollar was legally worth either 371 grains of
silver or 22.5 grains of gold, that means the
legal ratio was 371/22.5 = 16.5 : 1
- Legal tender
- A legal tender is a mean of payment (gold, coin, note,
etc...) which the laws forces the sellers to accept to settle debt. That is, if you're a
banana wholesaler, you can refuse payment in coconuts but you have to accept dollars from
a client who want to pay its debts.
- Market ratio
- As gold and silver had other uses beside money (jewelry,
false teeth, etc...), there was also an active market for both metals, called the bullion
market. Here their price changed daily, as the force of supply and demand moved it back
and forth. Note that we cannot speak of a dollar market price of gold or silver, because
that price was legally fixed. If gold was cheaper at the Mint,
it just ceased to be used as a coin, but its nominal dollar price would not change. That
why we always talk of the ratio, that is, how many pounds of silver you get for one
pound of gold.
- The Mint
- The government agency responsible for the coinage of the monetary unit. That's the place people brought
their gold and silver to get dollars. Click here
for a picture of the American Mint.
- Monetary Base
- Sum of the currency in the hands of the public and the
currency commercial banks keep as reserves
- Monetary Standard
- A legal system which specifies what currency a country uses,
how it is defined and who runs it. For example, the UK was on a gold standard a the end of the 19th century, and the
power to coin gold was granted to the Bank of England.
- Money stock
- There are many definitions of the money stock, but they all
include the monetary base, and add bank deposits
of various flavors. This is a most important magnitude for the working of the economy,
because this indicates how much is available for people to buy and get paid at the going
prices. If the money stock goes down, or the output
of goods and services goes up more rapidly, there's a fat risk of a depression.
- Monetary unit
- The coins, notes, unit of account which a country uses
legally. Since the end of the 19th century, most countries have a single monetary unit on their territory. For example the
dollar in the USA, the French franc in France, the Deutsche Mark in Germany are all
- Ratio of
reserves to deposits
- This ratio is defined as banking reserves divided by
deposits the public has made in the national banking system as a whole. It is often seen
as an indicator of the carefulness of the banks, because careful banks will tend to keep
more reserves for a given amount of deposits, increasing the ratio. After bank runs, this
ratio climbs, depressing the money stock.
- Ratio of
deposits to currency
- This ratio is defined as deposits the public has made in the
national banking system as a whole divided by currency in the hands of the public. It is
often seen as an indicator of the trust of the public in the banks, because it is thought
that if the public keeps more dollars of deposits in the banks for each dollar he hoards
at home, it means that the trust in the banking system increases. During bank runs, this ratio goes down sharply.
- A coin is undervalued when its official price is under the
real value that the coin has if melted and sold as (part of) a metal bar. Conversely, a
coin is said to be overvalued when it would be worth less as a metal than as a coin.