Discussion — Lectures 9 & 10

This session covers Lecture 9: The World That Bagehot Knew and Lecture 10: Dealers and Liquid Security Markets.

• Lecture 9 Notes
• Lecture 10 Notes

Lecture 9 describes the nineteenth-century London money market operating through banks buying and selling self-liquidating commercial bills of exchange at a discount to face value. Deficit agents sell bills of exchange for cash. Surplus agents buy bills of exchange with their excess cash. Monetary policy originates with the central bank attempting to influence the market by adjusting the price at which it is willing to buy bills of exchange (its discount rate).

This lecture serves as a transition from viewing banking as a payments system to viewing banks (including the central bank) as dealers making markets in and between money and securities. The payments perspective emphasizes the par price of money. The dealer market perspective emphasizes interest rates—including discount rates—as the relevant price of money.

Lecture 10 introduces the Treynor model of the economics of dealers. It emphasizes the concept of "market liquidity" as distinct from "monetary liquidity" and "funding liquidity." Dealers use inventories absorb order flow mismatches and translate between various types of liquidity. Here, we examine securities dealers, but we will soon expand this model to describe dealers in short-term funding markets and the payments system.

Money and Banking Summer 2023 Reddit Master Thread