Money and Banking

1. Money and Banking Chapter 10

2. Money • Anything that serves as a medium of exchange, a unit of account, and a store of value

3. Three Uses of Money • Money as a Medium of Exchange • Money as a Unit of Account • Money as a Store of Value

4. Money as a Medium of Exchange • Is anything that is used to determine value during the exchange of goods and services. • Without money, people must barter; this is exchanging goods and services for other goods and services.

5. Money as a Unit of Account • A means for comparing the values of goods and services.

6. Money as a Store of Value Value German Inflation • Something that keeps its value if it is stored rather than used. • Does not work when economy experiences period of rapid inflation.

7. Currency • Coins and paper bills used as money

8. The Six Characteristics of Money • Durability • Portability • Divisibility • Uniformity • Limited Supply • Acceptability

9. Durability • Must be able to withstand physical wear and tear.

10. Portability • People need to take money with them.

11. Divisibility • Easily divided into smaller portions. Spanish doubloons Different denominations

12. Uniformity • Must be the same in what they will buy.

13. Limited Supply • Money must be limited in supply.

14. Acceptability • Everyone must be able to exchange the objects that serve as money.

15. Sources of Money’s Value • Commodity Money • Representative Money • Fiat Money

16. Commodity Money • Objects that have value in themselves and that are also used as money

17. Representative Money • Objects that have value because the holder can exchange them for something else of value

18. Fiat Money • Money that has value because the government has ordered that it is an acceptable means to pay debts

19. The History of American Banking Chapter 10 section 2

20. American Banking Before the Civil War • Banking debate started as part of larger debate about role of government in new nation.

21. Two views of Banking Federalist Anti-FEDERALIST • Strong central government. • Led by Alexander Hamilton. • National Bank • Power in the hands of the states. • Led by Thomas Jefferson. • Decentralized banking system

22. The First Bank of the United States • Federalists successful, Bank of the United States set up by Congress in 1791. • 20 year charter • Helped bring order and stability to American banking.

23. The First Bank of the United States • Bank only functioned until 1811. • Jefferson argued that it was not a power given to Congress by the Constitution. 1804

24. Chaos in American Banking • Banks issuing their own notes. • Inflation and mistrust. • http://www.swifteconomics.com/2010/02/28/cities-printing-their-own-money/

25. Second Bank of the United States • Chartered by Congress in 1816 to end chaos • Another 20 year charter • Renewal vetoed by President Jackson in 1832

26. Free Banking Era 1837-1863 • Bank runs and panics: widespread panic in which great numbers of people try to redeem their paper money. • Wildcat banks: banks with high rate of failure. • Fraud: banks collected gold / silver, issued notes, and fled. • Many different currencies.

27. The later 1800s • 8,000 banks issuing currency, no federal government currency.

28. Currency in the North and South • 1861 US Treasury issues its first paper currency. “greenbacks” • South issues currency backed by cotton

29. The Gold Standard • The gold standard, a monetary system in which paper money and coins are equal to the value of a certain amount of gold, was adopted in the 1870s.

30. The Federal Reserve System • This is the nation’s central banking system. • It serves as the nations central bank, it can lend to other banks in times of need. • It is made up of member banks, that belong to the Federal Reserve System.

31. Banking Reforms • 1933 Congress passed act to create Federal Deposit Insurance Corporation (FDIC), this is the government agency that insures customer deposits if a bank fails.

32. Banking Today Chapter 10 section 3

33. Measuring the Money Supply • The Money Supply: all the money available in the U.S. economy

34. M1 • M1 represents money that people can gain access to easily and immediately to pay for goods and services, liquidity. • Currency • Demand Deposits • Other checkable deposits • Traveler’s checks

35. M2 • Consists of all of M1 plus many other assets. • M1 • Savings deposits • Small denomination time deposits • Retail money market funds

36. Functions of Financial Institutions • Storing Money • Saving Money • Loans • Mortgages • Credit Cards • Simple and Compound Interest

37. Functions of Financial Institutions • Loans • Based upon fractional reserve system, banks only have to hold a certain % of what we deposit. • Mortgages • A loan to buy real estate, usually in 15, 25, or 30 year increments. • Simple and Compound Interest • Interest is the price paid for the use of borrowed money. Principal is the amount of money borrowed. Simple paid on principal only, compound on principal and interest.

38. Types of Financial Institutions • Commercial banks • Savings and Loan Associations • Savings Banks • Credit Unions • Finance Companies

39. Electronic Banking • ATM • Debit Card • Home Banking • Automatic Clearing House: automatic bill paying • Stored Value Cards: phone cards, id cards, gift cards

40. Many Forms of Money • Item 1 = $10-25 • Item 2 = $25-50 • Item 3 = $50-100