Week 9 Management: Money and Finance

SPEAKER 0 There. So this week in management, 1035 we're gonna talk about money and finance uh currencies and all sorts of fun stuff. Uh But I'd like to start with the idea of talking about what is money. And as I've said before, in lectures for this course, I like to go to the Oxford English dictio...

SPEAKER 0 There. So this week in management, 1035 we're gonna talk about money and finance uh currencies and all sorts of fun stuff. Uh But I'd like to start with the idea of talking about what is money. And as I've said before, in lectures for this course, I like to go to the Oxford English dictionary to figure out what a definition of something is. It's a classic of the genre. Uh So the OED defines money as any generally accepted medium of exchange, which enables the society to trade goods without the need for barter any objects or tokens regarded as a store of value. I like that phrase and used as a medium of exchange. So that's important stuff. But also when we talk about money, we talk about things like coins and bank notes that uh are also a medium of exchange uh more w uh later uh and, and current probably any written or printed or electronic record. And that's an important addition of ownership of the values represented by coins and notes. And then this is the key phrase, which is why I highlighted it on the uh on the powerpoint, which is generally accepted as equivalent to or exchangeable for these. And this is the fundamental thing about money. We all have to agree that it has the value we attribute to it. If it doesn't, if we don't agree, then its value is significantly reduced or rendered meaningless. So coins sometimes coins were valued for the metal content. The value of a gold coin reflected the value of the gold. Uh much more frequent. Uh Modern coins are tokens. They represent a value. Uh A 25 cent coin does not have 25 cents where the metal in it, it simply rep uh represents that amount of value. Uh The same with paper money, paper money has been around for a long time. Uh And again, obviously a piece of paper like say this one has value as money only if we all agree that it does, it's been issued by someone who we trust to stand behind the value of that money, uh digital currency, which we see now uh exchanged us information rather than physical money. And we could maybe talk about Bitcoin as something related to that. Although I am firmly in the camp that says Bitcoin is not money. Uh Bitcoin is an investment. Um But again, with all of these things, they all work only as uh with a shared consensus of the value that a $10 bill, we all agree is worth $10 and can be used to buy $10 worth of goods. And if we suddenly say, well, you know, I that's a $10 bill, but I really think it's only worth eight, it loses its value. So different kinds of money that we've encountered. Commodity money, gold and silver, obviously. Uh but things like shells, seashells, uh uh grain, other items of agreed value that have a predetermined value and can be exchanged to represent that value. Uh token money, uh coins or paper that can be exchanged for the face value of gold or silver, usually, uh the gold standard which the uh major currencies tended to be on before the Great Depression. Uh which said that if you had a $10 bill, you were entitled to exchange it for $10 worth of gold in various circumstances. Um and fiat money, which is the kind of money that is almost always issued. Now, uh fiat money is issued by a government. Uh it's not backed up by gold in the way. Uh uh money backed by the gold standard was uh back in the gold standard days, say in the 19 twenties in Canada, uh bef or earlier before you could issue new money, you had to have the equivalent value in physical gold uh to allow you to print the money. We don't do that anymore. Now, the, the government of Canada, for example, says the $5 bill is worth $5 because we say it's worth $5 and we use the authority and uh confidence in, in, in the financial ability of the government to sustain that. And most modern governments, that's what they do. I want to talk about the way in which money can change things politically. Uh And, and with long term implications we're gonna talk about. Oh, I forgot to change this slide. Uh uh Talking about last week, we didn't have this in the last week of this course. But there's a place called Potosi in South America. It was conquered by the Spanish. And when they arrived in Potosi, what they found was this huge mountain and much of the, of the like the stones and, and minerals within the mountain uh was incredibly rich with silver. The local people had mine silver and refined silver on a scale that they found what they needed. But the Spanish were just blown away by it. Uh And started a very aggressive campaign, basically enslaved the local population and forced them to work constantly mining and refining silver at this mountain. Uh that the uh colonial power of Spain increased dramatically because suddenly they had a lot of