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 Preface l vii

Through frequent use of FRED, students will gain up-to-date knowledge of the U.S.
and other economies and an understanding of the real-world challenges of economic
measurement; they will also gain skills in analysis and data manipulation that will
serve them well for years to come. Many of the graphs in this book were produced
(and can be easily updated) using FRED. In addition, end-of-chapter Data Explora-
tion problems call on students to use FRED to analyze key economic and financial
indicators highlighted in that chapter. (For detailed instructions for using FRED online
to answer the Data Exploration problems in Chapters 1 to 10, visit www.mhhe.com
/moneyandbanking5e and click on Data Exploration Hints.) Students can even do some
assignments using the FRED app for their mobile devices.

Impact of the Crises

The effects of the global financial crisis of 2007–2009 and the euro-area crisis that
began in 2010 are transforming money, banking, and financial markets. Accordingly,
from beginning to end, the book integrates the issues raised by these crises and by the
responses of policymakers.
The concept of a liquidity crisis surfaces in Chapter 2, and the risks associated with
leverage and the rise of shadow banking are introduced in Chapter 3. Issues specific to the
2007–2009 crisis—including securitization, rating agencies, subprime mortgages, over-
the-counter trading, and complex financial instruments like credit-default swaps—are
included in the appropriate intermediate chapters of the text. Chapter 16 explores the role
of the European Central Bank in managing the euro-area crisis. More broadly, the sources
of threats to the financial system as a whole are identified throughout the book, and there
is a focused discussion on regulatory initiatives to limit such systemic threats. Finally, we
present—in a logical and organized manner—the unconventional monetary policy tools,
including the use of negative interest rates and the concept of the effective lower bound,
that have become so prominent in postcrisis policy debates and remain relevant today.

Early Introduction of Risk

It is impossible to appreciate how the financial system works without understanding
risk. In the modern financial world, virtually all transactions transfer some degree of
risk between two or more parties. These risk trades can be extremely beneficial, as they
are in the case of insurance markets. But there is still potential for disaster. In 2008,
risk-trading activity at some of the world’s largest financial firms threatened the stabil-
ity of the international financial system.
Even though risk is absolutely central to an understanding of the financial system,
most money and banking books give very little space to the topic. In contrast, this book
devotes an entire chapter to defining and measuring risk. Chapter 5 introduces the
concept of a risk premium as compensation for risk and shows how diversification can
reduce risk. Because risk is central to explaining the valuation of financial instruments,
the role of financial intermediaries, and the job of central bankers, the book returns to
this concept throughout the chapters.

Emphasis on Financial Instruments

Financial instruments are introduced early in the book, where they are defined based
on their economic function. This perspective leads naturally to a discussion of the uses
viii l Preface

of various instruments and the determinants of their value. Bonds, stocks, and deriva-
tives all fit neatly into this framework, so they are all discussed together.
This approach solves one of the problems with existing texts, use of the term
­financial market to refer to bonds, interest rates, and foreign exchange. In its conven-
tional microeconomic sense, the term market signifies a place where trade ­occurs, not
the instruments that are traded. This book follows standard usage of the term market
to mean a place for trade. It uses the term financial instruments to describe virtually
all financial arrangements, including loans, bonds, stocks, futures, options, and insur-
ance contracts. Doing so clears up the confusion that can arise when students arrive in
a money and banking class fresh from a course in the principles of economics.

Parallel Presentation of the Federal Reserve

and the European Central Bank
To foster a deeper understanding of central banking and monetary policy, the presenta-
tion of this material begins with a discussion of the central bank’s role and objectives.
Descriptions of the Federal Reserve and the European Central Bank follow. By starting
on a theoretical plane, students gain the tools they need to understand how all central
banks work. This avoids focusing on institutional details that may quickly become obso-
lete. Armed with a basic understanding of what central banks do and how they do it, stu-
dents will be prepared to grasp the meaning of future changes in institutional structure.
Another important innovation is the parallel discussion of the two most important
central banks in the world, the Federal Reserve and the European Central Bank (ECB).
Students of the 21st century are ill-served by books that focus entirely on the U.S.
financial system. They need a global perspective on central banking, the starting point
for which is a detailed knowledge of the ECB.

Modern Treatment of Monetary Economics

The discussion of central banking is followed by a simple framework for understand-
ing the impact of monetary policy on the real economy. Modern central bankers think
and talk about changing the interest rate when inflation deviates from its target and
output deviates from its normal level. Yet traditional treatments of monetary econom-
ics employ aggregate demand and aggregate supply diagrams, which relate output to
the price level. Our approach is consistent with that in the most recent editions of the
leading macroeconomics textbooks and directly links output to inflation, simplify-
ing the exposition and highlighting the role of monetary policy. Because this book
also skips the IS-LM framework, its presentation of monetary economics is several
chapters shorter. Only those topics that are most important in a monetary economics
course are covered: long-run money growth and inflation and short-run monetary
policy and business cycles. This streamlined treatment of monetary theory is not only
concise but more modern and more relevant than the traditional approach. It helps
students to see monetary policy changes as part of a strategy rather than as one-off
events, and it gives them a complete understanding of business cycle fluctuations.

Integrated Global Perspective

Technological advances have dramatically reduced the importance of a bank’s physi­
cal location, producing a truly global financial system. Twenty years ago money and
 Preface l ix

banking books could afford to focus primarily on the U.S. financial system, relegat-
ing international topics to a separate chapter that could be considered optional. But in
today’s financial world, even a huge country like the United States cannot be treated
in isolation. The global financial system is truly an integrated one, rendering separate
discussion of a single country’s institutions, markets, or policies impossible. This book
incorporates the discussion of international issues throughout the text, emphasizing
when national borders are important to bankers and when they are not.

Organization
This book is organized to help students understand both the financial system and its eco-
nomic effects on their lives. That means surveying a broad series of topics, including what
money is and how it is used; what a financial instrument is and how it is valued; what a
financial market is and how it works; what a financial institution is and why we need it;
and what a central bank is and how it operates. More important, it means showing students
how to apply the five core principles of money and banking to the evolving financial and
economic arrangements that they inevitably will confront during their lifetimes.

Part I: Money and the Financial System. Chapter 1 introduces the core prin-
ciples of money and banking, which serve as touchstones throughout the book. It also
presents FRED, the free online database of the Federal Reserve Bank of St. Louis. The
book often uses FRED data for figures and tables, and every chapter calls on students
to use FRED to solve end-of-chapter problems. Chapter 2 examines money both in
theory and in practice. Chapter 3 follows with a bird’s-eye view of financial instru-
ments, financial markets, and financial institutions. (Instructors who prefer to discuss
the financial system first can cover Chapters 2 and 3 in reverse order.)

Part II: Interest Rates, Financial Instruments, and Financial Markets.​

Part II contains a detailed description of financial instruments and the financial theory
required to understand them. It begins with an explanation of present value and risk, fol-
lowed by specific discussions of bonds, stocks, derivatives, and foreign exchange. Students
benefit from concrete examples of these concepts. In Chapter 7 (The Risk and Term Struc-
ture of Interest Rates), for example, students learn how the information contained in the risk
and term structure of interest rates can be useful in forecasting. In Chapter 8 (Stocks, Stock
Markets, and Market Efficiency), they learn about stock bubbles and how those anomalies
influence the economy. And in Chapter 10 (Foreign Exchange), they study the Big Mac index
to understand the concept of purchasing power parity. Throughout this section, two ideas are
emphasized: that financial instruments transfer resources from savers to investors, and that
in doing so, they transfer risk to those best equipped to bear it.

Part III: Financial Institutions. In Part III, the focus shifts to financial institu-
tions. Chapter 11 introduces the economic theory that is the basis for our understand-
ing of the role of financial intermediaries. Through a series of examples, students see
the problems created by asymmetric information as well as how financial intermedi-
aries can mitigate those problems. The remaining chapters in Part III put theory into
practice. Chapter 12 presents a detailed discussion of banking, the bank balance sheet,
and the risks that banks must manage. Chapter 13 provides a brief overview of the
financial industry’s structure, and Chapter 14 explains financial regulation, including
a discussion of regulation to limit threats to the financial system as a whole.
x l Preface

Part IV: Central Banks, Monetary Policy, and Financial S

­tability.
Chapters 15 through 19 survey what central banks do and how they do it. This part of
the book begins with a discussion of the role and objectives of central banks, which leads
naturally to the principles that guide central bank design. Chapter 16 applies those prin-
ciples to the Federal Reserve and the European Central Bank, highlighting the strategic
importance of their numerical inflation objectives and their communications. Chapter 17
presents the central bank balance sheet, the process of multiple deposit creation, and the
money supply. Chapters 18 and 19 cover operational policy, based on control of both the
interest rate and the exchange rate. Chapter 18 also introduces the monetary transmission
mechanism and presents a variety of unconventional monetary policy tools, including
negative interest rates and the concept of the effective lower bound, that have become so
prominent in recent years. The goal of Part IV is to give students the knowledge they will
need to cope with the inevitable changes that will occur in central bank structure.

Part V: Modern Monetary Economics. The last part of the book covers modern
monetary economics. While most books cover this topic in six or more chapters, this
one does it in four. This streamlined approach concentrates on what is important, pre-
senting only the essential lessons that students truly need. Chapter 20 sets the stage by
exploring the relationship between inflation and money growth. Starting with inflation
keeps the presentation simple and powerful, and emphasizes the way monetary policy-
makers think about what they do. A discussion of aggregate demand, aggregate supply,
and the determinants of inflation and output follows. Consistent with the presentation
in recent editions of leading macroeconomic textbooks, Chapter 21 presents a com-
plete macroeconomic model with a dynamic aggregate demand curve that integrates
monetary policy directly into the presentation, along with short- and long-run aggre-
gate supply curves. In Chapter 22 the model is used to help understand the sources
of business cycles, as well as a number of important applications that face monetary
policymakers in the world today. Each application stands on its own, and the applica-
tions are ordered in increasing difficulty to allow maximum flexibility in their use.
Finally, Chapter 23 explores the monetary transmission mechanism in some detail and
addresses key challenges facing central banks, such as asset price bubbles, the effec-
tive lower bound for nominal rates, and the evolving structure of the financial system.
For those instructors who have the time, we recommend closing the course with a
rereading of the first chapter and a review of the core principles. What is the future
likely to hold for the six parts of the financial system: money, financial instruments,
financial markets, financial institutions, regulatory agencies, and central banks? How
do students envision each of these parts of the system 20 or even 50 years from now?

