The Economics of Money Banking and Financial Markets Global Full Chapter
The Economics of Money Banking and Financial Markets Global Full Chapter
PART 1 Introduction 47
1 Why Study Money, Banking, and Financial Markets?......................................................... 48
2 An Overview of the Financial System...................................................................................... 68
3 What Is Money?.............................................................................................................................. 95
PART 1 Introduction 47
CHA P TER 1
Why Study Money, Banking, and Financial Markets? 48
Why Study Financial Markets?............................................................................................................. 48
The Bond Market and Interest Rates...................................................................................... 49
The Stock Market.................................................................................................................. 49
Why Study Financial Institutions and Banking?.............................................................................. 51
Structure of the Financial System.......................................................................................... 52
Banks and Other Financial Institutions.................................................................................. 52
Financial Innovation............................................................................................................. 52
Financial Crises..................................................................................................................... 53
Why Study Money and Monetary Policy?....................................................................................... 53
Money and Business Cycles................................................................................................... 53
Money and Inflation.............................................................................................................. 54
Money and Interest Rates...................................................................................................... 56
Conduct of Monetary Policy.................................................................................................. 56
Fiscal Policy and Monetary Policy......................................................................................... 57
Why Study International Finance?...................................................................................................... 58
The Foreign Exchange Market............................................................................................... 58
The International Financial System....................................................................................... 60
How We Will Study Money, Banking, and Financial Markets..................................................... 60
Exploring the Web................................................................................................................ 61
Concluding Remarks............................................................................................................................... 61
Summary 61 • Key Terms 62 • Questions 62 • Applied Problems 63 •
Data Analysis Problems 63 • Web Exercises 64 • Web References 64
CHA P TER 2
An Overview of the Financial System 68
Function of Financial Markets............................................................................................................... 68
Structure of Financial Markets.............................................................................................................. 71
Debt and Equity Markets....................................................................................................... 71
Primary and Secondary Markets............................................................................................ 71
Exchanges and Over-the-Counter Markets............................................................................ 72
Money and Capital Markets................................................................................................... 73
CHA P TER 3
What Is Money? 95
Meaning of Money.................................................................................................................................. 95
Functions of Money................................................................................................................................. 96
Medium of Exchange............................................................................................................. 96
Unit of Account..................................................................................................................... 97
Store of Value........................................................................................................................ 98
Evolution of the Payments System...................................................................................................... 99
Commodity Money............................................................................................................... 99
Fiat Money............................................................................................................................ 99
Checks.................................................................................................................................. 99
Electronic Payment.............................................................................................................. 100
E-Money............................................................................................................................. 100
APPLICATION Yield to Maturity and Bond Price for a Coupon Bond..................... 117
C h a pte r 4 W e b App e n d i x
Measuring Interest-Rate Risk: Duration
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CHA P TER 5
The Behavior of Interest Rates 131
Determinants of Asset Demand.........................................................................................................131
Wealth................................................................................................................................. 132
Expected Returns................................................................................................................ 132
Risk..................................................................................................................................... 132
Liquidity............................................................................................................................. 133
Theory of Portfolio Choice.................................................................................................. 133
Supply and Demand in the Bond Market.......................................................................................134
Demand Curve.................................................................................................................... 134
Supply Curve...................................................................................................................... 135
Market Equilibrium............................................................................................................. 136
Supply and Demand Analysis.............................................................................................. 137
Changes in Equilibrium Interest Rates.............................................................................................137