money. Uh And Jack Rutherford, a popular historian of this sort of stuff said Potosi was the first city of capitalism for it supplied the primary ingredient of capitalism, which was money. And so in Potosi, uh uh you had this, this incredible ability to simply take out vast stores of, of, of mineral wealth. Uh The Spanish discovered in, in South and Central America, all sorts of good uh supplies of gold and silver. It made Spain one of the wealthiest countries in the world uh it made and they use that money to buy influence and military power uh in Europe, but also to extend their abilities to purchase things in uh China and other parts of Asia. Uh They shifted really, I think, importantly, shifted uh the economy of Europe dramatically towards a cash based economy rather than a uh barter based economy. Simply because they had access to this enormous amounts of uh gold and silver. It also drove countries like England and France, Holland and other places to try and find their own sources of this kind of wealth. They struggled to find anything with gold and silver that could compare to Potosi. However, so Potosi, the people of Potosi, the people that lived originally in that region, uh this massive huge wealth that was generated out of that, that hump of silver, they benefited very, very limited from. Uh as I said, the the local people were virtually enslaved in order to extract this mineral wealth. And the benefit of that mineral wealth went to Spain rather than the people in the area. Eventually. Uh the the people, you know, in Bolivia and the surrounding area uh managed to free themselves from uh Spanish colonial power. Uh By that point, Potosi, although there's still silver in Potosi uh had been its vast storehouse of silver had largely been extracted, but an interesting thing going on there. Now, at least I find it quite interesting and, and read about it in the economist, which you will be reading lots of, have read lots of economist stuff uh in the course. Uh But their story from which I borrowed this image, uh their story on the fact that there's huge amounts of lithium in the Potosi area. And the government of Bolivia is trying to figure out ways in order to maintain the benefits of extracting lithium within the region within Bolivia generally. And Potosi more specifically and so how they develop that and how successfully they developed that uh is gonna be, you know, lithium is vitally important for things like electric cars and other kinds of stuff like my phone or whatever has a lithium battery in there. Uh Potosi is gonna have another big influence on the way capitalism develops uh those ponds and, and that's lithium salt pond is the image those the the land around those ponds is being purchased largely by Chinese companies and also some American companies in order to try and leverage the benefits uh of exploiting lithium. So uh we'll see what happens as time goes on. I also want to talk about banks and you're gonna read a little bit about banks uh in over the course of this week. But II, I like to talk about the fact that there are two kinds of banks, there are uh uh central banks and we'll talk a little bit about those because I think they're very important as far as global policy institutions go. But they're also the banks in which you or I might deposit our money and, and have it available to spend. Um, let's talk central banks because I think uh if, if we're looking at this from a policy perspective, they're the ones that have enormous interest. The first real central bank, uh the Bank of England uh was formed in 1694. It became the model for most other central banks that developed in the world. Uh probably not the fed in the United States, but we can talk about the fed in a second. Um Initially, it was designed simply as a tool to raise money. The government needed a navy. They were about to fight another in their long series of wars with the French and they needed some money and they looked at an institution that might be able to, you know, exploit the value of government property and things. So they said, ok, we'll make a bank. They created a bank. Uh that bank let them raise the money. They needed 1 to 1.2 million pounds, which is just a, a vast sum in 1694. Uh And they liked it, they thought, ok, this is good and they began to give more and more power over the, over the English. It was an English bank. At that time, uh the English economy to this central bank, it became the bank for government accounts. Uh by the end of the 18th century. So by 1799 the bank issued British currency. They managed the public debt. Uh they became the banker's bank. And because there was Britain was on the gold standard at the time, they held gold to cover the currency being issued both by their bank and other branch type banks, chartered banks in the rest of England. So this is uh uh one of the buildings that was at one time, the Bank of England. And then in the basement of that building, there would have been bar after bar of gold to support the