Organizational Alternatives
While this book greatly streamlines the traditional approach to money and banking, it
remains flexible enough to be used in a broad variety of courses; up to 19 of the book’s
23 chapters can be assigned in the following courses:
General Money and Banking Course. Chapters 1–8, 11, 12, 15, 16, the first section
of 17 (through page 463), 18, and 20–22
This course covers the primary material needed to appreciate the connections
­between the financial system and the economy.
General Money and Banking Course with International Emphasis. Chapters 1–8,
­10–12, 15–19, and 20
 Preface l xi

This alternative to the general money and banking course substitutes chapters on
foreign exchange and exchange-rate policy for the macroeconomic model included
in courses with less international emphasis.
Financial Markets and Institutions. Chapters 1–9, 11–18
The traditional financial markets and institutions course covers money, financial
instruments and markets, financial institutions, and central banking. The focus is on
Parts II and III of the book.
Monetary Economics and Monetary Policy. Chapters 1–7, 10–12, 15–23
A course called monetary economics and monetary policy uses the material in
Parts II and III as a foundation for understanding the material in Parts IV and V.
A half-semester course for students with a background in financial instruments and
institutions might cover only Chapters 1–3 and 15–23.

What’s New in the Fifth Edition?

Many things have happened since the last edition. For that reason, all of the figures and data
have been updated to reflect the most recent available information. In addition, the authors
have made major changes to enhance the fifth edition of Money, Banking, and Financial
Markets. In quantity terms, the changes in this edition are the most extensive since the first
edition was published in 2005. What follows is only a sample of these changes.

New Topics in the Integrated Global Perspective

The fifth edition reflects the wide range of monetary and regulatory developments that
have taken place since 2015. New topics introduced or discussed in much greater detail
include:
∙ The role of paper money and vir- ∙ Stress testing banks to ensure
tual currencies resilience
∙ Mobile banking and financial ∙ The size of central bank balance
inclusion sheets
∙ Peer-to-peer lending ∙ Negative interest rates
∙ Bond market liquidity ∙ Chinese exchange-rate policy
∙ Conflicts of interest in finance ∙ Narrow banking
∙ Reforming LIBOR ∙ Big data and the macroeconomy
∙ High-frequency trading ∙ Secular stagnation

The most extensive changes are in Chapter 14, which includes a discussion of continued
reforms to financial regulation in the aftermath of the financial crisis; Chapter 18, which
includes a full treatment of the Federal Reserve’s new operational policy regime; and
Chapters 21 and 22, where the macroeconomic model has been further enhanced so
that it now conforms to the recently revised treatment in leading intermediate macro-
economics textbooks.

Changes at the Federal Reserve and the ECB

The discussion of the Federal Reserve and the ECB now considers their evolving com-
munications strategy (Chapter 16); the use of unconventional policy tools, including
negative interest rates and the dramatic growth in central bank balance sheets, aimed
xii l Preface

at addressing first the financial crisis and then the weak economic recoveries that fol-
lowed (Chapter 18); the interactions between monetary policy and financial stability
(Chapter 18); and the impairment of the monetary transmission process during the
crisis (Chapter 23). It also reflects recent challenges to Fed independence, including
the role of central bank capital (Chapter 15).

Updated Coverage of Current Events

The biggest change since the fourth edition is the new and updated Learning Tools
inserts. Each chapter now contains an In the Blog excerpt from the authors’ Money and
Banking blog (www.moneyandbanking.com). In addition, one-quarter of the other fea-
tures have been updated. Overall, more than 50 of the 140 inserts in the previous edition
have been replaced or altered substantially. These changes capture new developments in
the key areas of technological change, the financial crisis, regulatory reform, and mon-
etary policy.
Here is a partial list of the new features:
In the Blog
Virtual Frenzies: Bitcoin and the Blockchain (Chapter 2)
Banking the Masses (Chapter 3)
Bond Market Liquidity: Should We Be Worried (Chapter 6)
In Search of Better Credit Assessments (Chapter 7)
To RMB or not to RMB? Lessons from Currency History (Chapter 10)
The Cloudy Future of Peer-to-Peer Lending (Chapter 12)
Narrow Banks Won’t Stop Bank Runs (Chapter 14)
Do Central Banks Need Capital? (Chapter 15)
How Big Should Central Balance Sheets Be? (Chapter 18)
Is 2 Percent Still the Right Inflation Target? (Chapter 22)
A Guide to “Secular Stagnation” (Chapter 23)

Applying the Concept

Basics of High-Frequency Trading (Chapter 3)
How Much Is the Distant Future Worth? (Chapter 4)
Do U.S. Households Benefit When Growth Is Stable? (Chapter 5)
China’s Stock Market Boom and Bust (Chapter 8)
Truth or Consequences: Ponzi Schemes and Other Frauds (Chapter 11)
Shadow Banking in China (Chapter 12)
Reforming LIBOR (Chapter 13)
Negative Nominal Interest Rates: Blast from the Past? (Chapter 17)
Alternative Monetary Policy Targets: Inflation, Price Level, and Nominal GDP (Chapter 18)

Your Financial World

Why You Are Obliged to Buy Health Insurance (Chapter 13)
Making Finance Safe (Chapter 14)
Has Paper Money Outlived Its Purpose? (Chapter 17)
Is International Diversification Dead? (Chapter 19)

Lessons from the Crisis

Threats to Fed Independence (Chapter 15)
The Euro-Area Crisis and the ECB (Chapter 16)
The Financial Stability–Monetary Policy Nexus (Chapter 18)
 Preface l xiii

Learning Tools
In a sense, this book is a guide to the principles students will need to critically evaluate
and use what they read in the financial press. Reading a newspaper or a blog and apply-
ing the information it contains require some basic knowledge. Supplying that knowl-
edge is the purpose of the five types of inserts that complement the chapters, providing
a break from the more technical material in the body of the text:
• Applying the Concept • Tools of the Trade
• In the Blog • Your Financial World
• Lessons from the Crisis
 or a complete listing of the boxed features and their page references, refer to
F
the detailed table of contents. At the start of each chapter, the book now includes
more comprehensive learning objectives, to which the end-of-chapter problems
are linked.
The end-of-chapter material is divided into five sections: Key Terms, Chapter Les-
sons, FRED Data Codes, Conceptual and Analytical Problems, and Data Exploration.
Key Terms lists all the technical terms introduced and defined in the chapter. The key
terms are defined in full in the glossary at the end of the book. To aid student compre-
hension and retention, Chapter Lessons lists key lessons in an outline that matches the
chapter’s headings.
For a detailed description of FRED Data Codes, Data Exploration material, and
Conceptual and Analytical Problems, as well as the aforementioned boxed features,
please refer to the walkthrough on the pages that follow.

Supplements for Instructors

The following ancillaries are available for quick download and convenient access via
the Instructor Resource material available through McGraw-Hill Connect®.

Solutions Manual
Prepared by James Fackler (University of Kentucky) and Roisin O’Sullivan (Smith
College), this manual contains detailed solutions to the end-of-chapter questions—
Conceptual and Analytical Problems and Data Exploration Problems.

Test Bank
The revised test bank of more than 2,500 multiple-choice and 600 short-answer and
essay questions. The test bank can be used both as a study guide and as a source
for exam questions. It has been computerized to allow for both selective and random
­generation of test questions.

PowerPoint Slides
Updated presentation slides outline the main points in each ­chapter and reproduce major
graphs and charts. This handy, colorful supplement can be edited, printed, or rearranged
to fit the needs of your course.
Learning Tools Walkthrough
54 l Chapter 3 Financial Instruments, Financial Markets, and Financial Institutions

than borrowers of conventional mortgages—played an important role in the

financial crisis of 2007–2009 (see Chapter 7, Lessons from the Crisis: Subprime
Mortgages). The owners of these securities receive a share of the payments made
by the homeowners who borrowed the funds. Asset-backed securities are an
innovation that allows funds in one part of the country to find productive uses
elsewhere. Thus, the availability of some sorts of financing no longer depends on
local credit conditions.4

Learning Objectives Core Principle IconsUsed Primarily to Transfer Risk

Financial Instruments

Chapter 3
The learning objectives (LOs) introduced at the start of
each chapter highlight the material and concepts to be
The entire textpayments
following five core
2. Futures
1. Insurance contracts. The primary purpose of insurance policies is to ensure that
discussion
principles:
contracts.
is organized around the
will be made under particular, and often rare, circumstances. These
instruments exist expressly to transfer risk from one party to another.
Time
A futures contract has value;
is an agreement risk
between two parties to
exchange a fixed quantity of a commodity (such as wheat or corn) or an asset
Financial
mastered. EveryInstruments, Financial
end-of-chapter problem is denoted by requires compensation; information is the basis for
(such as a bond) at a fixed price on a set future date. A futures contract always
deci-
specifies the price at which the transaction will take place. A futures contract is a
theMarkets,
LO to whichand Financial Institutions
it relates for reinforcement. sions; marketstype set prices and allocate resources; and
of derivative instrument, since its value is based on the price of some other
asset. It is used to transfer the risk of price fluctuations from one party to another.

­stability improvesare based welfare.

on the value of Exploring
some underlying asset. these
Options principles
3. Options. Like futures contracts, options are derivative instruments whose prices
give the holder the