Shifts in the Demand for Bonds........................................................................................... 138
Shifts in the Supply of Bonds.............................................................................................. 141
C h a pte r 5 W e b App e n d i x 1
Models of Asset Pricing
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C h a pte r 5 W e b App e n d i x 2
Applying the Asset Market Approach to a Commodity Market:
The Case of Gold
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C h a pte r 5 W e b App e n d i x 3
Loanable Funds Framework
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CHA P TER 6
The Risk and Term Structure of Interest Rates 162
Risk Structure of Interest Rates..........................................................................................................162
Default Risk......................................................................................................................... 162
FYI Conflicts of Interest at Credit-Rating Agencies and the Global Financial Crisis 166
APPLICATION The Global Financial Crisis and the Baa-Treasury Spread............... 167
Liquidity............................................................................................................................. 167
Income Tax Considerations................................................................................................. 168
Summary............................................................................................................................. 169
CHA P TER 7
The Stock Market, the Theory of Rational Expectations,
and the Efficient Market Hypothesis 186
Computing the Price of Common Stock.........................................................................................186
The One-Period Valuation Model........................................................................................ 187
The Generalized Dividend Valuation Model......................................................................... 188
The Gordon Growth Model................................................................................................. 188
How the Market Sets Stock Prices.....................................................................................................189
APPLICATION Monetary Policy and Stock Prices.................................................... 191
APPLICATION The Global Financial Crisis and the Stock Market.......................... 191
The Theory of Rational Expectations..............................................................................................191
Formal Statement of the Theory.......................................................................................... 193
Rationale Behind the Theory............................................................................................... 193
Implications of the Theory.................................................................................................. 194
The Efficient Market Hypothesis: Rational Expectations in Financial Markets....................195
Rationale Behind the Hypothesis......................................................................................... 196
Random-Walk Behavior of Stock Prices............................................................................... 197
C h a pte r 7 W e b App e n d i x
Evidence on the Efficient Market Hypothesis
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CHA P TER 9
Banking and the Management of Financial Institutions 232
The Bank Balance Sheet.......................................................................................................................232
Liabilities............................................................................................................................. 232
Assets.................................................................................................................................. 235
Basic Banking............................................................................................................................................236
General Principles of Bank Management........................................................................................239
Liquidity Management and the Role of Reserves.................................................................. 239
Asset Management............................................................................................................... 242
Liability Management.......................................................................................................... 243
Capital Adequacy Management........................................................................................... 244
APPLICATION Strategies for Managing Bank Capital.............................................. 246
C h a pte r 9 W e b App e n d i x 1
Duration Gap Analysis
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C h a pte r 9 W e b App e n d i x 2
Measuring Bank Performance
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CHA P TER 1 0
Economic Analysis of Financial Regulation 261
Asymmetric Information as a Rationale for Financial Regulation............................................261
Government Safety Net....................................................................................................... 261
Global Where Is the Basel Accord Heading After the Global Financial Crisis? 268
Financial Supervision: Chartering and Examination............................................................ 269
Assessment of Risk Management......................................................................................... 270
Disclosure Requirements..................................................................................................... 271
C h a pte r 1 0 W e b App e n d i x 1
The 1980s Banking and Savings and Loan Crisis
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C h a pte r 1 0 W e b App e n d i x 2
Banking Crises Throughout the World
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CHA P TER 1 1
Banking Industry: Structure and Competition 280
Historical Development of the Banking System...........................................................................280
Multiple Regulatory Agencies.............................................................................................. 282
Financial Innovation and the Growth of the “Shadow Banking System”...............................283
Responses to Changes in Demand Conditions: Interest-Rate Volatility................................. 284
Responses to Changes in Supply Conditions: Information Technology................................ 285
FYI Bruce Bent and the Money Market Mutual Fund Panic of 2008 291
Financial Innovation and the Decline of Traditional Banking............................................... 292
Structure of the U.S. Commercial Banking Industry....................................................................295
Restrictions on Branching.................................................................................................... 296
Response to Branching Restrictions..................................................................................... 297
Bank Consolidation and Nationwide Banking...............................................................................298
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994........................... 299
What Will the Structure of the U.S. Banking Industry Look Like in the Future?.................. 300
Are Bank Consolidation and Nationwide Banking Good Things?......................................... 300
Global Comparison of Banking Structure in the United States and Abroad 301
