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Chapter 10 – Money and Banking

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					Chapter 10 – Money and
       Banking
      Cutler – Economics
        Section 1 – Money
• The Three Uses of     – Uniformity
  Money                 – Limited Supply
  – Medium of           – Acceptability
    Exchange          • Sources of
  – Unit of Account     Money’s Value
  – Store of Value      – Commodity Money
• 6 Characteristics     – Representative
  of Money                Money
  – Durability          – Fiat Money
  – Profitability
  – Divisibility
    Three Uses of Money
• Money: anything that serves as a
  medium of exchange, unit of
  account, and a store of value

• Three Uses of Money
  – Medium of exchange
  – Unit of account
  – Store of value
     Three Uses of Money
• Medium of Exchange
  – Anything that is used to determine
    value during the exchange of goods
    and services


• Alternative to a medium of
  exchange?
  – Barter: direct exchange of one set of
    goods or services for another
    Three Uses of Money
• Money as a unit of account
  – Means for comparing the values of
    goods and services
  – Comparing prices between stores
     Three Uses of Money
• Money as a store of value
  – Something that keeps its value if it is
    stored rather than used
  – You don’t have to spend every dollar
    you take in
  – You can put $ in savings and take it out
    when you need it at a later time
      Six Characteristics of
             Money
•   Durability
•   Portability
•   Divisibility
•   Uniformity
•   Limited Supply
•   Acceptability
    Six Characteristics of
           Money
• Durability
  – Using coins instead of wheat, olive oil,
    or other items that can disintegrate
    over time
  – Confused?
    • Dollar bills can easily be replaced…
    • Paper money can typically last at least a
      year in circulation
    Six Characteristics of
           Money
• Portability
  – Ability to take money anywhere
  – Transfer from one person to the next
    Six Characteristics of
           Money
• Divisibility
  – Breaking money up into smaller
    denominations
    • The $100 into 2 $50s or 5 $20s
    • Using a $20 to pay for something that is
      only $5
    Six Characteristics of
           Money
• Uniformity
  – $1 is always $1
  – Dried fish as money?
    • How much is a dried fish worth?
    • Size of the dried fish
    Six Characteristics of
           Money
• Limited Supply
  – Why isn’t sand valuable?
  – Federal Reserve controls the “SUPPLY”
    of money
    Six Characteristics of
           Money
• Acceptability
  – People must be willing to take your
    money
     Sources of Money’s
           Value
• Commodity Money
• Representative Money
• Fiat Money
     Sources of Money’s
           Value
• Commodity Money
 – Objects that have value in themselves
   and that are also used as money
          BELLRINGER
• On the front of our US Currency are
  the words “Federal Reserve Note”

        What does this mean?
           Section 2 –
     The History of American
             Banking
• American Banking           • Banking in the Early
  Before the Civil War         Twentieth Century
  – Two Views of Banking       – The Federal Reserve
  – The First Bank of the        System
    United States              – Banking and the Great
  – Chaos in American            Depression
    Banking                    – Banking Reforms
  – The Second Bank of the   • Banking in the Later
    United States              Twentieth Century
  – The Free Banking Era       – The Savings and Loan
• The Later 1800s                Crisis
  – Currency in the North      – Recent Trends
    and South
  – Unifying American
    Banks
  – The Gold Standard
  American Banking Before
       the Civil War
• Merchant Banks
 – Businesses that held your money and
   made loans
 – Problems?
   American Banking Before
        the Civil War
• Two Views of Banking
  – A need to establish a safe, stable
    banking system
  – Increase trade
  – Ensuring economic growth
• Federalist (Alexander Hamilton)
  – Strong Central Government
• Antifederalists (Thomas Jefferson)
  – Leaving power in the hands of the
    states
   American Banking Before
        the Civil War
• National Bank: a bank chartered, or
  licensed, by the national
  government