is the basis forright,learning what the financial system

time during adoes,
but not the obligation, to buy or sell a fixed quantity of the underlying asset
at a predetermined price either on a specified date or at any speci-
Learning Objectives fied period.
how it is o­ rganized,
4. Swaps. Swapand how
contracts it is linked
are agreements to exchange twoto specific
the real econ-
cash flows at
After reading this chapter, you should be able to: omy. They arecertain
ratediscussed
swap might involvein detailof in Chapter 1; through-
times in the future (as discussed in Chapter 9). For example, an interest-
the exchange payments based on a fixed rate of inter-
est for payments based on a rate of interest that fluctuates (or “floats”) with the
LO 1 Explain what financial instruments are, how they are used, and how they are valued.
out the rest ofmarket.
the Swaps text,comemarginal
in many varieties,icons
reflectingremind
differences instudents
maturity, pay-
LO2 Discuss the role and structure of financial markets and identify the characteristics ment frequency, and underlying cash flows. The cash flows and other contractual
of a well-run financial market. of the principles thatusually
arrangements underlie
are designed particular
so that there is no discussions.
upfront fee for the swap.
These are just a few examples of the most prominent financial instruments. Together,
LO3 Describe the role of financial institutions and structure of the financial industry. they allow people to buy and sell almost any sort of payment on any date under any
circumstances. Thus, they offer the opportunity to store value and trade risk in almost
any way that one might want.5 When you encounter a financial instrument for the first
Long before formal financial institutions and instruments became common, there time, try to figure out whether it is used primarily for storing value or for transferring
were times when people lacked the resources to meet their immediate needs. In the risk. Then try to identify which characteristics determine its value.
terminology of introductory economics, people’s incomes were exceeded by their
necessary consumption. When a harvest was poor, they would dip into the reserves 2 5
Money and How We Use It Chapter 2 l Financial Markets
stored from previous years or exchange assets like land and livestock for food. But
Financial markets are the places where financial instruments are bought and sold.
often those measures were insufficient, so communities developed informal financial They are the economy’s central nervous system, relaying and reacting to information
arrangements that allowed people to borrow or lend among themselves. After a poor MARKETS quickly, allocating resources, and determining prices. In doing so, financial markets
harvest, thoseYOUR people with FINANCIAL
relatively good yields WORLD would help those with relatively poor
ones. When the tables were turned, help would flow the other way. In some societ-
Debit Cards versus Credit Cards
ies, families spread out geographically to facilitate these arrangements. For example,
4
For an introduction to how asset-backed securities work, see Andreas Jobst, “What Is Securitization?” Finance
and Development, International Monetary Fund, September 2008.
in rural Indian communities, households deliberately married off their daughters to 5
An important exception is the common desire to borrow using future income as collateral. While young people
families
When you goin different
shopping, should regions
you pay withto increase
a credit cardthe chance
A creditthat
card their
createsin-laws
a deferred would
payment.beThe
ableissuer
with good career prospects might wish to spend their future earnings now, lenders worry that such loans will
diminish the borrower’s incentive to work and repay.
orto respond
a debit card? inTo a timeyou
decide, of need
crisis. These informal
to 1understand the agreesinsurance
to make thearrangements
payment for you, and ensured
you repaythat
the debt
everyone had enough to eat.
Lessons from the Crisis
difference between the two. First make sure you know which later. That sounds good, but there’s a catch. If you’re late pay-
one of your cards is which. Usually an ATM card (the one ing, there’s a late fee. And if you don’t pay the entire debt
While
that you family
got from members
the bank and friends
when you opened still make
your checking everyloans
month,among
you paythemselves,
interest on the the informal
balance—at what is
arrangements
account) that
is a debit card. Butwere
check the mainstay
to make sure. of the financial
usually a verysystem centuries
high interest rate. If ago have
you do pay given
your entire
What’s the real difference, from the shopper’s point of credit card debt every month, however, there is no late fee
way to the formal financial instruments of the modern world. Today, the international
view? A debit card works just like a check, only faster. When and no interest charge. Hence, you get an interest-free loan These boxes explain concepts or issues that are both inte-
financial system
check, exists
it usually to facilitate theto design,
from sale, and
youexchange of a broad setyouof pay
gral to the chapter and central to understanding how
you write a paper takes a day or two go the time make the purchase to the time
contracts
through withAadebit
the system. verycardspecific
transactionsetgoes
of characteristics.
through the balance. If you can pay off your credit cards in full and on
right away. The electronic message gets to your bank on the time, it’s to your advantage to use them.
In recent decades, finance has evolved at an unprecedented pace, and our under-
same day, and your account is debited immediately. So, if
standing
you want to use ofyour
it has
debitchanged, too. Formerly,
card, your account
Credit cards have another advantage over debit cards.
balance has economists
They help you distinguished
to build a credit sharply between
history, which you’ll need the financial crisis of 2007–2009 and the subsequent
direct finance (in which a borrower sells a security directly to a lender) and indirect
crisis in the euro area transformed the world of money,
to be higher than the payment you want to make. During and when the time comes to buy a car or a house. Because debit
after the financial crisis that began in 2007, debit card use cards are just extensions of your bank account, they don’t
finance
sharply outpaced(incredit
which an institution
card activity, as lenders andlike a bankshow
borrowers stands between
potential lendersthethat lender
you are and the bor-
creditworthy. In fact,
rower).
sought to slowIfthewe need (ora even
expansion
level) of household debt.
loanreduceto buy a car, wesome
the outstanding usually get itlikefrom
businesses, a bank
car rental or finance
companies,
customers to use credit cards for this reason.
require their
banking, and financial markets. The topics range from
1
See M. R. Rosenzweig, “Risk, Implicit Contracts, and the Family in Rural Areas of Low-Income Countries,”
specific aspects of the crisis such as shadow banks and
Having a unit
Economic 98 (December
of account
Journal 1988).
is an incredible convenience. Remember from microeco- central bank policy responses to broad concepts like
Your Financial World
nomics that prices provide the information consumers and producers use to ensure
that resources are allocated to their best uses. What matters are the relative prices of
goods and services. When the price of one product is higher than the price of another,
liquidity, leverage, sovereign default, and systemic risk.
that product is worth more to both producers and consumers. Using dollars makes
These boxes show students that the concepts taught in
these comparisons easy. Imagine what would happen if we needed to compute rela- Financial Markets Chapter 3 l 63
tive prices for each pair of goods. With two goods, we would need only one price.
the text are relevant to their everyday lives. Among the
With three goods, we would need three prices. But with 100 goods, we would need
4,950 prices, and with 10,000 goods (substantially less than the 42,000 products in
topics covered are the importance of saving for retire-
a typical supermarket), we would need nearly 50 million prices.1 Using money as a LESSONS FROM THE CRISIS
SHADOW BANKS
risks at low cost (see Chapter 9). After 2000, the use of
customized derivatives that do not trade in open markets
yardstick and quoting all prices in dollars certainly is easier. (so-called over-the-counter, or OTC, derivatives) rose dra-
ment, the risk in taking on a variable-rate mortgage, matically. Those derivatives permitted some large financial
institutions to take risks that were unknown to their inves-
Store of Value Over the past few decades, financial intermediation and
the desirability of owning stocks, and techniques for
For money to function as a means of payment, it has to be a store of value, too. That
leverage in the United States has shifted away from tradi-
tional banks* and toward other financial institutions that are
tors and trading partners and to the public officials who
were supposed to monitor them. The spillover from the fail-
ure of these firms during the financial crisis nearly sank the
getting thetomost
is, if we are going use moneyout to payof theandfinancial
for goods services, then itnews.
must retain its
worth from day to day. Sellers are much less likely to accept things that are perishable,
less subject to government rules. These other intermediaries
include brokerages, consumer and mortgage finance firms,
insurers, investment organizations (such as hedge funds and
entire system.
The financial crisis of 2007–2009 transformed shadow
banking. During the fateful week that began with the failure of
like milk or lettuce. So the means of payment has to be durable and capable of transfer- private equity firms†), money-market mutual funds (MMMFs),
Lehman Brothers on Monday, September 15, 2008, the larg-
ring purchasing power from one day to the next. Paper currency does degrade with use and even bank-created asset management firms, such as
est U.S. brokerages failed, merged, or converted themselves
special investment vehicles (SIVs).
($1 bills have an estimated life span of 70 months in circulation), but regardless of its into traditional banks in order to secure access to funding. In
These other intermediaries have come to be known as
physical condition, it is usually accepted at face value in transactions. shadow banks because they provide services that compete
the same month, the loss of confidence in MMMFs required
Of course, money is not the only store of value. We hold our wealth in lots of a U.S. government guarantee to halt withdrawals. During the
with or substitute for those supplied by traditional banks.
crisis, many SIVs failed or were reabsorbed by the banks that
other forms—stocks, bonds, houses, even cars. Many of these are actually preferable Unlike banks, however, shadow banks do not accept depos-
created them. Many hedge funds chose to shrink or close as
to money as stores of value. Some, like bonds, pay higher interest rates than money. its. In addition, the leverage and risk taking of shadow banks
investors fled.
can be greater than that of traditional banks while being less
The future of shadow banking remains highly uncertain.
1
The general formula is that for n goods we need n(n − 1)/2 prices, so for 10,000 goods, the number would be transparent.
The crisis has encouraged governments to scrutinize any
10,000(9,999)/2 = 49,995,000. Beginning in the 1970s, financial innovation sped the
financial institution that could, by its risk taking, pose a threat
shift of intermediation to the shadow banks and was, in
to the financial system. Partly as a result, the scope for lever-
turn, stimulated by it. Broader markets, plunging information
age and risk taking is lower for now, but incentives to take
costs, new profit opportunities, and government practices all
risk—at others’ expense—still can fuel future disruptions.
encouraged the development of new financial instruments
and institutions to meet customer needs at lower cost.
Over time, the rise of highly leveraged shadow banks—
*One traditional form of bank is a commercial bank, which is
combined with government relaxation of rules for traditional defined in Chapter 12 as accepting deposits from and making
banks—permitted a rise of leverage in the financial system as loans to businesses and individuals.
a whole, making it more vulnerable to shocks (see Lessons †
Hedge funds (defined in Chapter 13) are private, largely unregu-
from the Crisis: Leverage earlier in this chapter). lated investment partnerships that bring together small groups of
Rapid growth in some new financial instruments made wealthy people who meet certain financial requirements. Private
it easier to conceal leverage and risk taking. Derivatives— equity funds are investment pools that typically invest directly in
options, futures, and the like—allow investors to transfer private companies to gain management control.
 34 l Chapter 2 Money and the Payments System

IN THE BLOG
Virtual Frenzies: Bitcoin and the Block Chain

Bitcoin is one of several new “virtual currency schemes” transactions globally, compared with more than 500 million
that devotees hope will revolutionize everyday payments. in the United States alone.
By one definition, Bitcoin is “a decentralized peer-to-peer Bitcoin’s value is extremely unstable: the dollar value of
network that allows for the proof and transfer of own- a single Bitcoin surged from just pennies in 2010 to nearly
ership without the need for a trusted third party.”* The $1,150 at the peak in 2013, before plunging back below $300
technology used to record Bitcoin ownership—the block for most of 2015. Since 2012, the daily percentage change
chain—is an ever-growing public ledger of transactions in Bitcoin’s U.S. dollar value has ranged from –31 percent
that is encrypted and distributed over a network of com- to +42 percent. Had Bitcoin been employed as a unit of
puters. Promoters of the block chain technology believe account over this period, all other prices would have been
that it will have broad applications in supporting payments subject to enormous day-to-day swings.
in any currency. Bitcoin’s use was initially fed by those seeking anonymity—
Advocates view Bitcoin as a new form of digital money including money launderers, tax evaders, and drug traf-
with two important advantages: (1) its value cannot be fickers. Perhaps the most notorious users of Bitcoin were
undermined by government fiat (because its value is created participants in the online black market known as Silk Road,
and controlled by the network of users and a set of unchang- which the U.S. government shut down in 2013. In 2015,
ing rules, not by government), and (2) its users can remain most Bitcoin currency transactions were against China’s
anonymous while making payments electronically and renminbi, probably to get around government controls on
3 8 l Chapter 2 Money and the Payments System
efficiently. moving capital out of the country.
In the Blog
However, Bitcoin lacks the three key characteristics of Government attention to activity in digital currencies has
money. It is not a commonly accepted means of exchange. It surged. And despite Bitcoin’s complex TOOLS infrastructure,
OF THE TRADE pri-
Oneis article per unit
not a reliable chapter is featured
of account. from
And it is not the store
a stable authors’
vacyblog
experts question its security: according The Consumer to one
Priceanalysis,
Index
at www.moneyandbanking.com. These
of value. As for the block chain, only extensive readings show
experimenta- about 40 percent of Bitcoin users can be identified by track-
tion will determine whether it can beat out existing payments ing their activity in the Understanding
public block how to chain ledger thatto records
howmechanisms.
concepts introduced in the chapter are applied to transactions. standing
measure inflation is central under- And for 2018, we get $165. Choosing 2017 as the base year,
economics and finance. Most of us keep a close the index level in each year equals
Bitcoin eye on measures like the consumer price index (CPI) to help Cost of the basket in current year
CPI = ___________________________ × 100
contemporary issues
Let’s start with in money
Bitcoin itself. In and
some banking,
countries, itincluding
is
gauge the value of our salary increases or the purchasing
Can a private currency—digital
power of the money weor otherwise—do
hold. a job
And adjusting interest rates
for inflation is critical for making investment decisions. (See
Cost of the basket in base year
The result of this computation is the fifth column of the table.
treated as a commodity subject to capital gains taxation or better as money than what Chapter 4.)we currently have? So far, the
changes in technology, regulation, and the mechanisms of
Finally, we can use the index number to compute the
inflation rate from the previous year. From 2017 to 2018, this
its use is severely restricted. And in no country can Bitcoin answer is no. Government-issued fiatit cost
monies
for peoplelike the today
The CPI is designed to answer the following question:
dollar,means that