currencies that are going on. And so the Bank of England becomes this institution that is political to a certain extent, but certainly not a, a branch of the government. Uh It, its officials aren't elected, they're appointed and its job is to basically manage the economy. But I want to talk about a couple of other ones. I wanna talk about the Central bank or the Federal Reserve in, in the United States and then briefly talk a little bit about the one in Canada. Uh the Federal Reserve in the United States is created uh December the 23rd, 1913. Uh It's a uh the, the creation story behind the Federal Reserve I think is a very interesting one. it, it was a response to several financial crises that had happened, um, generally in the post American civil war period, but particularly in the 1st 10 or so years of the 20th century, most significantly the, the uh crisis of 1907. And for those of you, with, uh, with some understanding of what happened in the United States and to a lesser extent elsewhere in the world, actually, British got Wham pretty hard too in 2008. Uh but some of this will sound familiar uh in two thou uh sorry, 1907, uh the banks in New York City found themselves in a, in a critical situation. They had uh entered into real estate transactions. They had uh that had uh not gone the way they had wanted to. Therefore, they were facing a situation in which they may not be able to meet a cash call that they did not have enough cash or assets to cover the deposits that had been been made in their banks. And this, of course, is a, a critical failure for a bank. And the problem could be in the, in this situation that if you go to the bank and you fill out your withdrawal slip as you did it, then in writing as you did might do now you punch into something uh and you say I would like $100 and the bank says, hm, we don't have $100 sorry. Uh, you are annoyed and you immediately want not only that $100 but you want all of your money and not only you, everybody else who hears about it wants all of their money too. It's called a run on a bank and banks find, uh, you know, you can lose your bank in the Silicon Valley, uh, bank a couple of years ago, experienced a run accentuated by modern circumstances in the old days, you can actually go into the bank to get your money. Now, you can use one of these things and simply, you know, your money's gone from the bank. Uh, but in, in 1907, the crisis was significant and in the face of a significant crisis, the bank, uh bank, New York Banks did what people do in significant crisis. They looked at the government and they said fix this. Yes, it's our fault but fix it. Uh, and the federal government said, well in the United States said, ok, I guess, uh, here's about 31 $32 million that should fix things, I guess. But how do we do that? How do we get that money? Here's big pilot money. But how do we get that to the banks in a way that resolves this crisis? And they didn't have a structure to do that. Americans very suspicious, uh, of big national institutions, especially around money. Uh, they'd never created a central bank and hadn't felt particularly the need for one. But now they did. So they made AAA decision that I think is historically a very interesting one. They approached one person, John Pierpoint Morgan. JP Morgan and they said Morgan was apparently someone that everybody trusted. And they said to Morgan, here's 30 ish million dollars, fix the New York banking system. And he did, he went to all the bank uh leaderships and said, OK, your bank has failed. Uh We are taking the accounts in your bank. We're moving them to this other bank and we're giving them money in order to survive. But you, you're not there anymore, you're gone. Other banks, you're doing great. Keep on doing what you're doing. Some banks, you just need some cash and a stern talking to uh and, and life will proceed and they survive the crisis. But someone in Congress asks, I think a rather pertinent uh question. Uh What are we gonna do when Jp Morgan dies if this happens again? Jp Morgan's old and in fact, he died not long after they created the fed. Uh And the answer was maybe we have to bite the bullet and create something like uh central bank. And so they created as I say, and by 1913, they found the negotiations are finally concluded that they will create what is called the United States Federal Reserve, Federal Reserve says, uh the, the act in Congress to, to create this says you have three roles. The Federal Reserve in the United States. Uh It, the first one of those is to maximize employment, which is an interesting role for a bank and, and a rule that is somewhat open to interpretation, stabilized crisis. And again, a, a role that a lot of central banks including ours and the Fed and, and others have have embraced somewhat enthusiastically which is try to control inflation, try to get inflation out of the economy um and moderate long term interest rates. Ok. That seems like a reasonable role as time went on. Uh The Federal Reserve had more