Separation of Banking and Other Financial Service Industries................................................302
Erosion of Glass-Steagall...................................................................................................... 302
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999:
Repeal of Glass-Steagall.................................................................................................. 302
Implications for Financial Consolidation............................................................................. 303
CHA P TER 1 2
Financial Crises in Advanced Economies 313
What Is a Financial Crisis?....................................................................................................................313
Dynamics of Financial Crises...............................................................................................................314
Stage One: Initial Phase....................................................................................................... 314
Stage Two: Banking Crisis.................................................................................................... 315
Stage Three: Debt Deflation................................................................................................. 317
APPLICATION The Mother of All Financial Crises: The Great Depression............. 318
Stock Market Crash............................................................................................................. 318
Bank Panics......................................................................................................................... 318
Continuing Decline in Stock Prices..................................................................................... 319
Debt Deflation..................................................................................................................... 319
International Dimensions.................................................................................................... 320
Inside the Fed Was the Fed to Blame for the Housing Price Bubble? 323
Global The European Sovereign Debt Crisis 326
Height of the 2007–2009 Financial Crisis........................................................................... 327
Government Intervention and the Recovery................................................................................328
Short-term Responses and Recovery.................................................................................... 328
CHA P TER 1 3
Financial Crises in Emerging Economies 338
Dynamics of Financial Crises in Emerging Market Economies..................................................338
Stage One: Initial Phase....................................................................................................... 338
Stage Two: Currency Crisis.................................................................................................. 342
Stage Three: Full-Fledged Financial Crisis........................................................................... 343
CHA P TER 1 5
The Money Supply Process 386
Three Players in the Money Supply Process..................................................................................386
The Fed’s Balance Sheet.......................................................................................................................386
Liabilities............................................................................................................................. 387
Assets.................................................................................................................................. 388
Control of the Monetary Base............................................................................................................388
Federal Reserve Open Market Operations........................................................................... 389
Shifts from Deposits into Currency...................................................................................... 390
Loans to Financial Institutions............................................................................................ 391
Other Factors That Affect the Monetary Base....................................................................... 391
Overview of the Fed’s Ability to Control the Monetary Base................................................. 392
Multiple Deposit Creation: A Simple Model.................................................................................393
Deposit Creation: The Single Bank...................................................................................... 393
Deposit Creation: The Banking System................................................................................ 394
Deriving the Formula for Multiple Deposit Creation............................................................ 397
Critique of the Simple Model.............................................................................................. 398
Factors That Determine the Money Supply..................................................................................399
Changes in the Nonborrowed Monetary Base, MBn.............................................................. 399
Changes in Borrowed Reserves, BR, from the Fed................................................................ 399
Changes in the Required Reserve Ratio, rr........................................................................... 400
Changes in Excess Reserves................................................................................................. 400
Changes in Currency Holdings............................................................................................ 400
Overview of the Money Supply Process........................................................................................400
The Money Multiplier..........................................................................................................................401
Deriving the Money Multiplier............................................................................................ 401
Intuition Behind the Money Multiplier................................................................................ 403
Money Supply Response to Changes in the Factors............................................................. 404
C h a pte r 1 5 W e b App e n d i x 1
The Fed’s Balance Sheet and the Monetary Base
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C h a pte r 1 5 W e b App e n d i x 2
The M2 Money Multiplier
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C h a pte r 1 5 W e b App e n d i x 3
Explaining the Behavior of the Currency Ratio
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C h a pte r 1 5 W e b App e n d i x 4
The Great Depression Bank Panics, 1930–1933, and the Money Supply
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CHA P TER 1 6
Tools of Monetary Policy 411
The Market for Reserves and the Federal Funds Rate...............................................................411
Demand and Supply in the Market for Reserves.................................................................. 412
How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate...................... 413
Inside the Fed Using Discount Policy to Prevent a Financial Panic 423
Interest on Reserves............................................................................................................. 424
Relative Advantages of the Different Tools........................................................................... 424
Nonconventional Monetary Policy Tools and Quantitative Easing........................................425