monetary
be widelypolicy.
How much more would to purchase
CPI in 2018 − CPI in 2017
exchanged for goods and services. As a result, in euro, yen, and renminbi are
bought farfixed
at some moretime in reliable
the past? than Bitcoin Inflation rate 2018 = _____________________
the same basket of goods and services that they actually
CPI in 2017

early 2015, Bitcoin accounted for less than 70 thousand daily as a means of payment,Bureau unit of account, and store of value.
To calculate the CPI, every few years statisticians at the Using the numbers from Table 2.2 to compute the inflation
of Labor Statistics (BLS) survey people to find out rate in 2018, we get that
what they bought. This gives us the basket of goods and ser- 110 − 100
________
vices bought by the typical consumer. Next, every month the × 100 = 10%
100
BLS collects information on the prices of thousands of goods and for 2019 the result is
Applying Present Value Chapter 4 l 87 and services—everything from breakfast cereal to gasoline to
washing machines to the cost of cable television. Combining 120 − 110
________ × 100 = 9.1%
110
the expenditure and price surveys allows statisticians to com-
pute the current cost of the basket. Finally, this current cost is (These numbers are just for illustration. The U.S. inflation rate
compared to a benchmark to yield an index. And the percent- is closer to 2 percent.)
APPLYING THE CONCEPT $0.02. Spending more than these amounts today would not age change in this index is a measure of inflation. Inflation measured using the CPI tells us how much more
money we need to give people to restore the purchasing
more of themWhatagaindiscount transform thevaluepayments process over the next decade (see In the
make economic sense. To see how this works, let’s look at an example. Assume
HOW MUCH IS OUR DISTANT power they had in the earlier period when the survey was done.
rate should we use to things in the people spend 25 percent of their income on food, 50 per-
FUTURE WORTH? But adjustments in wages based on fixed-expenditure-weight
Blog: Virtual Frenzies:
market prices. Bitcoin and the Block Chain).
distant future? For questions like this, economists usually cent on housing, and 25 percent on transportation. That’s the
look at survey information. Examples of the prices are in Table 2.2. inflation indexes like the CPI are known to overcompensate
One possibility is to adjust the yield on ultra-long-term Importantly, these are the prices of exactly the same bundle people in an unintended way. This overstatement of inflation
of food, the same size and quality of housing, and the same comes from what is known as substitution bias. Because infla-
Many people worry about the challenges their descendants debt—like British consols, which never repay principal—for
transportation for each year. tion is not uniform, the prices of some products will increase
will face. There are plenty of things to fret about, ranging from the level of inflation. In 2014, the consol with a coupon of 2½
Using the numbers in Table 2.2 we can compute the cost by more than the prices of others. People can escape some
the threat of rising sea levels in this century to the long-range percent (first issued in 1751) yielded on average just over 4

Measuring Money of the basket of goods in each year: of the inflation by substituting goods and services that have
challenge of managing radioactive waste, which can be toxic percent. Assuming inflation of 2 percent, that is equivalent to sustained less inflation for those that have sustained more.
for many thousands of years. Physicist Stephen Hawking a discount rate of about 2 percent. Cost of the basket in 2017 By assuming that any substitution makes people worse off,
has argued that human beings “won’t survive another 1,000 Policy disagreements among serious analysts of climate = 0.25 × Price of food + 0.5 × Price of housing the index overstates the impact of price changes. To address
years without escaping our fragile planet.” change are closely related to their views on the appropri-
Changes in the amount of money in the economy are =related
How much ought we be willing to spend now to avoid to changes in interest
+ 0.25 × Price of transportation
ate discount rate. One well-known report applied a relatively
0.25 × $100 + 0.5 × $200 + 0.25 × $100
this problem, and take into account changes in spending pat-
terns, the Bureau of Labor Statistics in 2002 began changing

rates, economic growth, and, most important, inflation.= Inflation is the pace at which
damage 100 years from now that will cost $1 at that time? The low discount rate of 1.4 percent and called for a large tax on the weights every two years. Nevertheless, many economists
answer depends on many factors, including the relative afflu- carbon emissions to limit future losses from climate change.
$150 believe that the CPI still overstates inflation.

prices in general are increasing over time—and the inflation is a the

rateComputing measure of that
ence of our descendants, the degree of uncertainty about A different analysis used a relatively high 4.3 percent dis-
the future, and the possibility of existential threats. count rate and called for a carbon tax only about one-tenth
Table 2.2 Consumer Price Index
process. With inflation, you need more units of money to buy the same basket of goods
To simplify the question, suppose that the only thing we
care about is the present value of the expected losses asso-
8 the level implied by the 1.4 percent rate analysis. Why? The
low discount rate puts a great deal more weight on losses
ciated with a preventable future disaster. In that case, the dis- that are predicted to occur hundreds of years in the future.
count rate we use is critical for determining what we should Of course, it’s not just about discount rates. It’s about the Price of Price of Price of Cost of Consumer
The terms inflation and inflation rate are often used interchangeably. We will
do today. For example, for a disaster that 8is 100 years away,
the value today of a $1 future loss at an annual discount rate
Year refer to
scale of future losses, too. If policy actions today can prevent ainflation Housing
Food
calamity that threatens life on earth, then people might judge the
as the process
Transportation the Basket Price Index

of prices rising, and inflation rate as the measurement of the process. The 2017
of 1 percent is $0.37. But at a discount rate of 2 percent, the relationship
appropriate discount rate to be quite low because they would between these
$100 $200 terms is $100 $150 100

analogous to that between heat and temperature. The second is the measure
present value drops to $0.14. And at 4 percent, it is less than of the first.
not weight the value of future lives any lower than their own.
2018 110 205 140 165 110
2019 120 210 180 180 120

Applying the Concept

be 7.3 percent. Clearly, the three payments are better for you as the lender, but we had
to do quite a bit of work to figure it out.

These
Bonds: The sections
Basics showcase history and examine issues Tools of the Trade
relevant to the public policy debate to illustrate how
One of the most common uses of the concept of present value is in the valuation of
bonds. A bond is a promise to make a series of payments on specific future dates. It These boxes teach useful skills, including how to read
ideas
an IOU to the lender, or buyer, in in
introduced the
return chapter
for some canBoth
amount of money. begovernments
applied to the
is issued as part of an arrangement to borrow. In essence, the borrower, or seller, gives
bond and stock tables, how to read charts, and how to
world around us. Subjects include the
and corporations need to borrow, so both issue bonds. Because bonds create obliga-
LIBOR
tions, they are best thought of as legal contracts that (1) require the borrower to make scandal; do some simple algebraic calculations. Some provide
why Long-Term Capital Management
payments to the lender and (2) specify what happens if the borrower fails to do so.
Because there are many different kinds of bonds, caused
to focus our discussion, we’ll look at a near brief reviews of material from the principles of eco-
the most common type, a coupon bond. Say a borrower who needs $100 “issues” or sells a
collapse
$100 coupon bondof to a the world
lender. The financial
bond issuer is required to makesystem; and
annual payments, calledwhat mon- nomics course, such as the relationship between the
coupon payments. The annual amount of those payments (expressed as a percentage of
etary
the amountpolicymakers learned
borrowed) is called the coupon fromratethe
rate. If the coupon Great
is 5 percent, then the­Depression
TIME
current account and the capital account in the balance
borrower/issuer pays the lender/bondholder $5 per year per $100 borrowed. The yearly
of the
coupon 1930s.
payment equals the coupon rate times the amount borrowed. The bond also speci- of payments.
fies when the issuer is going to repay the initial $100 and the payments will stop, called the
maturity date or term to maturity. The final payment, a repayment of the initial $100 loan,
is often referred to as the principal, face value, or par value of the bond.
Before the advent of computers, an investor buying a bond would receive a cer-
tificate with a number of dated coupons attached. To claim the coupon payments, the
 End-of-Chapter Features

l Chapter 2 Money and the Payments System

Using FRED: Codes for Data in This Chapter FRED Data Codes
The FRED table lists key economic and financial
Data Series FRED Data Code ­indicators relevant to the chapter and the codes by
Price of gold (U.S. dollars)
Consumer price index
GOLDAMGBD228NLBM
CPIAUCSL
which they are accessed in FRED, the free online
M1 M1SL ­database provided by the Federal Reserve Bank of
M2
Currency in circulation
M2SL
CURRSL
St. Louis. With the data codes, students can use FRED
Traveler’s checks TVCKSSL to analyze key economic patterns and illuminate the
Demand deposits DEMDEPSL
Other checkable deposits OCDSL 44 l Chapter 2 Money ideas in theSystem
and the Payments chapter. See Appendix B to Chapter 1 for
Small-denomination time deposits STDCBSL help using FRED.
Savings deposits and MMDAs* SAVINGSL
19. If money growth is related to inflation, what would you expect to happen to the
Retail MMMFs** RMFSL inflation rates of countries that join a monetary union and adopt a common cur-
Nominal GDP GDP rency such as the euro? (LO4)
20. Why might one doubt that current new forms of digital money, such as Bitcoin,
2 l Chapter 2 Money and the Payments System will replace more traditional fiat currencies? (LO3)
*Money market deposit accounts 21. Is the challenge of making “time consistent” policy unique to fiat-biased paper
**Money market mutual funds money? (LO4)
Chapter Lessons
Chapter Lessons
1. Money is an asset that is generally accepted in payment for goods and services or
Data Exploration
repayment of debts.
1.a.Money
Moneyishasanthree
assetbasic
thatuses:
is generally accepted in payment for goods and services or Data Exploration
i. Means of payment
repayment of debts.
New, ii. detailed
a. Money
Unit of accountend-of-chapter ­questions
has three basic uses: For detailed instructions on using Federal Reserve Economic Data (FRED) online
iii. Store of value to answer each of the following problems, visit www.mhhe.com/moneyandbanking5e
askb. Money
students
i. Means ofto
is liquid. use FRED
payment
Liquidity to which
is the ease with analyzean asset can be turned into a and refer to the FRED Resources and Data Exploration Hints.
ii. Unit
means of account
of payment.
economic
c. For Store and
iii.financial financial
ofinstitutions,
value dataisrelevant
market liquidity the ease with towhich they can sell
1. Find the most recent level of M2 (FRED code: M2SL) and of the U.S. population
(FRED code: POP). Compute the quantity of money divided by the population.
theb.chapter.
a Money
security is or liquid.
loan forLiquidity
Appendix is the liquidity
B toeaseChapter
money. Funding with which
is the easean
1withasset
whichcanthey
be can
turned into a (Note that M2 is measured in billions of dollars and population is in thousands of
www.moneyandbanking.com

