History of Central Banking - Lesson Demonstration (Transcript)

Activity introduction
Leah Kilfoyle, 12th grade economics teacher at Mountain Brook High School, Mountain Brook, Alabama: Every year, I get at the end of the year with seniors, trying to explain the role of the Fed and the money supply—they look at you like a deer in the headlights, like, "What are you talking about?" They can't really grasp [it].

But if you've got money in their hands, and the money was there and now it's gone, and they've got what would essentially be a piece of paper with the Treasury, with the security, they recognize [it]. We will actually calculate that. In the demonstration, we will calculate the money supply before the sale and after the sale.

The students have been studying the Great Depression and the Fed's role in that process. We'll have students actually participating in an open market operation in changing the money supply. So students will either have cash, or some type of representation for funds in a checking account.  I will be actually selling Treasury bonds or bills in the forms of pencils today and trying to show that the money supply will decrease as a result of the sale of those securities. Then we'll reverse the flow and actually do a purchase of some of those securities back to inject money into the economy.

Teacher: Okay. So our classroom economy here has $35,000 in cash, $30,000 in checkable deposits, $65,000. Okay. The economy is moving along. You all participate. You buy and sell goods in the marketplace. But we know that there are times when monetary policy is going to be used, and that means changing the money supply.

So, to show that, we're going to have a sale of these amazing government securities pencils, okay? The price has been set at $5,000. This is a $5,000 asset that’s available. Now, remember, you're going to buy this amazing pencil, and it's going to increase in value when it matures. So you're going to actually get more than the $5,000 principal that you put into this, okay?

So, if you've got the means—is there anyone willing and able to buy this asset? It's $5,000. Wait a minute. I see a taker. Now, Mr. Thacker, are you paying in cash or are you paying with a checking account?

Student 1: Cash.

Teacher: Okay. We have concluded our sale of these valuable treasury securities, also known as pencils. Now, there was $65,000 circulating in our economy that could be spent on goods and services, the things that you all do in your everyday lives. But now, because some of you chose to buy these assets for later, we have now removed money from the economy. We are now left with $30,000.

Now, I want you all to think about the Great Depression. Okay? Because I know we've talked about…the Fed was young, and might not have really understood how to use the tools of monetary policy the best. I want you to think about with this activity, this experiment. What difference could a change in the money supply done in the Great Depression?

Student 2: It could have helped the economy speed back up.

Teacher: How?

Student 2: More money, more cash...

Student 3: Less unemployment.

Student 2: ...in the hands of individuals.

Teacher: Okay. More money in the hands of individuals. Those individuals spend. The businesses where they spend their money take in that revenue. They've got to buy more inventory. They've got to hire more workers. Could that not necessarily prevented the Great Depression, but maybe made it what? Not a depression but a...?

Students: Recession.

Teacher: Recession. Hindsight is a good thing to have, but the importance here is for us to understand that we want to prevent anything like the Great Depression from happening again. So this is how the Federal Reserve can use its tools to try to stimulate the economy when it needs to for economic growth, or, as we did in the first instance, take that money out of circulation and slow it down.

Activity summary
Teacher: I think any time you get students involved in a lesson where they're a participant and they're more engaged in the activity, it helps some of those learners that do better with hands-on application. It helps them to really understand it more.

If we'd known then what we know now with monetary policy, perhaps the Depression would have been a recession and not such a devastating economic event in our country's history. So I want to try to tie back to that and that that's what the Fed is currently doing. They're doing it all the time to make sure that we achieve our goals of economic growth and price stability.