So, have a look at the syllabus, I mentioned just as I was talking there that we're going to start with banking as a clearing system. Understand it as a payment system. You can see were not starting immediately there, there's going to be this is lecture one that we're having now. The four prices of money, and next week is the natural hierarchy of money, and money in the state. So there's sort of the two key ideas in the course are thinking of banking as a clearing system, a payment system, and banking as market making. The third section there, international money banking, is just expanding that because it's a global system. Expanding those two ideas to the international arena. And then the fourth idea, banking is advanced clearing, this is how we bring in finance. And forwards and futures and swaps and all these derivatives and things like that. So that comes in toward the end of the class, and then we go back to some of these issues of regulation. What to do about shadow banking, touching the elephant reviews, this is about how this course connects up to what you have learned in economics and what you've learned in finance, both. We're sort of straddling in the middle of that. So the course has these definite sections and you can see there's a problem set for each section to help you get on to on top of it. Clearing market making advanced clearing and also intermediation. Let me say one more thing about that, here's my chalk. So I titled this lecture the Four Prices of Money, and I haven't mentioned the four prices of money. So I better tell you what they are. The four prices of money is in a certain sense, that's what this whole course is about, is understanding where these prices come from. Economics focuses on one of them. Certainly the interest rate might be thought of as the price of money conceivably. One of them is certainly the interest rate. The interest rate is the price of money in what sense? It's the price of money today in terms of money tomorrow. So it's the interest rate on a deposit account which it's how you can transform money today into money tomorrow. So that I think is pretty clear for most people with some economics training. But there's a more primitive price that is important. That gets neglected and we're going to pay a lot of attention and that is the price of par. This is the price of one money in terms of another money right now, today. So this is about today, this is about the future. For example, you all let me write down this balance sheet without any complaint and yet, what do we have here? We have deposit accounts money on this side and we have cash reserves money on this side. And we take these all for granted that they're traded par. Then if you have an account at Citibank that says a $107. You can go to Citibank, and they will give 107 of these dollars. That's par, and we see in financial crises, sometimes par is broken. You bank money trades at a different rate than central bank money. This is central bank money here. This is private money so the system is hybrid. There's private money and there's state money and that hybridity is masked by par. You think like it's just the same and if the system is working well it is just the same but that then begs the question. Why does it work well? How do we make it work well? What do we do in the case of a financial crisis? So par is actually quite an important price and it's key to the payment system. If you were buying something from California and they said, because you're here in New York, we're going to charge you an extra 5% there's not going to be, because there's not par clearing between California and New York. You would be really upset. But this is how it was in the United States before the Fed there was not par clearing, par clearing was created. Par clearing in the payment system in the United States was created by a set of institutions and it is not easy to create this thing, by the way. because this is like a fixed price, economists serve sensitive enough to realize that. If you have a price there and now you've fixed it at one for one and you're not going to let it budget all no matter what the pressure is that's not so easy. That's like rent control. So we're going to look at that. That's one price, interest rate is the second price. The exchange rate. So this is about the price of domestic money in terms of foreign money or about domestic money in terms of world reserve money. We know that there's a best money. We know that best money is the dollar. This is particularly obscure, because we live in the United States, so we tend to ignore exchange rates. Because the dollar is the world's, we go to Europe for vacation or something, but the notion that we have to worry about the exchange rate of the dollar for larger economic purposes. We never worry that the dollar is going to fall below par with the international dollar. The international dollar, which is actually used for reserve. There are two dollars. Again, private dollar and a state dollar. And the international dollar is largely private dollars. There all this European banks with dollar deposits and no accounts at the Fed. How does that work? Euro dollars. That's third price. The fourth price is the price level. So here we're talking about the price of money in terms of commodities. Economists often talk about that using the quantity theory of money, mv equals py, or pt, or something like that, imagining that the quantity of money sort of moves one for one with the price level of commodities. We will come to some of that, and understand what might lie behind that by the end of the course, but most of our attention is actually going to be on these on these here, on these things here. If you look in the just preview of coming attractions, if you look