borrow
meanstoofacquire payment. a security or loan. individuals.) Do you think your answer is large? Why? (LO1)
provides
2. Money
c. For
arrangements
makes
fi information
nancialthe payments
institutions, on using
system work.
market The
liquidityFRED
payments
is the system
ease is
with the web
which of can sell
they
2. Reproduce Figure 2.3 from 1960 to the present, showing the percent change from
a securitythat or allows
loan forpeople
money.to exchange
Fundinggoods and services.
liquidity There
is the ease are which
with three they can
a year ago of M1 (FRED code: M1SL) and M2 (FRED code: M2SL). Comment
and sets
broadborrowthe
a. Cash
categories stagea security
of
to acquirepayments,for itsor loan.
all of use thereafter.
which use money at some stage.
on the pattern over the last five years. Would it matter which of the two monetary
2.b.Money
Checksmakes the payments system work. The payments system is the web of aggregates you looked at? (LO4)
c.arrangements that allows people to exchange goods and services. There are three
Electronic payments 3. Which usually grows faster: M1 or M2? Produce a graph showing M2 divided by
3. Inbroad categories
the future, moneyof payments,
will alland
be used less of which
less as ause money
means at some stage.
of payment. M1. When this ratio rises, M2 outpaces M1 and vice versa. What is the long-run
4. Toa. understand
Cash the links between money and inflation, we need to measure the quan- pattern? Is the pattern stable? (LO4)
b. of
tity Checks
money in the economy. There are two basic measures of money: M1 and M2. 4. Traveler’s checks are a component of M1 and M2. Produce a graph of this component of
M1, the narrowest
c. Electronic measure, includes only the most liquid assets. M2, a broader
payments the monetary aggregates (FRED code: TVCKSSL). Explain the pattern you see. (LO1)
measure, includes assets not usable as a means of payment. 5. Plot the annual inflation rate based on the percent change from a year ago of the
3.a.InCountries
the future, money
with will be
high money used have
growth less high
and less as a means of payment.
inflation. consumer price index (FRED code: CPIAUCSL). Comment on the average and
4.b.ToInunderstand
countries with
thelow inflation,
links between money growth
money andisinfl
a poor forecaster
ation, we needoftoinflation.
measure the quan- variability of inflation in the 1960s, the 1970s, and the most recent decade. (LO4)
tity of money in the economy. There are two basic measures of money: M1 and M2.
M1, the narrowest measure, includes only the most liquid assets. M2, a broader
Conceptual
measure, includes and Analytical
assets not usable as aProblems
means of payment.
Conceptual and Analytical Problems
a. Countries with high money growth have high inflation.
1. Describe at least three ways you could pay for your morning cup of coffee. What
b.areInthe
countries with
advantages low
and inflation, money
disadvantages of each?growth
(LO2) is a poor forecaster of inflation.
Each chapter contains at least 18 conceptual and
2. You are the owner of a small sandwich shop. A buyer may offer one of several pay- analytic problems at varying levels of difficulty,
ment methods: cash, a check drawn on a bank, a credit card, or a debit card. Which
of these is the least costly for you? Explain why the others are more expensive. (LO2) which reinforce the lessons in the chapter. All of the
3. Explain how money encourages specialization, and how specialization improves
everyone’s standard of living. (LO4)
problems are available as assignable ­content within
4.* Could the dollar still function as the unit of account in a totally cashless society? (LO2) Connect, McGraw-Hill’s ­homework ­management
5. Give four examples of ACH transactions you might make. (LO2)
6. As of July 2016, 19 European Union countries have adopted the euro, while the
platform, organized around ­learning objectives to
remaining member countries have retained their own currencies. What are the
advantages of a common currency for someone who is traveling through Europe?
make it easier to plan, track, and ­analyze student
(LO1) performance across different learning outcomes.
7. Why might each of the following commodities not serve well as money? (LO2)
a. Tomatoes
b. Bricks
c. Cattle
 Preface l xvii

Assurance of Learning Ready

Many educational institutions today are focused on the notion of assurance of learning,
an important element of some accreditation standards. Money, Banking, and Financial
Markets­is designed specifically to support your assurance of learning initiatives with
a simple, yet powerful solution.
Instructors can use Connect to easily query for learning outcomes/objectives that
directly relate to the learning objectives of your course. You can then use the reporting
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and presentation of assurance of learning data simple and easy.

AACSB Statement
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Banking, and Financial Markets, 5/e, has sought to recognize the curricula guidelines
detailed in the AACSB standards for business accreditation by connecting questions
in the text and test bank to the general knowledge and skill guidelines found in the
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The statements contained in ­Money, Banking, and Financial Markets­, 5/e, are pro-
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knowledge and skills areas.

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Acknowledgments
I owe thanks to many more people than I can possibly list, including a large number
of academics, central bankers, and financial market participants around the world. A
few of these deserve special mention. I would like to thank Robert M. Solow, who set
me on the path doing economics as a 20-year-old undergraduate; George A. ­Akerlof,
whose inspiration still guides me, even more than 25 years after he signed my dis-
sertation; William J. McDonough, who gave me the opportunity to watch and ask
questions from inside the Federal Reserve; Peter R. Fisher, who was my day-to-day
guide to what I was seeing during my time at the Fed; and Jaime Caruana and Hervé
Hannoun, whose patience and understanding helped me appreciate the global central
bank community.
xviii l Preface

Of my numerous collaborators and colleagues over the years, Nelson Mark (now at
the University of Notre Dame) is the most important. His encouragement, counsel, and
friendship have guided me for more than 15 years. In addition, ­Michael Bryan of the
Federal Reserve Bank of Atlanta has been a constant source of help and encourage-
ment, as have numerous friends throughout the central banking world.
Among all of the professional colleagues who took the time to read early versions of
the manuscript, I would like to single out Jim Fackler for his insight and patience. This
book is much better for the time he generously devoted to correcting my logical mis-
takes and helping ensure that the exercises would reinforce the lessons in each chapter.
Without all the people at McGraw-Hill this book would never have been written.
Gary Burke and Paul Shensa first convinced me that I could write this book, and then
taught me how. Erin Strathmann worked tirelessly (and daily) to improve the book.
Betty Morgan made my sentences and paragraphs readable. And all of the people in
production and design turned the words and charts into a beautiful, readable book.
Starting with the third edition, Gregg Forte has made notable contributions through his
skilled editing of the manuscript. And, for the last two editions, Christina Kouvelis has
done the hard work of ensuring everyone maintained the high standard.
Without students, universities would not exist. And without a class in money and
banking to teach, I would not have written this book. I owe a debt to every student who
has sat in a classroom with me. Several deserve special mention for the time and effort
they put into helping with the manuscript: Margaret Mary McConnell of the Federal
­Reserve Bank of New York, Roisin O’Sullivan of Smith College, Stefan Krause formerly
of the Banque de France, Lianfa Li of Peking University, Craig Evers of Brevan How-
ard, and Georgios Karras of the University of Illinois at Chicago.
And finally, there is my family; my wife Ruth and our sons Daniel and Ethan. For
years they put up with my daily routine of writing, rewriting, and rewriting again and
again. To them I owe the biggest thanks.

Stephen G. Cecchetti
Brandeis International Business School

There is not enough space here to thank the many people who taught me about finan-
cial markets and institutions during my more than two decades of work as a market econ-
omist, but a few deserve special mention. Hugh Patrick was an inspiration in graduate
school and remains a friend and guide. In the financial markets, I benefited especially
from the wisdom of Henry Kaufman and the economists he gathered at S ­ alomon Brothers
in the 1980s—Richard Berner, Robert DiClemente, John Lipsky, and ­Nicholas Sargen.
The members of the economics team that I was privileged to lead at Salomon (and later at
Citi) continued my education, including (among many others) Lewis ­Alexander, Robert
­DiClemente, Don Hanna, Michael Saunders, ­Christopher ­Wiegand, and Jeffrey Young.
I also owe an extraordinary debt to my colleagues at the New York University L
­ eonard
N. Stern School of Business, who welcomed me, gave me the privilege of teaching
excellent students, and entrusted me with the honor of directing Stern’s ­Center for
Global Economy and Business (www.stern.nyu.edu/cgeb). For their sustained ­support
and guidance, I thank former Dean Thomas Cooley, current Dean Peter Henry, former
Vice Dean Ingo Walter, and the distinguished current and former chairmen of the
Department of Economics— the late David Backus, Luis Cabral, Paul Wachtel, Law-
rence White, and Stanley Zin. David Backus, Kim Ruhl, and Michael Waugh gave me
 Preface l xix

the tools to teach MBA students. Jennifer Carpenter has been my partner as Asso-
ciate Director of the Center for Global Economy and Business, while John Asker,
Thomas Philippon, Kim Ruhl, Laura ­Veldkamp, Paul Wachtel, and Michael Waugh
have all served as Center research group co­ordinators and my advisors. Jonathan
­Robidoux keeps the Center operating efficiently and with a smile each day. Many
­others deserve thanks for making Stern the thriving research and teaching environment
that it is today, but I am especially grateful for the support of Viral Acharya, Gian Luca
­Clementi, Robert Engle, Mervyn King, Matthew Richardson, Bruce Tuckman, Stijn
van ­Nieuwerburgh, and Robert Whitelaw. Finally, many thanks to Brian LeBlanc for
his research assistance in the preparation of this fifth edition.
Of course, my greatest debt is to my wife, Elvira Pratsch. I also thank my parents,
Harold and Evelyn, as well as my sister and brother, Sharon and Andy.