powers added to the list of things it was able to do. Uh it regulated banks, it supervised banks if the necessity arose. Um It's it approved financial mergers and things like that. Uh And in essence, tried to stabilize the financial system um successfully I would, the Federal Reserve has a very interesting political history. It was largely supposed to be a polit uh but has had, I think somewhat of a, an interesting play continues to have somewhat of an interesting political system. Uh Certainly, as I record this in 2024 they have found themselves in some unwanted political attention because the Republican candidate for president would like to change the, the uh control mechanisms around what the Fed does, uh which they have resisted and which uh other political people have resisted as well. A Bank of Canada, a similar kind of story. We didn't feel any particular need for a central bank because uh in a way, I find somewhat amusing, uh the first Canadian governments were happy to let the Bank of Montreal control most things and they found themselves still very much under the British uh model of, of, of control and deferred largely to the British in policy making in those areas. Uh So in 1913, when the US decided to create a Federal Reserve, we still felt no particular need for a central bank. What changed? That was the Great Depression, which changed lots of things in the world. Obviously, uh We wanted to inflate the economy because the Great Depression and created a significant amount of deflation. Uh But as long as we stayed on the gold standard, that was impossible to do so. In 1931 shortly after the British did the same thing, we moved off the gold standard and moved on to a basically a fiat uh currency system that allowed the government of Canada uh to begin to slowly try to reinflate the Canadian economy. Uh But we, we didn't really have the institutions to do that. Uh So in 1933 a royal commission was established, meaning a government inquiry. Uh It looked into the question and it thought uh a central bank was a good idea. 1935 they created the Bank of Canada, it would control Canada's monetary supply. In other words, how much money circulates in the Canadian economy. Uh It's had some other tasks appended to that, including that very important one about uh attempting to moderate inflation. Uh Initially, it was controlled by uh private interest by the banks. Uh And uh with some government representation. But in 1938 the federal government removed the private sector from the Bank of Canada. Uh they created what's called an arm's length institution. In other words, the Bank of Canada is a government institution, but one which is designed to be free of political influence. Uh The government of the day appoints the governor of the Bank of Canada. Uh But then theoretically and usually in practice steps back and lets them do what they need to do. Interesting exception to that in, in Canada in the early 19 sixties when the uh government again thought it necessary to perhaps inflate the economy uh facing some uh significant unemployment. Uh And the Bank of Canada governor declined to do what they wanted to do, in other words, to print more money. Uh And they fired him and it's the only time that's happened and it was not met well politically, but either in the West world who said you're firing your central banker uh and within the Canadian political system. But uh as I say, for the most part, central bankers are viewed as separate from politics. So let's talk about regular kinds of banks, the banks, you and I would go to uh they take deposits and they make loans. And this is a hugely important role in a capitalist economy. A sound effective banking system makes a capitalist economy possible because what do they do? Banks collect up money, you know, all the people living in the area put their money in the bank, the bank bundles it up and issues loans sometimes eventually mortgages, but usually business loans and things like that uh to businesses and individuals that give them access to pools of capital, they might not otherwise uh have been able to find. Uh it it was essential in the development of the, of the English industrial revolution that those um expensive, early stages of industrial development were funded in large part by the ability of banks to pool money and lend them to these new industrial and lend it to the new industrials. Um They used to print their own money, backing it up with gold or sometimes other assets uh similar to what happens uh in other jurisdictions. Uh But again, I emphasize that as your economy, as a capitalist economy grows, the the role of the bank uh is increasingly important. Uh First Canadian Bank was Bank of Montreal. 