Liquidity Provision.............................................................................................................. 425
Large-Scale Asset Purchases................................................................................................. 426
Inside the Fed Fed Lending Facilities During the Global Financial Crisis 427
Quantitative Easing Versus Credit Easing............................................................................ 428
Forward Guidance and the Commitment to Future Policy Actions...................................... 430
Monetary Policy Tools of the European Central Bank................................................................431
Open Market Operations..................................................................................................... 431
Lending to Banks................................................................................................................ 432
Reserve Requirements......................................................................................................... 432
Summary 432 • Key Terms 433 • Questions 433 • Applied Problems 434 •
Data Analysis Problems 435 • Web Exercises 435 • Web References 435
CHA P TER 1 7
The Conduct of Monetary Policy: Strategy and Tactics 436
The Price Stability Goal and the Nominal Anchor.......................................................................436
The Role of a Nominal Anchor............................................................................................ 437
The Time-Inconsistency Problem........................................................................................ 437
Other Goals of Monetary Policy........................................................................................................438
High Employment and Output Stability.............................................................................. 438
Lessons for Monetary Policy Strategy from the Global Financial Crisis................................451
Implications for Inflation Targeting..................................................................................... 452
Should Central Banks Try to Stop Asset-Price Bubbles?...........................................................453
Two Types of Asset-Price Bubbles........................................................................................ 453
The Debate Over Whether Central Banks Should
Try to Pop Bubbles......................................................................................................... 454
Tactics: Choosing the Policy Instrument..........................................................................................457
Criteria for Choosing the Policy Instrument........................................................................ 459
Tactics: The Taylor Rule........................................................................................................................460
Inside the Fed The Fed’s Use of the Taylor Rule 463
Inside the Fed Fed Watchers 463
Summary 464 • Key Terms 464 • Questions 465 • Applied Problems 466 •
Data Analysis Problems 466 • Web Exercises 467 • Web References 468
C h a pte r 1 7 W e b App e n d i x 1
Monetary Targeting
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C h a pte r 1 7 W e b App e n d i x 2
A Brief History of Federal Reserve Policymaking
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CHA P TER 1 9
The International Financial System 497
Intervention in the Foreign Exchange Market...............................................................................497
Foreign Exchange Intervention and the Money Supply........................................................ 497
Inside the Fed A Day at the Federal Reserve Bank of New York’s
Foreign Exchange Desk 498
Unsterilized Intervention..................................................................................................... 500
Sterilized Intervention......................................................................................................... 501
Balance of Payments..............................................................................................................................501
Global Why the Large U.S. Current Account Deficit Worries Economists 503
9. The eggs develop in the earth, and give rise to embryos which are
transferred whilst still in the egg-cell to the body of an animal. The
embryos hatch out and form bisexual parasites: examples, Oxyuris,
Trichocephalus.
10. The larvae live in insects, the sexual worms in water or in the
earth: example, Mermis.
12. The sexual form lives for a short time in the intestine of a
Vertebrate, and produces larvae which bore through the intestinal
wall and become encapsuled in the tissues: example, Trichina
spiralis.
13. The sexual animal lives in the trachea of birds; the ova
containing embryos are coughed up and are taken into other birds
with food. They quit the egg-shell and wander into the air-sacs, and
finally into the trachea: example, Syngamus.
14. There are two larval forms; the first lives in water, the second in
the lungs of Amphibia, whence they wander into the intestine and
become sexually mature: example, Nematoxys longicauda in Triton
alpestris.
Parasitism.
1. Effect of Parasitism on the Parasite.—The usual effect of
parasitism on the parasitic organism is that the various organs
necessary for a free life tend to degenerate, whilst there is a
multiplication and development of organs of adhesion, by means of
which the parasite maintains its hold on its host. There is further an
immense increase in the powers of reproduction, which may take the
form of an increase in the number of fertilised eggs produced, or the
parasite may at some time of its life reproduce asexually, by
budding, or fission, or parthenogetically.
In spite of the fact that the class as a whole shows but few special
modifications consequent on a parasitic mode of life, it is clear that
the Nematoda are peculiarly adapted for such a mode of life. Their
elongated thread-like bodies afford little resistance to the passage of
the food, which, as it passes through the intestine of the host, might
tend to carry the parasites out of the body. At the same time their
shape enables them to pierce and wriggle through the various
tissues without making any very serious lesions such as might prove
fatal to their host. Their extraordinary power of resisting desiccation
both in the egg and in the adult state vastly increases their chances
of ultimately hitting on the right host. They are capable of living in a
state of suspended animation for months, and even years when
dried (vide p. 136), and of resuming their activity on being
moistened.
The great faculty this group shows for living parasitically is evinced
by the extraordinary variety of life-history presented by the different
species. There is scarcely a stage which may not be parasitic; the
eggs, the larvae, the adults are all in some cases free, in others
parasitic, and in many cases first the one and then the other.
Until the last few years it has been customary to regard the
Gordiidae as a family of Nematodes. Although in external
appearance and life-history they closely resemble the members of
this group, yet recent research has shown so many important
morphological differences between them and the Nematoda, that
most zoologists are now agreed in placing them in a different sub-
Order, the Nematomorpha, a name first suggested by Vejdovsky.[204]
Fig. 82.—A water plant around which a female Gordius is twining and
laying eggs. a, a, Clump and string of eggs. (From von Linstow.