Kermit L. Schoenholtz
New York University Leonard N. Stern School of Business

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Another Random Scribd Document
with Unrelated Content
correspondence with Benjamin Constant, with Lafayette and Lafitte.
He participated in the theories of the Napoleonists of his time, and
aspired for the elevation of the nations, and especially for that of
Italy. In 1834, the Scientific Congress at Stuttgard being in session,
Beltrami was sent to it to represent the Historical Institute of France,
accredited therefore by the perpetual secretary, Mons. de Monglave,
who did not hesitate to style him one of the most honorable and
distinguished of that scientific association. Shortly after, he went to
Heidelberg, where he acquired a small landed estate which he lived
on for two years. In 1837 we find him at Vienna; then, shortly, at
Home, and so—now here, now there—he lived till 1850, when,
finding himself bowed down by the weight of years, he returned to
his property at Filotrano, where, amongst his early friends, he
placidly passed the remainder of life, and where, in February, 1855,
he died, having completed his seventy-fifth year.
Beltrami was a man of frank and sincere soul—an enemy of all
flattery, and capable of unparalleled self denial. In proof of the latter,
it is related that although he suspected that the cases of articles
sent by him from America had been opened and plundered on their
arrival at Florence, yet, to avoid the bitterness of certainty of such
fact, he would never consent to their being examined during his
lifetime, desiring that it should only be done by his heirs,—as so
happened.
In the desire to be more generally read, he wrote everything in
foreign languages, for which indeed he can hardly be blamed,
having to print his works out of Italy. A complete list of his published
writings is as follows:

1. Deux mots sur des promenades de Paris et

Liverpool. Philad’a., 1823.
2. La Decouverte des Sources du Mississippi, &c.
New Orleans, 1824. (Previously mentioned).
3. A Pilgrimage in Europe and America, &c. London,
1828. (Previously mentioned).
 4. Le Mexique. 2 vols. 8vo. Paris, 1830.
5. L’Italie et L’Europe. Paris, 1834.
6. Letter to the Secretary of the Historical Institute
of France, (in French). Heidelberg, 1836. (Reprinted in
the Bergamo city memorial).

The Indian curiosities and other articles brought by Beltrami to his

native country from the region of our present Minnesota, together
with his MS. papers &c., were presented by his heir, a nephew,
shortly after his death, to the library of Bergamo, the municipality of
which city caused them to be properly displayed in the vestibule of
the building. Signore Rosa, his chief eulogist, says, in a private letter,
that there is no genuine portrait of him extant;—the one by
Professor Scuri being drawn from the engraving in the “Pilgrimage,”
and from tradition.

§ 4. REMINISCENCES OF MAJOR TALIAFERRO.

Major Lawrence Taliaferro, of Beaufort, Penn., a soldier of 1812,
who from the year 1819 to 1840, acted as Agent for Indian Affairs
for the tribes of the north-west, and who yet lives in the memories
of the Sioux, to whom he was known as Mahza Bakah or Iron Cutter,
furnished, under date of the 4th of April, 1866, the following
information concerning his friend Beltrami:
“I was in Washington in 1823 relative to my official connection
with the north-western tribes of Minnesota; whilst on my return, in
March, to my post, I found a note, or card, at a hotel in Pittsburg,
from Beltrami, asking permission to bear me company to the Falls of
St. Anthony. When I saw him, his presence and manner at once
obtained my confidence, and leave was granted to do so. We passed
together down the Ohio, and up the Mississippi to Fort Snelling. I
divided my quarters with him; and Col. Snelling and lady invited him
to take his meals at their hospitable table.
 “Beltrami was six feet high, of commanding appearance and some
forty-five years of age; proud of bearing, and quick of temper, high
spirited, but always the gentleman. He expressed an earnest wish to
explore the sources of the Mississippi. I gave him a passport to go
where he pleased, and instructed the Chippewas of Otter Tail, and
other lakes, to see him safely through their country, should he seek
assistance. Shortly after this desire, Major Long, of the
Topographical Engineers, with his corps, arrived. Beltrami was
introduced to Major L. and permission granted Mr. B. to accompany
the party to Pembina. At Pembina, a difficulty occurred between
Major Long and Beltrami, when the latter sold his horse (my horse)
and equipments, and in company with a half breed, passed near the
line of 49° to the sources of the Mississippi. His sufferings were of
no agreeable nature. Here, near Leech Lake, he fell in with a sub-
chief, the ‘Cloudy Weather,’ most fortunately, who knew Mr. B.,
having seen him in one of my councils at the agency. This old man
was given, by signs, to know that white man wanted to descend the
river. The chief took our Italian friend in his canoe, and turned down
stream. Indians are proverbially slow, hunting and fishing on the
way; Beltrami lost all patience,—abused his Indian crew,—made
many menaces, &c. The ‘Cloud’ tapped him on the hat with his pipe
stem, as much as to say, ‘I will take you to my father safe if you will
be still.’ The old chief told of this temper of my friend, but Mr. B.
never made allusion to it, but was very grateful to his kind Pillager
friends.
“Beltrami had been in the military service;—was judge of a court. I
touched him at times with the appellation of Count; ‘Who is your
dear Countess to whom you address many affectionate
letters?’—‘Not my wife,’ said he; ‘but a lovely woman; and if you
would replace the G in your name, [Tagliaferro] and come with me
to Italy—the home of your ancestors—I would make you happy in
her company.’
“That the tour of Mr. B. was not altogether abortive, I have full
reason to believe. He explained by his notes to me his whole route,
put the discovery of the true sources correctly, as others have since
done,—including the distinguished Nicollet. To learn the habits of the
Indian tribes was almost a mania with him. He had every facility;—
his greatest anxiety was, before he left Italy, as he stated to me, to
explore the wildest portion of the continent, north and west,—to see
as many of the noble North American Indians as possible. He
seemed fond of adventure. I saw he was dispirited for the lack of
means;—he did not deny it when questioned delicately on this point.
“In conversing of Italy and Italian affairs, he hesitated not to
speak very broadly about the highest ecclesiastical dignitary,
touching whom he often lost his patience. Beltrami was a patriot,
and undoubtedly of note, and had suffered persecution.”

§ 5. CONCLUSION.
No further direct information concerning Beltrami, personally, can
be added to the preceding; and enough undoubtedly has been said
to fill the blank hitherto existing, and to place him properly before
the people of Minnesota, to the majority of whom his name is totally
unknown. There remains, however, to supplement this monograph,
one more task to be performed, at some future time, when the
territory he independently explored shall have been surveyed and
mapped by the deputies of the General Land Office, and that is the
examination and verification of the route traveled by him, and of the
lakes and rivers he visited, in order to restore and bring into popular
use, so far as practicable, the names he gave to many places;
though he named only certain lakes, streams and islands, hitherto
undistinguished.
The Legislature, last winter, at the instance of the Historical
Society, and in conformity with the custom of naming some of the
counties of a territory or state after its early explorers, established a
county by the name of Beltrami; which extends from the first “range
line” below the mouth of Turtle River, on the east, to the line
between ranges 38 and 39 on the west, and from the line between
townships 154 and 155 on the north to the north line of Beecher
county, and to the Mississippi on the south. This county
comprehends the region of the head of “Bloody River,” &c., and is in
area about 4,000 square miles—subject to reduction and
modification of boundary it is true; but, it is to be hoped, always to
retain the same name, and to include the “Julian Sources of the
Mississippi” within its limits. Of this act of legislation, his friend,
Major Taliaferro says, “It is a high compliment;—one well deserved,
and creditable to the movers and State;” and all lovers of justice
who read Beltrami’s own words will rejoice that his claims have at
last been officially recognized.
In reference to the opportunity he had of perpetuating his own
name in the Indian territory by giving it an archipelago, as he terms
it, of the Mississippi—the present “Thousand Islands,” situated a mile
or two below St. Cloud—he wrote, “After my death, men will dispose
of my name as God will of my soul, according as I shall have well or
ill deserved during my life; and I leave to my friends, and to those
who have had opportunities of becoming acquainted with my heart,
the charge of defending my memory, should it ever be attacked by
injustice or prejudice.”

APPENDIX.
HYDROGRAPHY OF THE SOURCES OF THE MISSISSIPPI RIVER.

In reference to the question as to which stream we should look to

for the right source of the Mississippi, the following article has been
prepared by Col. Charles Whittlesey—a man well known to the
reading public, not only by his explorations and contributions to the
stock of knowledge concerning the geology and physical geography
of the North West, but by his writings on the earthworks and other
relics of the aboriginal inhabitants of the same region:

“Cleveland, O., March 28, 1866.

“Turtle Lake, at the head of Turtle River, which
discharges into Cass Lake, is the most northerly of the
waters of the Mississippi. Mr. Schoolcraft claims that
Itasca Lake and its tributaries constitute the true
source of the Great River, because these streams are
further from the mouth than any other. Whether this, if
true, is a correct mode of fixing the head waters of
rivers, I must be allowed to doubt. It seems to me that
the largest branch forms the river, and the heads of
that branch constitute the sources.
“When I was on the upper waters of the Mississippi,
in September 1848, I compared the quantity of water
flowing from Lake Winnibigoshish with that from Leech
Lake, as far as observations without gauging enabled
me to do it. At that time I judged the discharge from
the Leech Lake branch to be three times as much as
from Lake Winnibigoshish, and one of our voyageurs,
who was raised in the region, said it generally
discharged twice as much. The distance from the
junction of the Leech Lake branch, below
Winnibigoshish, to the most distant sources of the
various branches, does not appear to me to be
materially different. Among the hundreds of small
streams converging into, and passing through nearly
as many lakes, there cannot be said to be a main or
separate river above this junction. From this point, the
Mississippi assumes its proper characteristics, as one
stream, to the gulf of Mexico; but above it, the
branches are excessively numerous. Below the
junction, it is two chains wide, with a broad regular
current, having the same imposing features which it
retains to its mouth. The furthest streams that
discharge into Leech Lake rise to the south,
interlocking with the waters of Pine River; but, if we
can rely upon our maps—of a region as yet
unsurveyed—the development of these branches,
including the lakes through which they pass, equals in
length the Itasca branch.
“Our missionaries at Cass Lake said the Turtle River
discharged more water than Bemidji River, which
enters Cass Lake from Itasca Lake.”
HISTORICAL NOTES OF THE UNITED
STATES LAND OFFICE.
[By Hon. H. M. Rice, of St. Paul.]
On the 26th day of January, 1796, when the American Congress
was in session in Philadelphia, a Bill was reported for establishing
land offices for the sale of lands in the North-western Territory. It
was under discussion until April of the same year in the House of
Representatives. A great diversity of opinion existed; some were in
favor of selling in small tracts of fifty acres—others contended that
none should be surveyed or sold in less than township tracts. Some
favored a Bill that would retain the lands for actual settlers, others
were for disposing of as much of the public domain as possible, and
at the highest price, for the purpose of paying the public debt. For a
long time, they could not agree upon the price. Mr. Williams, of New
York, said “it was as necessary that the country should be settled as
that the land should be sold. Or shall it be said that the honest,
industrious settlers shall make roads, bridges, and other
improvements, whilst the rich holders keep their lands in hand until
these improvements are made, in order to increase the value of
them?” Mr. Williams, undoubtedly, took a correct view of the case.
The Bill, as finally agreed upon, established the office of Surveyor
General, under the following title: “An Act providing for the sale of
the Lands of the United States, in the Territory North-west of the
river Ohio, and above the mouth of Kentucky river.” On the 18th of
May, 1796, the Bill was approved by receiving the signature of
George Washington. The office was first opened at Marietta, Ohio,
under Rufus Putnam, Surveyor General. In 1804 it was removed to
Vincennes;—in 1805 to Cincinnati;—in 1814 to Chillicothe;—in 1829
it was removed back to Cincinnati, where it remained until 1845,
when it was removed to Detroit. In May, 1857, the office was again,
and for the last time, removed to St. Paul. It now has in its custody
the original correspondence for its establishment in 1796, which,
undoubtedly, contains many important facts and reminiscences that
would not only fully pay for their perusal, but might furnish historical
points of great value. Through it, the past and present are
connected. There can be found the workings under the original act
under which no lands could be surveyed in tracts of less than 640
acres, nor sold for less than two dollars per acre; and out of this has
grown our admirable system, which places within the reach of every
man a home, be he rich, or be he poor.
 THE GEOGRAPHY OF PERROT;
SO FAR AS IT RELATES TO MINNESOTA AND
THE REGIONS IMMEDIATELY ADJACENT.

