The first section, the next section of the class that we're going to do is thinking about the payment system. Okay banking as a system of payments. and central banking as a clearing house, okay. So it's, it's a pretty it's an unusual approach to beginning thinking about banking. But I've found that it really helps to build intuition for later on in the course. And in particular, it helps to explain why the Fed Funds Market is such a key, key place and also what's going in the repo market. And so it helps to introduce some of the main monetary instruments, in the Eurodollar market as well. So that's what we're going to use it for. But this first lecture is meant to set that up and tell you sort of what do we mean by payment system and where do all the little pieces fit. So, it's titled the Central Bank as a clearinghouse. [COUGH] so, one big picture idea is to think of all of the institutions in the, in the monetary system, in the credit system. As all of the different instruments, all of the different practices, as an attempt worked out over eons okay, to make the system work as if it were one big bank, instead of a bunch of little banks. Okay. So, let's start by just thinking of it, eh, how payments would work if in fact it were one big bank. And then see how the mechanisms make it work as if it were one big bank. Even though it's not. Okay. So, one big bank, by one big bank, we might mean two different things. Okay. One idea, two different things. Remember this is basically building on last time. I talked about the difference between the money system, discipline system, and the credit system, elasticity system. So one idea of a one big bank is that you have a bank that has it's as assets holding reserves. Okay, say maybe gold just all, just all gold and then it has these deposits on the liability side from let's say two different people so that we have something where we can make a payment person Alpha and person Beta. Okay. So that if there's a payment between Alpha and Beta, what this is really just, is moving money from one account to another, or even just a book entry. No reserves have to move at all. Right? It's just if everyone in the world. Has a deposit account at this one bank. Then all you're doing is just moving stuff from one account to another. And in fact the reserves are kind of, they don't even matter. You know, you never are moving reserves in your vault. They just stay there. Okay. The problem with the pure money system which is what we've seen, we've seen last time is that when you run your deposits down to zero, you're, you can't make any more purchases. Okay? You can only make purchases if you have if you have a positive, a positive thing or if you're able to then borrow from somebody else who'll give you a deposit account to do it with so there has to be some bi-lateral borrowing possibly behind it, behind the scenes. the Ia-meth, okay, in your problems that you'll see. The Ia-meth was set up on this model, okay? That, it's, there's a fixed, a fixed balance sheet size and we're just reallocating. Every now and then they expand their balance sheet in one big trosh, okay? But, it's on this discipline, kind of, model. Okay? The other one big bad model is a pure credit system. Okay. Where the bank has deposit accounts. But it takes advantage of the fact that no reserves, really, are needed, to make this go. And, it has, it has credit on the liability side. so, what am I calling these? Overdrafts, yes, overdrafts. Overdrafts of person Gamma, and of person Lambda. And, now, depending on the pattern of payments this balance sheet either expands or contracts or nothing happens at all. So, just to see that, think about a matrix showing all the possible patterns of payment from Alpha, Beta, Gamma, Lambda, to Alpha, Beta, Gamma, Lambda okay. So from on this axis and then 2 on this axis. And you can see what happens. Okay, if eh, well, certainly these are all zeroes on this axis, okay. That is you're paying yourself there's no change in the balance sheet, so these are just zeroes. If Alpha is paying Beta, okay, that's also, there's no expansion of the balance sheet or contraction of the balance sheet. What we're trying to look at here is, is there a change in the aggregate money supply or in the size of the balance sheet depending on the pattern of payments. If Alpha pays Beta or Beta pays Alpha there's no change. Okay, so it's just the same as the pure money system. And of course, the same is true of these people over here. Okay, these people with overdrafts. If somebody with an overdraft pays somebody with an overdraft okay, one of those overdrafts gets bigger, and one of those overdrafts gets smaller. Okay, so, but overall total overdrafts stay the same. So again we have zero blocks here. Okay? Where there's an expansion of credit happens when somebody on one side pays somebody on the other side. Okay? So just think about this. If depositor, if, if Mr Alpha okay, who has a positive deposit here pays Mr Gamma okay deposits go down but overdrafts also go down. Right? He's, he's being paid so he's paying back some of his debt to the bank. Okay, so both of these go down so if Alpha is paying Gamma the money supply contracts or rather the measured size of the balance sheet if we think of, of that. Often the balance sheet is measured as sort of the size of the liability side or something but the size of the balance sheet in general goes down. If Alpha pays Gamma, and of course that's going to be true if it's Lambda, as well. And of course it's going to be true, if its Beta doing the paying as well. So these are all negative numbers here. But, if somebody with an overdraft pays somebody with a positive deposit The overdraft gets bigger, and the deposit gets bigger, both of them, okay. So, these are all pluses, here. Okay, so this is just another way of saying, what I said last time okay. But now with sort of balance sheets, and concrete payments, and more people stuff like that. So that you can nail this a little, a little more. Okay, so the one big bank idea, okay. Is that you want to have a system where mutually, mutually beneficial trades can happen. People who want to buy from each other, and, and, and if there's a willing buyer and a willing seller, the payment system shouldn't stand in the way. Okay. And you can see that in that regard the credit payment system is more flexible. Okay, it can do everything that the money payment system did, which is sort of up here, okay. But it can also do other kinds of payments as well. And so, most actual payment systems, and certainly in the United States, our payment system domestically Is really sort of this character. It's of this, it's of this credit character here. I said the IMF is an example of this okay? You should think of the Federal Reserve system as an example of this.