in the FT, usually it's like two or three pages from the back, you see a really horrific page filled with very, very tiny little numbers here. And by the end of this class we're basically going to know what all these numbers are. So we have market interest rates, US dollar LIBOR. We have US dollar CDs. We have US overnight Repo. We have federal funds effective. These are all different interest rates here. And how they're connected to each other is something we're going to understand. They also have pound LIBOR. They also have Swiss franc LIBOR. They also have exchange rates. They have interest rate swap rates. They have all of this. We're going to understand all this stuff. You're going to know what this is, and you're going to know it in language that you can explain to your roommate. This is the goal, that we can translate the FT into language that we can talk to each other about. That it's not an arcane world that is only for people who are partners in investment banks. This is something that the average citizen can and should understand. In fact, my whole inspiration for this course is the book Lombard Street that Walter Bagehot, wrote in 1873. And I named my book the New Lombard Street in homage to him. And this was a best selling book in 1873. I hoped to write a best selling book, it hasn't gotten there yet, but why? He was trying to explain the money markets to his fellow citizens in Britain because there had been a series of financial crises and the central bank had had to get involved and do things that they promised they weren't going to do. And he was saying they did the right thing, they lent freely at a high interest rate against collateral. That's what a central bank should do to solve a crisis. And I wrote my book for the same reason. By saying here we had this financial crisis it was a crisis of the shadow banking system. And the central bank did a lot of things that we had never imagined. It had sworn up and down it would never do, and it did them. It's not over yet, however. In order to get out of the crisis that is overwhelming us, and it's a global crisis too. We need to actually understand how the system works. And this means the population understanding how the system works, so that we can get appropriate action. Because if every proposal gets locked up in politics and it's like you're just in favor of the bankers. You're just against the bankers, we don't make any intellectual progress. So in this course we will not be taking sides pro banker, anti banker we'll be trying to figure out how the system works. And so that we can approach this as scientists as scientists and also as citizens. So once again, I come back. The world has changed. It's a global world, and it's a global financial world. The world of the 1950s textbooks is not a world with private capital markets very much at all. It's also not a world that's global, because the global financial markets of the 19th century had broken down. Bagehot is a better guide for today that Irving Fisher. Irving Fisher was living in a simpler world than Bagehot. Bagehot in the 19th century was living in a global financial system organized around the pound sterling. So Bagehot is a better guide for today. Now, he didn't have fancy derivatives, he didn't have cyborgs doing billionth of a second trading. He didn't have all of that stuff, that's new. We gotta figure out where that fits in. But he would know how to start thinking about that because he understood how money markets worked. And it's just a matter of applying that same way of thinking to the modern situation. That's what we're going to do. So the first thing is globalization following Bagehot, and the second idea is integrated in finance. And the idea that this is actually occupying most of my time for the last ten years, is figuring out how to connect up money and finance. I showed you that picture of my books. One is The History of Money, one is The History of Finance people think they are two primarias, they can't imagine that because they're separate fields entirely. But I'm trying to connect them up into Lombard Street and the way you connect them up. The way we're going to connect them up in this class is with this, this is going to be our motto. All banking. Is a swap of IOUs. A swap, and by swap I mean things like interest rate swap, credit default swap but also loans, also all banking is a swap of IOUs. Finance thinks they know everything there is to know about swaps. This comes out of finance, derivative, all of this. We're not going to be thinking of swaps in the way finance people think. We're going to be thinking of swaps in the way money people think of swaps. There's a funding piece to this. There's a liquidity piece to this, and that liquidity piece is what's driving all the action. And that's what this is going to be about. This is a course about money markets. This is a course about liquidity. We're going to connect it up to solvency, and all of that. Absolutely, but we're starting is a different place. We're starting in a different place. We're starting where Bagehot would have started in understanding the money markets as a system of clearing, as a system of finance that is global. So maybe I should write that up again just to get that in there. We're talking about financial globalization. And we're thinking, what does that imply for money and monetary theory? That's what we're trying to do. We're trying to develop monetary theory for the real world. For the real work that's around us now. And the guideposts we're going to use are these great texts of the past, because that's what I know. But also these great, great texts of the present, Stigam and The Financial Times. These are our guideposts to doing that. That's what this course is going to be about.