[Prepared by A. J. Hill, of St. Paul, and accepted for

publication by the Minnesota Historical Society.]

§ 1. SHORT ACCOUNT OF PERROT AND HIS

WRITINGS.
Nicolas Perrot, whose name is already well known to the readers
of the early history of Minnesota, was born in 1644, and repaired, at
an early age, to New France, where he resided, almost habitually,
from 1665 to 1689, amongst the diverse races of its most distant
part—the extremity of the angle formed by the valleys of the St.
Lawrence and of the Mississippi. “At first simple coureur du bois by
trade (1665-1684), and interpreter incidentally (1671-1701), he was
at last, under the successive governments of M. M. de la Barre,
Denonville and Frontenac (1684-1699), charged with a command
analogous to that of our chiefs of Arab bureaux in Algeria.” In his
capacity of interpreter, he was present at the convocation of the
tribes at Sainte-Marie-du-Sault, where, on the 14th of June, 1671,
the French government assumed the sovereignty of the regions
beyond the Great Lakes. Nearly eighteen years later, on the 8th of
May, 1689, he himself, acting as principal agent, took formal
possession, in the name of the King of France, of all the country
visited by him, or that might be visited, from Green Bay to the
regions beyond the St. Croix and St. Peter. Subsequent to 1718, no
information concerning him can be obtained.
 The writings of Perrot are as follows:
1. Memoire sur les Outagamis, addresse au Marquis de Vaudreuil.
2. Plusieurs memoires tant sur les guerres des Iroquois contre les
Illinois et les nations d’en haut, que sur les trahisons des sauvages,
et en particulier, des Outaouais et des Hurons.
3. Memoire sur les moeurs, coustumes, et relligion des sauvages
de l’Amerique Septentrionale.
Of these works, the last one only, the “Memoir upon the manners,
customs and religion of the savages of Northern America,” which
must have been written some time between 1718, and 1721, has
come down to us; though the “Plusieurs memoires” &c., is supposed
to have been inserted, almost literally, by La Potherie, in the second
volume of his history. It was not composed for publication, but for
the confidential information of the Intendant of Canada, M. Begon,
and remained in manuscript till 1864, when it appeared at Leipzig
and Paris, being Part Three of the Bibliotheca Americana, edited by
the Rev. Father J. Tailhan, of the Society of Jesus, on whose
authority the preceding facts are stated. “There is only one copy of
Perrot’s memoir in existence, of the last century; the same, probably,
that Father Charlevoix used, and which he received from M. Begon,
Intendant of Canada, in 1721. Our edition is a scrupulous
reproduction of it.” [T.]
Scattered through this book are accounts of the Sioux and other
tribes living in the region comprised within the limits of the present
Minnesota, and between it and Lake Michigan; and, in the same
connection, a description of the country of the former nation, and
other geographical information of more or less direct reference. As
an interesting addition to our knowledge of the historical geography
of this region, all such notices have been carefully searched for, and
are here given in a collected form for the use of the Historical
Society of Minnesota. The extracts are purely in Perrot’s own words;
no changes having been made, even in the orthography. In addition,
though trenching somewhat on the domain of history, the episode of
the disappearance of Father Menard is included;—partly by reason of
the new and interesting version of the matter, and partly as showing
that he should be considered as one of the very earliest European
visitors to Minnesota. Our first desideratum being accurate texts,
comments are best postponed; yet the notes of Father Tailhan are so
well considered that this compilation would be incomplete without
the insertion of such of them as correspond to the extracts from the
original work. The translator has also ventured upon two or three
explanatory remarks, or interpolations, of his own, distinguishable by
being inclosed within brackets; except the dates, which are the
Father’s.

§ 2. Extracts from his “Memoire sur les

moeurs, &c.”
Car le pays du nord est la terre du monde la plus ingratte,
puisque, dans quantitez d’endroits vous ne trouveriez pas un oiseau
a chasser; on y ramasse cependant des bluets dans les mois d’aout
et de septembre[2]....
Les Chiripinons ou Assiniboualas sement dans leurs marais
quelques folles avoines qu’ils recueillent, mais ils n’en peuvent faire
le transport chez eux que dans le temps de la navigation(1)....
Les Kiristinons qui hantent souvent le long des bords du Lac
Superieur et des grandes rivieres, ou sont plus communement les
elans(2)....
Les sauvages que l’on nomme Saulteurs [Chippewais] sont au sud
du lac Superieur ... ils ont pour voysins et amis les Scioux, sur les
limites desquels ils chassent, quand ils veulent....
Si on avance dans le nord, vers l’entree d’Ouisconching, l’hiver y
est extremement froid et long. C’est la ou les castors sont les
meilleurs, et le pays ou la chasse dure plus longtemps dans
l’annee....
 Ils tirent aussy l’hyver de dessous la glace dans les marests ou il y
a beaucoup de vase et peu d’eau, une certaine racine, ... mais elle
ne se trouve que dans la Louisianne, a quinze lieues plus haut que
l’entree d’Ouisconching. Les sauvages nomme en leur langue cette
racine Pokekoretch....
Mais les peuples plus avancez dans le nord, jusqu’a la hauteur
d’Ouisconching, n’ont plus de ces nefles, et ceux qui sont encore
plus loin manquent de ces noix semblables a celles de France....
Car ce pays [des sauvages des prairies] n’est que plaines; il y a
seulement quelques islets ou ils ont coustume d’aller camper pour
faire secher leurs viandes....
Quand touts les Outaouas se furent repandus vers les lacs [au
Mechingan (3)], les Saulteurs et les Missisakis s’enfuirent dans le
nord, et puis a Kionconan(4) faute de chasse; et les Outaouas
craignants de n’estre pas assez forts pour soustenir les incursions
des Iroquois, qui estoient informez de l’endroit ou ils avoient fait leur
establissement, se refugierent au Micissypy, qui se nomme a present
la Louisianne. Ils monterent ce fleuve a douze lieues ou environ
d’Ouisconching, ou ils trouverent une autre riviere qui se nomme des
Ayoes(5). Ils la suivirent jusqu’a sa source et y recontrerent des
nations qui les receurent cordialement. Mais, dans toutte l’etendue
de pays qu’ils parcoururent, n’ayant pas veu de lieu propre a
s’establir, a cause qu’il n’y avait dutout point de bois, et qu’il ne
paroissoit que prairies et rases campagnes, quoyque les buffles et
autres bestes y fusses en abondance, ils reprirent leur mesme route
pour retourner sur leurs pas; et, apres avoir encore une fois aborde
la Louisianne, ils monterent plus haut.
Ils n’y furent pas longtemps sans s’ecarter pour aller d’un coste et
d’autre a la chasse: je parle d’une partie seulement de leurs gens,
que les Scioux rencontierent, prirent et ammenerent a leurs villages,
... et puis les rendirent a leurs gens.
Les Outaouas et Hurons les recurent fort bien a leur tour, sans
neantmoins leur faire de grands presents. Les Scioux estant revenus
chez eux avec quelques petites choses qu’ils avoient receues des
Outaouas, en firent part aux autres villages leurs alliez, et donnèrent
aux uns des haches et aux autres quelques cousteaux ou alaines.
Touts ces villages envoyerent des deputez chez les Outaouas(6).——
...
Les Scioux faisoient milles caresses aux Hurons et Outaouas
partout ou ils estoient.—— ... Les Outaouas se determinerent enfin a
choisir l’isle nommee Pelee pour s’establir; ou ils furent quelquees
annees en repos. Ils y receurent souvent la visitte des Scioux....
Les Hurons, ayant assez d’audace pour s’imaginer que les Scioux
estoient incapables de leur resister sans armes de fer et a feu,
conspirerent avec les Outaouas de les entreprendre et de leur faire
le guerre, afin de les chasser de leur pays, et de se pouvoir estendre
d’avantage pour chercher leur subsistance. Les Outaouas et les
Hurons se joignirent ensemble et marcherent contre les Scioux. Ils
crurent que sitost qu’ils paroistroient, ils fuiroient; mais ils furent
bien trompez; car ils soustinrent leurs efforts, et mesme les
repousserent, et s’ils ne s’estoient retirez ils auroient estez
entierement deffaits par le grand nombre de monde, qui venoient
des autres villages de leurs alliez a leur secours. On les poursuivit
jusqu’a leur establissement, ou ils furent contraints de faire un
mechant fort, qui ne laissa par d’estre capable de faire retirer les
Scioux, puisqu’ils n’oserent entreprendre de l’attaquer.
Les incursions continuelles que les Scioux faisoient sur eux les
contraignirent de fuir(7). Ils avoient eu connoissance d’une riviere
qu’on nomme la Riviere Noire; ils entrerent dedans et, estant arrivez
la ou elle prend sa source, les Hurons y trouverent un lieu propre
pour s’y fortiffier et y establir leur village. Les Outaouas pousserent
plus loin, et marcherent jusqu’au lac Superieur, et fixerent leur
demeure a Chagouamikon. Les Scioux, voyant leurs ennemis partis,
demeurerent en repos sans les suivre d’avantage; mais les Hurons
n’en voulurent point demeurer la; ils formerent quelques partys
contre eux, qui firent peu d’effect, leur attirerent de la part des
Scioux de frequentes incursions, et les obligerent de quitter leur fort
pour aller joindre les Outaouas a Chagouamikon, avec une grande
perte de leurs gens. Aussytost qu’ils furent arrivez, ils songerent a
former un party de cent hommes pour aller contre les Scioux, et s’en
vanger.
Il est a remarquer que le pays ou ils sont [les Sioux] n’est autre
chose que lacs et marests remplis de folles avoines, separes les uns
des autres par de petites langues de terre qui n’ont tout au plus d’un
lac a l’autre que trente a quarante pas, et d’autres cinq a six ou un
peu plus. Ces lacs ou marests contiennent cinquante lieues et
d’avantage en carre, et ne sont separes par aucune riviere que par
celle de la Louisianne, qui a son lit dans le milieu, ou une partie de
leurs eaux viennent se degorger. D’autres tombent dans la riviere de
Sainte Croix, qui est situee a leur egard au nord-est, et qui les range
de pres. Enfin les autres marests et lacs situez a l’ouest de la riviere
de Saint Pierre s’y vont jetter pareillement; si bien que les Scioux
sont inaccessibles dans un pays si marecageaux, et ne peuvent y
estre detruits que par des ennemis ayant des cannots comme eux
pour les poursuivre; parceque dans ces endroits il n’y a que cinq ou
six familles ensemble, qui forment comme un gros, ou une espece
de petit village, et tous les autres sont de mesme eloignez a une
certaine distance, afin d’estre a portee de se pouvoir prester la main
a la premiere alarme. Si quelqu’une de ces petites bourgades est
attaquee, l’ennemy n’en peut deffaire que tres peu, parceque tous
les voysins se trouvent assemblez tout d’un coup, et donnent un
prompt secours ou il est besoin. La methode qu’ils ont pour naviguer
dans ces sortes de lacs est de couper dedans leur semences, avec
leurs cannots, et, les portant de lac en lac ils obligent l’ennemy qui
veut fuir a tourner autour; qui vont tousjours d’un lac a un autre,
jusqu’a ce qu’ils les ayent tous passez, et qu’ils soient arrivez a la
grand terre.
Les cent hommes Hurons s’engagerent dans le milieu de ces
marests, sans cannots, ou ils furent decouverts par quelques Scioux,
qui accoururent pour donner l’alarme par tout. Cette nation estoit
nombreuse, dispersee dans toutte la circonference des marests, ou
l’on recueilloit quantite de folles avoines, qui est le grain de cette
nation, dont le goust est meilleur que celuy du riz.
Plus de trois mil Scioux se rendirent de touts costez, et investirent
les Hurons, ... de tout ce party, il n’en echapa qu’un(8).
...
Les Hurons, se voyant fort peu de monde, prirent le party de ne
pas songer a se venger et de vivre paisiblement a Chagouamikon
pendant plusieurs annees. Pendant tout ce temps la, ils ne furent
point insultez des Scioux, qui ne s’appliquerent uniquement qu’a
faire la guerre aux Kiristinons, aux Assiniboules et a toutes les
nations du nord, qu’ils ont detruits et desquels ils se sont aussy faits
detruire respectivement....
Le Pere Mesnard qu’on avoit donne pour missionnaire aux
Outaouas [1660], accompagne de quelques Francois qui alloient
commercer chez cette nation, fust abandonne de touts ceux qu’il
avoit avec luy, a la reserve d’un qui luy rendit jusqu’a la mort touts
les services et les secours qu’il en pouvoit esperer. Ce Pere suivit les
Outaouas au lac des Illinoets, et dans leur fuitte dans la Louisianne
jusqu’au-dessus de la Riviere Noire. Ce fut la qu’il n’y eust qu’un seul
Francois qui tint compagnie a ce missionnaire et que tous les autres
le quitterent. Ce Francois dis je suivoit attentivement la route et
faisoit son portage dans les mesmes endroits que les Outaouas; ne
s’ecartant jamais de la mesme riviere qu’eux. Il se trouva, un jour
[Aout 1661], dans un rapide qui l’entrainoit dans son cannot; le Pere
pour le soulager debarqua du sien, et ne prit pas le bon chemin pour
venir a luy; il s’engagea dans celuy qui estoit battu des animaux, et
voulant retomber dans le bon, il s’embarrassa dans un labyrinthe
d’arbres et s’egara. Ce Francois apres avoir surmonte ce rapide avec
bien de la peine, attendit ce bon Pere, et comme il ne venoit point,
resolut de l’aller chercher. Il l’appella dans les bois de touttes ses
forces, pendant plusieurs jours, esperant de le decouvrir, mais
inutilement. Cependant il fit rencontre en chemin d’un Sakis qui
portoit la chaudiere du missionnaire; qui luy aprist de ses nouvelles.
Il l’asseura qu’il avoit trouve sa piste bien avant dans les terres, mais
qu’il n’avoit pas vue le Pere. Il luy dit qu’il avoit aussy trouve la trace
de plusieurs autres qui alloient vers les Scioux. Il luy declara mesme
qu’il s’imaginoit que les Scioux l’auroient pu tuer ou qu’il en auroit
este pris. En effet, on trouva, plusieurs annees apres, chez cette
nation, son breviaire et sa soutanne, qu’ils exposoient dans les
festins en y vouant leurs mets, ... chasser du costez des Scioux, car
Chagouamikon n’en est eloigne, coupant par les terres en ligne
direct, que de cinquante a soixante lieues, ...
... on luy donna pour second M. de Lude [du Lhut] qu’il envoya
avertir [1684] a Kamalastigouia, au fond du lac Superieur, ou estoit
son poste(9)....
Je fus envoye a cette baye [des Puans, poste de Saint Francois
Xavier], charge d’une commission pour y commander en chef et
dans les pays plus eloignes du coste du ouest, et de ceux mesme
que je pourrois decouvrir [1685]....
Je ne fus pas plustot arrive dans les endroits ou je devois
commander, que je recus ordre de M. Denonville de revenir avec
tous les Francois que j’avois ... Je me trouvais en ce temps-la dans
le pays des Scioux ou la gelee avoit brise tous nos cannots; je fus
contraint d’y passer l’este [1686]....
Je fus pas terre chez les Miamis qui estoient a soixante lieues
environ de mon poste [dans le pays des Scioux], et m’ens revins par
terre de mesme que j’y estoit alle....
Quelques jours apres je m’en fus a travers les terres a la Baye
avec deux Francois. J’en rencontroit a tout moment qui
m’enseignoient le meilleur chemin et me regaloient fort bien(10)....

