Money and Banking Tutorial

Author: Wu Kangping
Editor-in-Chief: Wei Rongqiao
Publisher:
Publish Date: 1999-10-01
Features: This book is one of the series textbooks for economics courses at Tsinghua University. The entire book is divided into 8 chapters, elaborating on the basic content and development trends of monetary banking. The content includes: Money and Monetary System, Credit and Finance, Financial Market Theory, Financial Innovation, Banking Operations and Management, Bank Regulation, Financial Crisis, Money Supply, Money Demand, Theories of Interest Rate Determination, Monetary Policy, Causes and Prevention of Inflation. This book is suitable as a textbook for economics, management, accounting, finance, and other majors in higher education institutions, as well as for workers and researchers in banking and financial departments. Excerpt: Before the 1970s, ordinary American citizens without substantial wealth could not enjoy high interest rates on savings. The only option for wage earners was to deposit their savings in low-interest savings accounts. However, today, even small savers have multiple choices, such as placing funds in Negotiable Order of Withdrawal (NOW) accounts or money market mutual funds. These accounts allow depositors to issue checks while earning higher interest. To understand the reasons behind these new choices, we will study why and how financial innovation occurs. Another reason for studying financial innovation is that it demonstrates how the creative thinking of financial institutions can bring them greater benefits. By reviewing how and why financial institutions have been creative in the past, we can better grasp their creativity in the future. This knowledge will provide a useful clue for us to understand the future direction of the financial system. The rapid pace of financial innovation means that many regulations on the banking system that governments implemented in the past are now outdated or even become obstacles to the healthy development of the financial system. The rapid pace of financial innovation is accompanied by rapid changes in the management environment. Understanding the methods of management and the reasons behind them will enable us to gain insights into the future development of banks and ensure that the knowledge we learn about banks and their role in determining the money supply does not become outdated.
Section 3: The Role of Financial Markets
Financial markets are where funds are transferred from surplus holders to deficit holders, such as bond markets and stock markets. These markets play a crucial role in guiding funds from those who cannot invest them productively to those who can, thereby improving economic efficiency. The activities of financial markets directly affect our wealth and also have a direct impact on the behavior of business enterprises.
I. Bond Market
A security is a claim on the future income or assets of its issuer. A bond is a debt security that promises regular payments over a specific period. The bond market is particularly important for economic actors, as it allows businesses or governments to borrow funds to finance their economic activities. Additionally, interest rates are determined in the bond market. Since different interest rates tend to move in a consistent trend, economists often refer to them collectively as "interest rates." However, in reality, the interest rates of different bonds can sometimes vary significantly. For example, the interest rate of a three-month Treasury bill is more volatile than other bonds and has a lower average. We need to study how the general movement of bond interest rates is formed and why the interest rates of different bonds differ from each other.
II. Stock Market
A stock is a claim on a company's profits. The stock market is a market that people pay close attention to, and people often express opinions on its trends. You may also frequently hear news about someone "making a big profit" from their recent stock trades. Many people have noticed a simple fact: the stock market is a place where people can make quick fortunes, which may be the reason for its widespread attention. Stock prices have always been extremely volatile, as the black days in the history of world securities demonstrate. The term "Black Monday" to refer to a market crash can be traced back as early as 1869. That year, famous American Wall Street speculator Jay Gould and Jim Fisk engaged in large-scale trading of gold, causing its price to rise steadily. By September 24 (Friday), the gold price index had jumped from 145 points to 162 points. However, in the middle of the day, it was announced that President Grant had ordered the New York Gold Reserve to begin selling gold, causing the gold price to plummet. In the brief time between the church bells ringing 12 times, the gold spot price index fell by 25 points. For many who had just bought gold at high prices, this was undoubtedly as painful as the crucifixion of Jesus. Friday was the day of Jesus' crucifixion, so people began to use "Black Friday" to refer to this event, and the term has been used ever since. Then came "Black Thursday," referring to the sudden crash of the U.S. Wall Street stock market on October 24 (Thursday) in 1929. Before October 1929, the Wall Street stock market had experienced a sustained boom of about 7 years, with all stock prices rising steadily. In early September 1929, a statistician predicted that the United States would face an unprecedented economic depression, and the Dow Jones index fell by about 10 points. Subsequently, President Hoover claimed that the U.S. economy was fundamentally sound, and the stock market rose again. However, a sense of alertness had already enveloped Wall Street. On October 24, an unprecedented wave of selling swept the market, with 12,894,650 shares traded in a single day, and the scale of selling continued to expand, breaking historical records. With no buyers, the stock market began to crash. By October 29, the stock market collapse reached its peak, with over 16 million shares traded, again breaking historical records. During this period, despite some financial giants attempting to rescue the market, such as Richard Whitney of Morgan Company buying 10,000 shares of steel company stock in one go, it was to no avail. The stock market collapsed rapidly, and this slide continued until mid-1932, lasting 34 months. The Dow Jones Industrial Index fell by 87.4%, with the sharpest declines in stocks from the metallurgical, machinery, automotive, electricity, and chemical industries, all falling by more than 90%. The stock market crash in New York also affected the stock markets in the United Kingdom, Germany, France, Belgium, Austria, Sweden, Norway, and the Netherlands, triggering a large-scale and prolonged decline in stock prices. Since October 29, 1929, was a Tuesday, and the New York stock market crash reached its peak on that day, some people also referred to this event as "Black Tuesday."