Money and Banking MONEY AND BANKING Chapter 10 MONEY  Money

Document Sample
Money and Banking MONEY AND BANKING Chapter 10 MONEY  Money Powered By Docstoc
					MONEY AND BANKING
Chapter 10
MONEY
           Money is anything that serves as a
            medium of exchange, unit of account
            or store of value
           Medium of exchange- determines
            value during exchange of goods and
            services
           Without money goods and services
            acquired through barter
           As economy becomes more specialized
            bartering becomes too difficult and
            time consuming
           Money as a unit of account-
            provides means of comparing value of
            goods and services (dollars, Euros,
            rubles, pesos)
           Money as a store of value- keeps
            value if you decide not to spend it,
            always recognized as a medium of
            exchange
           Exception is when there is inflation,
            does not work well as a store of value
SIX CHARACTERISTICS OF MONEY
    Currency- coins and paper bills used as
     money
    Various objects through human history used
     as money
    Six Characteristics
1.    Durability- must withstand wear and
      tear
2.    Portability- needs to be easily carried
3.    Divisibility- easily divided into smaller
      units, needs various denominations
4.    Uniformity- needs to be the same in
      terms of what it will buy, be able to count
      and measure accurately
5.    Limited Supply- too much in circulation,
      it looses value
6.    Acceptability- must be able to be
      exchanged for goods and services
SOURCES OF MONEY’S VALUE
   Commodity Money- objects that have value in and of
    themselves (salt, cattle, precious stones) and have other
    uses as well
   Not portable, durable or divisible
   Only works in simple economies
   Representative Money- objects with value because they
    can be exchanged for something else
   Paper receipts that could be exchanged for gold or silver
    were an early form of money
   Fiat Money- money valuable because government said it
    can be redeemed for debt
   Has value and is limited in supply
AMERICAN BANKING
            Early banks in US were unstable,
             money was unreliable
            Banks were independent, many
             worried that government would own
             banks (American tradition of distrust
             of central government)
            Late 1800’s gold standard gave
             money value
            It was in limited supply and paper
             money could be redeemed for it at
             any time
            Panic 1907 occurred because not
             enough gold to back currency in
             circulation, showed economy needed
             central banking system to avoid
             system in the future
FEDERAL RESERVE SYSTEM
               1913 Federal Reserve Act passed
           A.     Federal Reserve System served as nations first
                  central bank and reorganized banking system
           B.     Created regional banks that store cash reserves
                  for member banks
           C.     Regional feds loan money to member banks to
                  prevent bank panics
           D.     Created national currency and allowed Federal
                  Reserve to regulate money supply
           E.     Federal Reserve Board supervises all banks in
                  the US
               Unable to prevent Great Depression (kept money
                supply too low to prevent inflation)
               1933 banking reform passed during the New
                Deal
               Glass Stegall Act separated banking and
                finance industries, regulated interest rates
               Established Federal Deposit Insurance
                Corporation that covered losses if banks fail up
                to a certain amount ($200,000 today)
BANKING IN THE LATER 20TH CENTURY
   Banks closely regulated from 1930’s-1960’s
    restrictions on interest rates and loans to customers
   Late 1970’s and early 80’s banks became deregulated
   Contributed to Savings and Loan (S&Ls) crisis in the
    late 1980’s
   S&Ls unprepared to deal with lack of regulation
   1980’s interest rates went up and S&Ls had too many
    low interest loans
   Made risky loans
   Many made bad loans to failed businesses
   1999 Glass-Stegall Act repealed it allowed banks to
    buy and sell stocks and bonds and established new
    privacy rules for banks
BANKING TODAY
           Money supply- all the money in the
            US economy
           Divided into several categories, two
            main categories M1, M2
           M1- represents money people have
            easy access to
          A. Consists of assets that have
              liquidity (assets that can be
              directly converted into cash)
          B. 48% is held by people outside of
              bank vaults
          C. Money in checking accounts is M1
              money
           M2- all assets in M1 and additional
            assets
           Additional funds called near money
            (deposits in savings accounts,
            money market mutual funds)
FUNCTIONS OF FINANCIAL INSTITUTIONS
                   Banks and financial institutions
                    essential to managing money
                    supply, largest source income from
                    interest received from loans
               A.     Storing Money- provide safe
                      place to store money
               B.     Saving money- savings
                      accounts, checking accounts,
                      money market accounts,
                      certificates of deposit
               •      Money market accounts and CDs
                      pay higher rate of interest than
                      other accounts
               A.      Loans- banks make profit
                      lending deposits to borrowers and
                      charging interest
                   Fractional reserve banking
                    (keeps a fraction of funds on hand
                    and lends rest out) banks today
                    operate under this principle
 FUNCTIONS OF FINANCIAL INSTITUTIONS
 Loans- more money banks lend out
  more money they make
 Failure to payback loan called default
  and bank loses money
E. Mortgage- specific type of loan used
    to buy real estate
   Terms of loan 15-30 years
E. Credit cards- entitles holders to but
    goods and services based on promise
    to pay for them
 Simple and Compound Interest-
  interest is price paid for borrowed
  money
 Simple interest paid only on principal
 Compound interest paid on principal
  and accumulated interest
TYPES OF FINANCIAL INSTITUTIONS AND ELECTRONIC
BANKING
                  Commercial banks- provide wide variety of
                   services from checking and savings accounts
                   to loans
                  Most are regulated by the federal government
                  One third are part of the federal reserve
                   system
                  Savings and loan associations- originally
                   chartered to provide funds to members for
                   home loans
                  Credit Unions- cooperative lending
                   associations for employees of a specific group
                  Finance companies- make installment
                   loans to customers, usually for people with
                   poor credit, interest rates are high
                  Electronic Banking
                  Use of computers has increased dramatically
                   in banking since 1970’s
                  ATMs, debit cards, internet banking,
                   automatic clearing houses (automatic draft
                   from bank accounts to pay bills), stored value
                   cards (gift cards)

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:45
posted:5/18/2012
language:English
pages:11
fanzhongqing fanzhongqing http://
About