Money, Banking, and Financial Markets This innovative text offers an introduction to money, banking, and fnancial markets, with a special emphasis on the importance of confdence and trust in the macroeco- nomic system. It also presents the theory of endogenous money creation, in contrast to the standard money multiplier and fractional reserve explanation found in other textbooks. The U.S. economy and fnancial institutions are used to explain the the- oretical and practical framework, with international examples weaved in through- out the text. It covers key topics including monetary policy, fscal policy, accounting principles, credit creation, central banks, and government treasuries. Additionally, the book considers the international economy, including exchange rates, the Euro- zone, Chinese monetary policy, and reserve currencies. Taking a broad look at the f- nancial system, it also looks at banking regulation, cryptocurrencies, real estate, and the oil and gold commodity markets. Students are supported with chapter objectives, key terms, and problems. A test bank is available for instructors. This is an accessible introductory textbook for courses on money and banking, macroeconomics, mone- tary policy, and fnancial markets. Dale K. Cline is a CPA in public practice, a CMA, a business owner, and an inves- tor. He holds an undergraduate degree from Lenoir-Rhyne College and an MBA from Wake Forest University. While he has a wealth of business knowledge gained through his client advisory role, he learned much of what he knows about the econ- omy through hands-on experience. Most recently, navigating his real estate invest- ment and development business through the Great Recession provided him with unique insight into the way the banking system and the economy respond to stress. Viewing the meltdown from the dual perspectives of a CPA and a market partici- pant prompted him to embark on a study of the lesser understood intricacies of the economy that culminated with the writing of this book. Sandeep Mazumder received his BA in Economics from St. Catharine’s College at Cambridge University. He earned his MA and PhD in Economics from Johns Hop- kins University. His research and teaching interests include macroeconomics, mon- etary economics, international monetary economics, and time-series econometrics. Sandeep has focused much of his research on U.S. infation dynamics and the Phil- lips Curve, and has published in journals such as the Brookings Papers on Economic Activity, Macroeconomic Dynamics, and the Journal of Money, Credit and Banking. He was a Professor in the Department of Economics at Wake Forest University for 12 years, where he also served as Department Chair for several years. Since 2021 he has been the William E. Crenshaw Dean of the Hankamer School of Business at Baylor University. In addition, he also is an Associate Editor of the Journal of Macroeconomics, a position he has held for several years. Money, Banking, and Financial Markets A Modern Introduction to Macroeconomics Dale K. Cline and Sandeep Mazumder With Research and Writing Assistance from Tina R. Lineberger, CPA First published 2022 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2022 Dale K. Cline and Sandeep Mazumder The right of Dale K. Cline and Sandeep Mazumder to be identifed as authors of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identifcation and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Cline, Dale K., author. | Mazumder, Sandeep, 1982- author. Title: Money, banking and fnancial markets : a modern introduction to macroeconomics / Dale K. Cline and Sandeep Mazumder ; with research and writing assistance from Tina R. Lineberger, CPA. Description: Abingdon, Oxon ; New York, NY : Routledge, 2022. | Includes bibliographical references and index. Identifers: LCCN 2021046990 (print) | LCCN 2021046991 (ebook) | ISBN 9781032170305 (hbk) | ISBN 9781032170268 (pbk) | ISBN 9781003251453 (ebk) Subjects: LCSH: Macroeconomics. | Monetary policy. | Banks and banking. | Money. Classifcation: LCC HB172.5 .C59 2022 (print) | LCC HB172.5 (ebook) | DDC 339—dc23 LC record available at https://lccn.loc.gov/2021046990 LC ebook record available at https://lccn.loc.gov/2021046991 ISBN: 978-1-032-17030-5 (hbk) ISBN: 978-1-032-17026-8 (pbk) ISBN: 978-1-003-25145-3 (ebk) DOI: 10.4324/9781003251453 Typeset in Times New Roman by codeMantra Access the Support Material: https://www.routledge. com/9781032170268 Contents Prologue vii Introduction 1 PART I How the economy works: nuts and bolts 3 1 Confdence, monetary policy, and fscal policy 4 2 Basic accounting and fnancial statements 13 3 Relationship of the Federal Reserve Bank and the U.S. Treasury Department 23 4 The truth behind money creation 34 5 Money, banking, and the real economy 52 6 Global monetary linkage 74 7 Monetary sterilization in China 92 8 World reserve currency 109 PART II Related topics 119 9 Real estate 121 10 Oil 137 vi Contents 11 Gold 153 12 Cryptocurrencies 165 Conclusion 174 Other references 177 Index 178 Prologue This textbook is derived from BANKING ON CONFIDENCE, A Guide- book to Financial Literacy, a book written for a general audience, authored by Dale K. Cline, CPA, CMA, MBA, and assisted by Tina R. Lineberger, CPA, CGMA. Sandeep Mazumder, PhD, later joined the endeavor to reim- agine the book as a textbook for a global student audience. Introduction In our time, the curse is monetary illiteracy, just as inability to read plain print was the curse of earlier centuries. This quote, from Ezra Pound, American poet and intellectual, sums up the inspiration behind this book. It was born out of frustration with the myriad conficting stories, reports, and debates about the economy. Regardless of our stations in life, we are all affected by the economy at the local, national, and even global levels. And when we encounter so much contradictory in- formation, we are left wondering just how it all really works. The average citizen has a diffcult time overcoming monetary illiteracy. Although a wealth of information is available from books and media outlets, much of it is laced with political sentiment, and separating the wheat from the chaff, so to speak, is diffcult. This book is meant to offer the average citizen a fundamental under- standing of how to think about the economic world in which we live and work from an everyday point of view. It covers basic macroeconomic and fnancial concepts from an intuitive viewpoint, together with some of the key theoretical underpinnings that accompany the concepts presented. It is for anyone and everyone who is optimistic, pessimistic, or just curious about the way the economy actually operates. It is written to be user friendly, and is of particular importance to undergraduate and graduate students in busi- ness and economics. There are some nuts and bolts about how the banking system works, how the money supply expands and contracts, and how currency markets oper- ate. We will draw special attention to a theory that explains how money is created in the economy, which replaces the hypothetical story that is found in most textbooks. Since economics is really about how people think about and behave with their money, what you will fnd in this book is mostly common sense. We truly feel that the terms and concepts described in this book are important for everyone to know—whether you are a business or economics student taking a macroeconomics or money and banking class, whether you want to know more about the economy, whether you work in DOI: 10.4324/9781003251453-1