Unit 4: Money, Banking, and Finance

1. Unit 4: Money, Banking, and Finance Ch. 10: Money and Banking Ch. 11: Financial Markets

2. Chapter 10.1 • Bell Work: Grab workbook sheets • Complete: Unit 1 Warm-up (88 A-C) (105-6 A-E) • Complete Ch. 10 Warm-up (89 A-C) • “How does money serve the needs of our society?” • Objectives • 3 Uses of Money • 6 Characteristics of Money • Sources of money’s values • Key Terms • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch10/Econ_OnlineLectureNotes_ch10_s1.swf

3. Ch. 10 Introduction • How does money serve the needs of our society? • Provides means for comparing values of goods/services • Serves as a store of value • W/out wouldn’t be able to get wants/needs

4. 3 Uses of Money • Money is anything that can serve as…… • Medium of Exchange • Unit of Account • Store of Value

5. Bartering • W/out money, we would acquire goods/services through barter • Still used in many parts of world • Only in more traditional economies • Too difficult to est. value of bartered goods in a specialized economy • Money makes exchange EASIER • Provides means for comparing value of goods/services • Usually Money can serve as good store of value except in times of inflation

6. Currency • Coins and paper money • Past forms of currency • Cattle, salt, precious stones, fur, dried fish • Would not work well today b/c they lack at least one of six characteristics of Money • 6 Characteristics of Money • Durability • Portability • Divisibility • Uniformity • Limited Supply • Acceptability

7. Durability/Portability • Durability • Money must be able to withstand physical wear/tear • Portability • Needs to be easily carried • Paper/coins are small/light

8. Divisibility/Uniformity • Divisibility • Must be easily divided into small denominations • Uniformity • Must be able to be counted/measured correctly

9. Limited Supply/Acceptability • Limited Supply • Would lose value if unlimited • Fed. Reserve regulated supply of money in circulation • Acceptability • Must be accepted by everyone as exchange for goods/services

10. Sources of Value • Commodity Money: Objects of value to society • Representative Money: Rep. ownership of value • Fiat Money: Govt. says it is acceptable • Identify this source • http://www.youtube.com/watch?v=7GSXbgfKFWg

11. Lesson Closing • Frontline Video: The Warning • http://www.pbs.org/wgbh/pages/frontline/warning/view/?utm_campaign=viewpage&utm_medium=grid&utm_source=grid • Complete Workbook • Pgs. 90,15 • HW/Bell Work for tomorrow • Complete S.1 Quiz

12. 10.2 Bell Work Books/Folders Complete S.1 Quiz

13. 10.2 • “How has the American banking system changed to meet new challenges?” • Objectives • Shifts bt. Centralized/decentralized banking before Civil War • How govt. reforms stabilized banking system in 1800s • Developments in early 1900s banking • Causes of 2 recent banking crises • Key Terms • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch10/Econ_OnlineLectureNotes_ch10_s2.swf

14. Introduction • How has the American banking system changed to meet new challenges? • Early people distrusted banks • Banks have worked a lot to increase American Trust • American Banking has developed to meet needs of growing and changing population

15. Banking before Civil War • Early banks were informal businesses that merchants managed in addition to their regular trade • Post Revolution, nations leaders had idea • Est. a safe, stable banking system • Led to tireless disagreement on how to organize nat’l banking system • 2 Views • Federalists: Wanted centralized banking system • National bank • Anti-federalists: Opposed plan • Decentralized banking; owned/regulated by each state

16. 1st Bank of US • Federalists won the 1st debate in 1791 • Est. Bank of U.S. w/20 year charter for operations • Anti-federalists argued bank unconstitutional and was set up only for wealthy • Bank functioned well until 1811 when charter ran out • State banks then took over • Led to chaos/confusion • Banks issued notes w/out specie to back it up • Banks issued different currencies

17. 2nd Bank of U.S. • To eliminate chaos, 2nd bank chartered in 1816 • Stability greatly restored • Many still feared Banks powers • 1832, Congress tried to renew charter • Andrew Jackson vetoed renewal • Led to Free Banking Era