[205])
The body is in the younger stages practically solid, the interior being
filled with clearly defined polygonal cells which are arranged in
definite rows; in later life certain splits arise in this tissue which
subserve various functions; between these splits strands of tissue
are left which form mesenteries, and some of the cells remain lining
the muscular layer (Fig. 86). These cells have been described by
Vejdovsky as a definite somatic, peritoneal epithelium, but this was
not found by von Linstow. Besides forming the mesenteries, and
acting as packing between the various organs of the body, these
cells also form the ova and the spermatozoa.
The splits which have appeared when the animal has reached the
second larval stage, are two dorsal and a ventral; the latter contains
the alimentary canal, and may be termed the body-cavity, the former
will develop the generative organs. The mouth is occluded in the
older larvae, and in the adults there is a distinct but solid
oesophagus which passes into a tubular intestine. The intestine
consists of a single layer of cells surrounding a lumen; it runs straight
to the hinder end of the body, where it opens in both sexes with the
ducts of the reproductive organs.
The generative organs only attain maturity in the adult, which is, in
fact, exclusively devoted to reproduction. No trace of testes is found
in the larva, though the two dorsal splits from the walls of which the
spermatozoa will arise are present. They are lined by a definite
epithelium (Fig. 83), and this serves at once to distinguish them from
the body-cavity. Posteriorly the splits narrow and become the two
vasa deferentia which open one on each side into the cloaca. The
cells lining the lumen give rise to secondary cells, and these become
spermatozoa, the process extending from behind forwards. The
external organs—bursa, etc.—described by Vejdovsky were not
found by von Linstow.
In the female larva two similar splits are present; these form the egg-
sacs. Posteriorly they end in two short oviducts which open into a
uterus, in which fertilisation takes place, and in which the secretion
arises which cements the eggs together. In the adult the ovaries and
a receptaculum seminis are found, in addition to the organs present
in the larva. The ovaries are formed from modifications of the
packing tissue; they begin close behind the head, and soon attain
such dimensions as to compress the egg-sacs and body-cavity to
small slits. After a time the wall between the ovary and the egg-sacs
becomes absorbed, and the eggs grow into the latter. In the old
females, where the egg sacs are empty, there is a considerable
space round the exhausted ovary, into which eggs continue to fall
off; there is also a median dorsal canal which contains a few eggs.
By this time the wall between the ovary and the egg-sac has again
appeared.
One of the most interesting points about the female is that, according
to Vejdovsky, the ovary is segmented, the cells which form the ova
being heaped up in segmentally-arranged masses. This observation,
if correct, is almost the only instance of segmentation recorded in the
group Nemathelminthes.
Fig. 87.—Nectonema agile Verrill. A, The adult. Magnified. (After
Fewkes.) B, Longitudinal section through the head. × about 20.
(From Bürger.) a, Mouth; b, circumoesophageal commissure
(dorsal); c, cell of salivary gland; d, septum cutting off head from
rest of body; e, testis; f, ventral cord; g, oesophageal cells; h,
lumen of oesophagus; i, cerebral ganglion (ventral).
The only other genus which is associated with Gordius in the group
Nematomorpha is Nectonema, of which there is as yet but one
species known, Nectonema agile Verr.[207] Our knowledge of the
anatomy of this worm is due mainly to Bürger[208] and Ward.[209]
Nectonema is a marine worm found swimming near the surface of
the sea with rapid undulatory motion. The males are from 50 to 200
mm. long, the females from 30 to 60 mm. The body is faintly ringed,
and bears two rows of fine bristles on each side. Owing to a curious
torsion of the body through a right angle, the lateral bristles of the
anterior third seem to be placed in the ventral and dorsal middle line.
They are very easily broken off. The body is divided into a small
anterior and a large posterior chamber by a transverse septum
placed a little way behind the head. The anterior chamber contains
the brain and is lined by a definite epithelium, the posterior is not.
The layers of the skin correspond with those of Nematodes or of
Gordius, but the hypodermal cells show no cell outlines; still they are
not so modified as in the former group. The hypodermis is thickened
in the median dorsal and ventral line, and the single nerve-cord lies
in the latter.
Once free in the water the Gordius is soon sexually mature; the
fertilisation takes place in April, and then the female may be seen
twisting and writhing round the stems of water-plants and laying the
long bead-like strands of eggs (Fig. 82). The first deposition
observed by von Linstow took place on 14th April, the last on 2nd
August, and the period of egg-laying for each female extended over
four weeks. At first the eggs are snow-white, but within twenty-four
hours they turn brown in colour.
