Title: "Money, Banking, and Financial Markets"
Author: Lloyd B. Thomas
Length: 678 pages
Price: $79.06
Reading time: 30 hours
Reading rating: 3 (1=very hard, 10=very easy)
Overall rating: 4 (1=average, 4=outstanding)

Reviewed by Robert F. Mulligan

Special to the Asheville Citizen-Times

Scores of undergraduate money and banking textbooks are published each year, but Lloyd B. Thomas' new "Money, Banking, and Financial Markets" is a textbook with a difference. The author very wisely chose to write a policy-oriented text. His policy emphasis serves to keep the discussion grounded firmly in reality and while Thomas never skimps on theoretical rigor, he also avoids losing the reader with dull theoretical filler.

Though intended for use in undergraduate money and banking classes, this book can be read profitably by anyone wanting to deepen their understanding of the banking and finance industries.

This book is written in an especially clear style, but at a necessarily high level which may make it heavy going for some readers. Thomas provides a comprehensive text which displays encyclopedic knowledge, and would make a useful reference for bankers, economists, and financial analysts who need to keep abreast of financial esoterica. As any modern text should, Thomas gives especially in-depth, up-to-date coverage of financial deregulation and S&L crisis issues.

The chapters on the Fed's monetary policy instruments and the alternative explanations of the Great Depression are especially interesting. Thomas gives an excellent discussion of the Federal Reserve System's Open Market Operations, the primary vehicle the Fed uses on a day-to-day basis to control the U.S. money supply.

To tighten the money supply in order to control inflation, the Fed sells U.S. treasury bills to the public. People pay the Fed in money which the Fed then removes from circulation - the public gets the treasury bills, but now makes do with less money to buy goods and services.

Controlling the money supply in this manner prevents the upward pressure on prices which leads to inflation. When inflation is well under control, but the economy requires a stimulus, the Fed can perform the same operation in reverse, buying treasury bills from the public, and paying with money which increases the amount of money in circulation.

Thomas also gives an especially good discussion of the Fed's two other policy instruments, the reserve requirement and the discount rate. His discussion here is much more detailed than most other texts. He gives a very useful policy criticism about the Fed's discount rate policy. The discount rate is the interest rate the Fed charges to member banks to borrow to meet their required reserves. The Fed adjusts the discount rate in a very conservative manner, so when market interest rates rise during the expansion phase of the business cycle, it is usually very cheap for banks to borrow to meet their reserve requirements. This encourages banks to loan out more of their reserves, increasing the amount of money in circulation. The conservative discount policy promotes economic expansion when the economy is doing well anyway and when inflationary pressure is greatest.

In contrast, during a recession, when market interest rates are low, the discount rate tends to be high, simply because the Fed does not adjust it fully to counteract the business cycle. The relatively high discount rate in a recession discourages banks from borrowing reserves from the Fed as well as discouraging them from loaning out as much money as they would otherwise. During recessions, when it would be beneficial for the money supply to be larger, the Fed's conservative discount policy tends to make recessions more severe.

Robert F. Mulligan is visiting assistant professor of economics, finance, and international business in the College of Business at Western Carolina University. His research interests are monetary and international economics and he is a fierce fan of Clarkson University and ECHL ice hockey. For previously reviewed books, visit our web site at www.wcu.edu/cob/bookreviews/.