[2] Au lecteur. Dans ces extraits, le text que donne le Pere T. a

ete implicitement suivi; mais quant aux accents grammatiques, on
doit pardonner leur absence, puis ce qu’il n’y a pas encore de
type Francais dans les imprimeries de St. Paul.
H.

TRANSLATION.
 For the country of the north is the most ungrateful country in the
world, since, in many places, you would not find a bird to hunt; still,
blueberries are gathered there in the months of August and
September....
The Chiripinons, or Assiniboines, sow wild rice in their marshes,
which they afterwards gather, but they can only transport it home
during the period of navigation(1)....
The Kiristinons, who often frequent the shores of Lake Superior
and of the great rivers, where the elk are most commonly to be
found(2)....
The savages, called Sauteurs, [Chippewas] are on the south of
Lake Superior....
They have for neighbors and friends the Sioux, upon whose limits
they hunt, when they wish....
Advancing to the north, towards the entry of the Wisconsin, the
winter is extremely cold and long. It is there that the beavers are the
best, and the country where hunting lasts the longest during the
year....
They take, also, in winter, from under the ice, in marshes where
there is much mud and little water, a certain root; ... but it is only
found in Louisianne, fifteen leagues [4½ miles] above the entry of
the Wisconsin. The savages name this root, in their language,
Pokekoretch....
But the tribes the furthest advanced in the north, as far as the
latitude of the Wisconsin, do not have these medlars, and those who
are yet further, want also the nuts similar to the ones of France....
For this country [of the savages of the prairies] is entirely plains;
there are only some islands [oases] where it is their custom to camp
to dry their meat....
When the Ottowas had scattered towards the lakes [to
Mechingan(3)], the Sauteurs and the Missisakis fled to the north,
and then to Kionconan(4), for want of hunting; and the Ottowas,
fearing they were not strong enough to resist the incursions of the
Iroquois, who were informed of the place where they had made their
establishment, took refuse on the Mississippi, called at present the
Louisianne. They ascended this river to twelve leagues, or about [33
miles] from the Wisconsin, where they found another river that is
called [river] of the Ioways(5). They followed it to its source, and
there met nations who received them cordially. But, in all the extent
of country which they overran, having seen no place proper to
establish themselves, by reason that there was no wood there at all,
and that prairies and level plains were all that appeared, although
buffaloes and other animals were there in abundance, they returned
upon their steps by the same route; and, after having once more
reached the Louisianne, they ascended higher.
They were not there long without scattering, going from one side
to another for hunting: I speak of a portion, only, of their people,
whom the Sioux met and led to their villages, ... and then returned
them to the rest.
The Ottowas and Hurons received them very well in their turn,
without, however, making them any great presents. The Sioux
having arrived at home with some little matters that they had
received from the Ottowas, divided portions of them with the other
villages, their allies, and gave to the ones, hatchets, and to others,
knives or awls. All these villages sent deputies to the Ottowas(6)....
The Sioux received the Ottowas and Hurons in the best manner,
wherever they went.... The Ottowas at last resolved to choose the
island called Bald, [Pelee] to settle on; where they were several
years in repose. They often received there the visit of the Sioux....
The Hurons, having so much audacity that they imagined the
Sioux were incapable of resisting them without fire-arms and
weapons of iron, conspired with the Ottowas to make war upon
them, in order to drive them from their country, so as to be able to
spread themselves more, to procure means of subsistence. The
Ottowas and the Hurons joined together and marched against the
Sioux. They believed that as soon as they would appear, the others
would fly; but they were much deceived, for their attacks were
sustained, and they were even repulsed; and if they had not
retreated, would have been entirely defeated by the great number of
people who came from the other allied villages to the assistance of
the Sioux. They were pursued to their settlement, where they were
obliged to make a hasty fort, which, however, was sufficient to cause
the Sioux to retire;—not daring to storm it.
The continual inroads that the Sioux made upon them constrained
them to fly(7). They had known of a river called the Black River. This
they entered; and, having arrived where it takes its source, the
Hurons found there a place fit to fortify themselves in, and to
establish their village. The Ottowas, however, pushed beyond, and
reached Lake Superior, where they fixed their home at
Chagouamikon. The Sioux, seeing their enemies fled, remained in
peace, without following them any more. But the Hurons were not
content to stop there; they sent some parties against them, which,
however, making little impression, drew frequent incursions on the
part of the Sioux, and caused them to quit their fort to join the
Ottowas at Chagouamikon, with a great loss of their people. So soon
as they arrived there, they thought of forming a war party of one
hundred men to go against the Sioux, and to revenge themselves for
their former defeats.
It is to be remarked that the country where they are [the Sioux] is
nothing but lakes and marshes, filled with wild rice, separated, the
ones from the others, by little tongues of land, which, at the most,
from one lake to the other, are but thirty to forty steps, and, in many
cases, only five to six or a little more. These lakes, or marshes,
contain fifty or more leagues square, [19 or 20,000 square miles]
and are divided by no river but the Louisianne, which has its bed in
the middle, and into which a part of their waters is emptied. Others
fall into the river of Sainte Croix, which is situated, in respect to
them, to the north-east, and flows near them. Finally, the other
marshes and lakes, situated to the west of the river of Saint Peter,
throw themselves similarly into it. Thus, the Sioux are inaccessible in
that marshy country, and cannot be destroyed there, but by enemies
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