The development of the first larva within the egg takes about a
month. When it emerges from the egg-shell it is minute, .065 mm.
long, ringed anteriorly, and provided with a protrusible and retractile
boring apparatus consisting of three chitinous rods; round the base
of this piercing proboscis is a double crown of papillae, each bearing
a spine (Fig. 90).
Fig. 89.—The tail ends of a female Gordius (a) and a male (b) in
copula. × 1.5. (From G. Meissner.[212])
This first larval form breaks through the egg-shell and sinks to the
bottom of the water, where it moves about sluggishly and awaits the
arrival of the right host in which to take up its abode. This host is the
larva of the Alder-fly, Sialis lutaria Lin. (vide vol. v. p. 444), and into
this it bores and comes to rest in the muscles or the fat body. It does
not form distinct capsules. It remains in this larva during the following
winter, and in the spring passes over into the imago Sialis. The
complete insect frequents the small plants growing along the water's
edge, and falls an easy prey to the predaceous beetle Pt. niger. The
larva is eaten, and undergoing a change becomes the second larval
form mentioned above. It remains in the body of the beetle during
the second winter, and finally returns to the water as the adult some
eighteen or twenty months after it has been hatched from the egg.
The sex of the adults may be told from their colour, the males being
of a blackish brown, the females of a light clay brown; the former
average 120 mm. in length, the latter 170 mm. The males are also
more numerous, the proportion being seven to three. Camerano[213]
has drawn attention to the fact that there is a certain polymorphism
in size, form, and colour which is especially common amongst the
males; dwarf forms with mature reproductive organs exist, and he is
of opinion that these differences depend both on the size of the
second host and on the duration of the parasitic life.
In addition to the larva of Sialis lutaria, the first larval stage has also
been found in the larva of Ephemera, Tanypus, Corethra, and
Chironomus; the second in Carabus hortensis Fabr., Procerus
(Carabus) coriaceus Linn., Calathus fuscipes Goeze, Molops elatus
Fabr., several species of Pterostichus, and a number of other
beetles. It is probable that its normal hosts are S. lutaria and Pt.
niger, but it is clear that it often comes to rest in other insects. The
view that the Gordiidae have no special hosts, but may either pass
the whole of their life-history within one and the same animal, or, on
the other hand, may inhabit animals belonging to very different
groups, is held by Villot, who has paid great attention to the subject.
He finds the first larval form encysted in the walls of the alimentary
canal in fishes, such as Leuciscus phoxinus, the minnow, Cobitis
barbatula, the loach, and Petromyzon planeri, the lamprey; in the
larvae of Diptera, Ephemera, and beetles, in Planorbis (a water
snail), in Enchytraeus (an Oligochaet); the second larval form in all
kinds of insects, spiders, Crustacea, fish, frogs, birds (Otis), and in
man, and these various habitats lead him to the conclusion that "Les
Gordiens n'ont pas d'hôtes spéciaux." On the other hand, as von
Linstow points out, it is contrary to our knowledge of parasites that a
single species should develop equally well in the body of warm and
cold-blooded Vertebrates and of Insects, and the explanation of the
presence of the larvae in these various forms may either be that they
belong to different species of Gordius or, more probably, that they
are accidentally present, having passed into their hosts with drinking
water.
Fig. 91.—Tarsal joint of an Ephemerid larva into which two Gordius
larvae (a, a) have penetrated. Magnified. (From G. Meissner.)
All the spaces in the skin of the proboscis open ultimately into a
circular canal situated round its base; on each side the canal opens
into a sac-like structure which extends through the body-cavity
towards the posterior end of the animal. These two lateral diverticula
are termed the lemnisci. They have always attracted considerable
attention from the workers at the group, and numerous functions
have from time to time been attributed to them. They are more or
less hollow, and their walls consist of sub-cuticular tissue surrounded
with a scanty muscular coat; they contain the same fluid as the
lacunae of the skin of the proboscis, with which they are placed in
communication by means of the circular canal; and it seems most
probable that, as Hamann[216] suggests, they act as reservoirs into
which the lacunar fluid retires when the proboscis is retracted, and
which, by means of the contractions of their muscular coat, force the
fluid into the lacunae when the proboscis is everted, and thus aid in
its protrusion.