1817, Bank of Nova Scotia came along in 1832 and others. Uh They were from the very beginning, Canadian banks have been heavily regulated uh initially because there was some suspicion of whether the Canadian economy was strong enough to support a bank, let alone more than one, as that, as those fears kind of abated a little bit. Uh, they, they were replaced by this very conservative idea of what a bank should do or should not do, uh, very different approach to the Americans. Uh, the Canadian banking system developed branch, uh, bank. In other words, you would have a small group of banks, the Bank of Montreal, the Bank of Nova Scotia, what they call the big five now. Uh And rather than have different banks spread across the country, the way the Americans did, uh you had those big five control everything, but they opened branches in all these different parts of Canada. And the branches allowed uh pools of capital to become even bigger so that you have uh a national scope to, to gather together money to lend out. Uh but also stability because if you had a problem with one branch of the Bank of Toronto, say, then uh you could uh rest assured that the rest of the structure would be able to cope with that problem. Uh So very, significantly different than the way the Americans uh approached a lot of stuff, bank failures. There was one huge one in Canada. Uh a bank failure occasioned by a run on the bank in 1923. Uh The Canadian Bank Act uh passed shortly after Confederation governed the way the Canadian banking system worked. And it's written right into the act that at least every 10 years, the Bank Act will be re examined to see if it needs to be changed, if updated or whatever. Uh And that had happened just before 1923 and everybody said we're good school. Uh Everything is gonna be fine. And then suddenly the home bank failed. Home Bank was a bank in Toronto. Uh If you have been to Casa Loma in Toronto, uh and it was uh built by a man named sir Henry Pellet and he was one of the major investor in, in the Home Bank. Uh And again, had made a number of very poor investments and suddenly did not have the resources to cover the deposits and they locked their doors and really shocked the Canadian banking system because as the government of the day said to the Canadian banking system, you told us everything was fine and we listened, well, we're not listening anymore. Now we're, we know things are not fine. We're gonna have to do something about it. And that's why I think that that happening in 1923 is so important because we know it that in 1929 the Great Depression is gonna hit. And we understand if we look at it that although the Canadian banking system was significantly impacted upon by, by the Great Depression, they, they had their struggles, they were never really in danger. Whereas in the United States, eventually they had to close the banking system temporarily. Uh when Franklin Roosevelt took power in 1933 50% of American banks had already closed their doors. Uh, their system was unable to sustain the impact of the Depression. And I think Canada's was because we had, uh, even though we were a conservative banking system before that become even more conservative as the 19 twenties went along. 1964 I think, called the Porter Commission looked at the banking system and, and to a great extent because the banks were chafing a bit under this very conservative structure. They said we need, we need the opportunity to do more. We, we need the opportunity to make more money. Uh and, and Porter agreed and he said, ok, we need a more open, a more competitive banking system. Uh Basically when they implemented this in the 1967 Bank Act, uh they, they allowed banks much more significantly into the mortgage market. Uh in the 19 fifties, banks for the first time were allowed to issue mortgages, but in very narrow circumstances, now, suddenly they could compete with anybody else in mortgages, with trust companies and with mortgage brokers. Um And that really uh that and a number of other revisions really opened up the Canadian banking system and allowed them to modernize and become uh uh much more financially powerful. Maybe the most significant change for you, the the consumer. Uh oh, and I changed it away from that. Did I? Yes, I did. Sorry. Uh was, they also created Canadian deposit insurance. Uh Up until that point, if you had your money in the bank and the bank went under, you were in a luck. Uh but in nine, in the 1967 and 68 time period, the Canadian government created the Canadian deposit insurance company. Uh It is not a government institution. It's uh banks have to pay premiums to insure the money, but you as a customer are secure in the knowledge that the 1st $100,000 you put in the bank. If the bank goes under this insurance company will compensate you. And it works. There's been uh in the 19 eighties, two banks in Alberta went, went bust and deposit insurance covered the deposits up to $100,000. So it works. But all of these things and we could talk about other ones. Uh we could talk about Bitcoin, we could talk about things like apple pay. Uh We're gonna talk in, in, in the tutorials. We're gonna talk a little bit about credit cards. Uh But all of those things, whether they're new innovations or old style money, they only work if we trust them to work.