Economics

1. Economics Chapter 11 – Money and Banking

2. Evolution of Money • Barter economy- relies on trade of goods for goods; no money. Bartering was used before the advent of money! Bartering is still used in some societies and on micro levels.

3. What is Money? Any substance that functions as a medium of exchange, a measure of value and store of value.

4. What is money?/ Functions of Money • Medium of exchange: money, or other substances generally accepted in exchange. • Measure of value: money, a common denominator to measure value. • Store of value: retains value over time.

5. Money in Early Societies • 1. shells, dog teeth, fishhooks • 2. commodity money – money that has alternative use. i.e. fishhooks you could also use to fish with. • 3. first money- money by government decree, has very little value on its own

6. Money in Colonial America • 1. commodity money- gunpowder, corn, tobacco. • 2. Wampum 1645 Connecticut set monetary value for wampum- made from shells. • 3. Paper currency- some states allowed individuals to print their own paper currency – had to be backed by gold and silver • 1775- Continental currency

7. Wampum

8. Money in Colonial America • 3. Paper currency- some states allowed individuals to print their own paper currency – had to be backed by gold and silver • 1775- Continental currency • 4. Specie- • Coins, usually made from silver or gold. • Usually preferred by early settlers over paper money, because they contained gold or silver

9. Origins of the Dollar • New money established by the first Congress. Based on the pesos. • Bullions- ingots or bars of precious metals- or minted into coins. • Mexican pesos smuggled into the US.

10. “Talers” • Pesos divided into 8 bits, resembled the Austrian taler, which sounded like “dollars”. • Franklin and Hamilton decided dollar would be basic monetary unit – standard unit of currency • Instead of divided into 1/8’s (pesos) they divided it into 1/10’s.

11. Characteristics of Money • Portable: easily transferred • Durability: has to last when handled • Divisibility: easily divisible into smaller units • Limited availability- limited supply

12. Class/Homework • How does money advance the exchange of goods and services. • Describe three functions of money. • Name four types of early money. • Describe the four characteristics of money.

13. Early Banking and Monetary Standards • Privately issue bank notes • Congress power to make money (Constitution) • 1. Growth of State Banks • 2. Abuse in Banks • 3. Problems with Currency

14. Growth in State Banks • By 1811 approximately 100 banks existed in the US. • State banks- chartered by the state gov’t • Bank of the United States- chartered by the federal government

15. Abuses in Banking • Wildcat banks- printed money that was not backed by silver or gold

16. Problems with Currency • too many different kinds of money • Temptation to print too much money

17. The Greenback Standard • 1. 1861- Congress authorized printing of federal notes called greenbacks. • 2. National banks created- issued bank notes or national currency • 3. gold certificates- money backed by gold 1863

18. The Greenback Standard • 4. 1886- silver certificates- notes backed by silver • 5. 1890- treasury coin notes- paper currency redeemable in gold or silver

19. The Gold Standard • 1. basic unit of currency equivalent to a set amount of gold • 2. Two major advantages: • 1. people feel more secure about money • 2. prevents government from printing too much money

20. The Gold Standard • 3. Disadvantages • 1. growing economy needs a growing money supply • 2. too many people decided to exchange their notes for gold- deplete govt’s gold reserve • 4. US went off gold standard in 1934

21. Inconvertible Fiat Money Standard • 1. Money cannot be exchanged for gold or silver though people can own gold. • 2. government controls money supply: consists of mostly checking accounts, coins, and currency.

22. Class/Homework • Explain how privately issued bank notes became part of the money supply. • List the five major currencies in use after the Civil War. • Identify the advantages and disadvantages of the gold standard. • Describe the inconvertible fiat money standard that the US uses.

23. Development of Modern Banking

24. National Banking System • 1. National Bank requirements: • Use National in the title • Pass stiff inspections • Purchase government bonds • 2. Dual Banking • Charter from state and national banks

25. National Banking System • 3. Reform: • Took too long to clear checks • Currency backed by bonds were difficult to maintain • No place to go in time of need • 4. Federal Reserve System- created 1913 • Central bank= lends to other banks • All nat’l banks required to join others are allowed to join • Federal Reserve notes- our money today

26. Banking during the Great Depression • 1. Bank Failures • Too many banks between 1880-1921 • Start of Depression • 25,500 banks had no deposit insurance • Too many runs on the bank • March 5, 1933, FDR called for a bank holiday • Congress checked the banks • 10,000 closed or merged with other banks

27. Banking during the Great Depression • Federal Deposit Insurance: • Started protecting at $2,500/per year • Now $250,000/per bank account

28. Other Depository Institutions • 1. Commercial Banks • Catered to interest of businesses and commerce • Issued demand deposit accounts (checks) • 2. Thrift Institutions • Savings and loan associations • Savings banks

29. Other Depository Institutions • 3. Savings Banks: • Depositor- owned financial organization operated for benefit of depositors • Later sold stock; depositors don’t own now • Catered to smaller customers • NOW accounts– interest on checking

30. Other Depository Institutions • 4. Savings and Loan Associations • Home mortgages • 5. Credit Unions • Owned and operated by and for its members • Costs low • Share drafts– like checking account

31. Class/Homework • Why was the Federal Reserve System created? • Explain why the National Banking System was created. • Identify 3 depository institutions. • Complete note cards.

32. Crisis, Reform, and Evolution • Decade of Deregulation • After depression until late 1970’s tremendous amount of regulation’s on banks • 1980 deregulation started • Savings banks and savings and loans allowed to pay more interest than commercial banks. Commercial banks felt cheated.

33. Crisis, Reform and Evolution • Commercial banks could issue checking accounts but savings banks could not. The felt cheated. • 1980- DIDMCA Act Passed • Regulation Q- max interest rates were phased out. • Now accts could be offered anywhere • All institutions could borrow from Feds not just commercial bansk

34. Crisis, Reform, and Evolution • 1982- Garn-St. Germain Act • S and L and savings could issue credit cards, real estate loans and commercial loans.

35. Savings and Loan Crisis • 1980- 4600 Savings and loan • By 1988 only 3000 – caused by bankrupcy and mergers

36. 4 Causes of Failures • Deregulation- s & L not prepared to compete in these new markets • High interest rates- has made loans at 10% in the ‘70s, by the ‘80s rates had gone up to 15% - lost money • Inadequate capital- bad loans hit them hard- not enough in reserve • Fraud- reduced member of inspectors therefore a few companies committed huge fraud

37. Evolution in the 1990’s • - 1980s turbulent • -1990s caution watchword • Banks merged • Larger accounts • More services • Less differences between commercial banks, savings banks and savings and loans.

38. Class/Homework • Describe the four factors contributing to the S&L crisis. • The FDIC insures deposits up to 250,000 what would you do if you had 2M dollars?