18. Free Banking Era • State chartered banks expanded from 1837-63 • Large number led to many problems • Bank runs/panics • Often not enough gold/silver to back notes issued • Led to bank runs: people trying to collect all at same time • Wildcat banks (poorly financed/high rate of failure) • Located in remote places where only “wildcats” lived • Fraud • New banks would issue notes for gold/silver then run off • Different currencies • Differing currencies from states/cities led to confusion and more fraudulent imitations

19. Stability of Later 1800s • Banking Acts of 1863 and 1864 • Gave federal govt. power to: • Charter Banks • Require banks to hold adequate amount of gold/silver reserves • Issue a national currency • 1870s • Nation adopted gold standard • Set a definite value for the dollar • 1 oz. gold =$20 • Gave public a stable currency and gained public confidence

20. Banking of Early 1900s • Problems persisted despite stabilizing efforts • Led to Federal Reserve Act of 1913 • Est. Federal Reserve System; reorganizing bank system • 12 regional Reserve Banks • All nat’l charted banks required to be members • Federal reserve board • People to supervise banks; appt. by president • Short-Term Loans • Each regional reserve allowed member banks to borrow to meet short term demands; helped prevent failures in face of panics • Federal Reserve notes • Created currency used today, allowed them to increase/decrease supply as needed

21. Banking and Great Depression • Fed. Was unable to prevent Great Depression • FDR acted to restore system in 1930s • Est. FDIC to insure customer deposits if bank failed • Changed currency to Fiat money so Fed could better control the supply

22. Two Crises for Banking Savings/Loan Sub-Prime Mortgage • 1970s-1980s Many industries Deregulated • Led to crises for S/L; wasn’t prepared for competitions • High interest rates and risky loans added on • 1989 congress passed legislation to abolish independence of S/L industry • Mortgage companies and banks lent $ to people who couldn’t afford to pay them off • Interest rates increased and led to foreclosures • Ripple effect hit banks and creditors hard and led to recession • Led to 2008 Bailout of banks, auto-makers, and financial firms

23. Lesson Closing • Workbook pages • 91 and 23 • S2 Quiz for tomorrow • Finish “Warning Video”

24. 10.3 Bell Work Watch 2 Online Sources Visual Glossary Action Graph Finish Sect. 2 Quiz

25. 10.3 • “What banking services to financial institutions provide?” • Objectives • How money supply in U.S. is measured • Functions of Financial institutions • Different types of Financial Institutions • Changes brought by electronic banking • Key Terms • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch10/Econ_OnlineLectureNotes_ch10_s3.swf

26. Introduction • What banking services do financial institutions provide? • Financial Institutions • Provide electronic services • Issue credit cards • Make loans to businesses • Provide mortgages to prospective home buyers • Manage ATM machines

27. Measuring Money Supply • To keep track of different types economists divide money into categories • M1 represents money that people can gain access to easily. Have liquidity (converted to cash easily) • Currency held by public • Deposits in checking accounts • Traveler’s checks • M2: all assets in M1 plus several additional assets. Cannot be converted to cash as easily • Called Near Money; Savings, mutual funds, CDs

29. Functions of Financial Institutions • Provide wide range of services • Storing money • Provide safe place to store money • Saving Money • Offer people ways to save money though: • Savings accounts • Checking accounts • Money market accounts, allow people to save and write limited amount of checks • CDs, offer guaranteed rate of interest but cannot be removed for period of time

30. Functions of Financial Institutions • Loans • Lend money to people and charge interest on loans • Loans help consumers: • Buy homes, pay for college, start/grow businesses • Many banks loan money to other financial institutions/individuals • Called Fractional Reserve Banking • Mortgages/Credit Cards • Specific type of loan to buy real estate • Banks also issue credit cards • Owners can buy goods/services w/promise to repay • Often have high interest rate

31. Simple and Compound Interest • Interest is price paid for use of borrowed money • Principal is amount borrowed • Simple Interest • Amount of interest paid only on the principal • Compound interest • Amount paid on both principal and gained interest • Interest is how banks make money! • They take in more than they pay out

33. Types of Financial Institutions

34. Electronic Banking Has Increased with the increasing importance of computers

35. Lesson Closing • Finish Online Videos • How the Economy Works • Case Study • Finish Any of Open workbook • Test Friday • Review/Work Day tomorrow