• The First National Bank of the
  United States
  – 1791, Congress establishes the Bank of
    the United States
  – 20 Year charter
   American Banking Before
        the Civil War
• First Bank of the United States
  – Hold tax money
  – Borrow money/regulate commerce
  – Representative Money
    • Gold and Silver Certificates
  – Ensure state banks had enough
    gold/silver
   American Banking Before
        the Civil War
• Succeeded in brining order and
  stability to American banking
• First Bank was controversial
• Hamilton dies – Nat. Bank loses
  main backer
• Charter runs out in 1811 (not
  renewed)
  American Banking Before
       the Civil War
• Chaos Ensues
 – State banks do not keep adequate
   reserves
 – Loss of confidence in banking
 – Printing of too much money
 – States charter banks without thinking
   of stability
   American Banking Before
        the Civil War
• Second Bank of the United States
 – Congress creates Second BoUS in 1816
 – Limited to a 20 year charter
 – Rebuilding of public confidence in Nat.
   banking
 – Surprise visits to banks with their
   gold/silver notes
     American Banking Before
          the Civil War
• Free Banking Era
 –   Bank runs and panics
 –   Wildcat Banks
 –   Fraud
 –   Many Different Currencies
         The Later 1800s
• 1860
 – 8,000 different banks had currency
 – No Fed role in currency
• Civil War made things worse
       The Later 1800s
• Greenbacks
 – Paper currency issued during the civil
   war by the federal government
• Cotton Backed Money
 – Confederates issued money backed by
   cotton
 – Poor Confederate economy made their
   money worthless
       The Later 1800s
• National Banking Acts of 1863 and
  1864 created three important
  powers
 – Charter Banks
 – Require adequate gold and silver
   reserves
 – Issue a single national currency
• Helped stabilize the US money
  supply
 – Eliminated the many different state
   currencies
        The Later 1800s
• The Gold Standard
 – Monetary system in which paper money
   and coins are equal to the value of a
   certain amount of gold
• Two Advantages
 – Set a definite value of the dollar
   • One ounce = $20
 – Currency only issued if the Treasury
   had gold
   • Prevented an unlimited printing of money
     by GOVT
          Gold Standard
• The gold standard fulfilled the
  essential requirements of a banking
  system
  – Stable currency with public confidence
      Banking in the Early
       Twentieth Century
• Gold standard helped stabilize
  American banking
• Still not central decision-making
  authority
      Banking in the Early
       Twentieth Century
• Central bank could
  – Help manage money supply for growth
  – Provide regulation over banks for
    stability
• Lacking adequate reserves, banks
  fail in 1907, GOVT decides to
  reinstate Central Banking.
      Banking in the Early
       Twentieth Century
• New form of Central Banking
 – Federal Reserve created by congress
 – Central bank lends to banks in times of
   need
        Federal Reserve
           Structure
• Member Banks
  – 12 Regional Banks
  – Nationally Chartered Banks required to
    join
• Federal Reserve Board
  – Oversight by Presidentially appointed
    people
• Short-term loans
  – Provide short term loans to member
    banks
• Federal Reserve Notes
   Banking and the Great
        Depression
• Risky loans to businesses and
  farmers
• VIDEO CLIP
• Unpaid loans and bank runs cause
  many banks to fail
         Banking Reforms
• FDIC
  – Federal Deposit Insurance Corporation
  – Insures customer deposits
• Created Fiat Currency
  – Federal Reserve had better control
    over the money supply
         BELLRINGER
• What is the Gold Standard?
         Section 3 – Banking
               Today
• Measuring the Money      • Types of Financial
  Supply                     Institutions
  – M1                       –   Commercial Banks
  – M2                       –   Savings and Loans
• Functions of Financial     –   Savings Banks
  Institutions               –   Credit Unions
  – Storing Money            –   Finance Companies
  – Saving Money           • Electronic Banking
  – Mortgages                – Automated Teller
  – Credit Cards               Machines
  – Simple and Compound      – Debit Cards
    Interest                 – Home Banking
  – Banks and Profit         – Automatic Clearing
                               House
                             – Stored Value Cards
  Measuring Money Supply
• Money Supply: All the money
  available in the United States
  economy.

• Different kinds of money are broken
  up as M1 and M2
 Measuring Money Supply
• M1
 – Money people can gain access to easily
   and immediately
 – 48% of M1 is held in cash outside of
   banks
• Demand Deposits
 – The money in checking accounts
 – Checks can be paid “on demand”
 Measuring Money Supply
• Other checkable deposits
 – Checking accounts that pay interest
• Travelers Checks
 – Small portion of M1
 Measuring Money Supply
• M2
 – All assets in M1 plus additional assets
 – Additional assets cannot be used as
   cash directly, but can be easily
 – “Near money”
• Savings accounts
 – Must go to the bank to get money first
   before making a purchase
 Measuring Money Supply
• Money Market Mutual Funds
 – Small savers who purchase short-term
   government and corporate securities
 – Checks must be written above a
   certain amount ($250)
     Functions of Financial
          Institutions
• Storing Money
 – Safe, convenient place to hold actual
   cash
 – Fireproof vaults
 – Insured against bank loss of money or
   robbery
       Functions of Financial
            Institutions
• Saving Money
 –   Savings Accounts
 –   Checking Accounts
 –   Money Market Accounts
 –   Certificates of Deposit (CDs)
    Functions of Financial
         Institutions
• Checking Accounts
 – Used for demand purchases
• Savings Accounts
 – Small interest rates
 – Easily accessible for customers
    Functions of Financial
         Institutions
• Money Market Accounts
 – Higher interest than Checking or
   Savings
 – Limited number of checks you can
   write
 – Minimum amount of withdrawal
• CDs
 – Guaranteed rate of interest
 – Locked in for a specific time frame
 – Penalty for early withdrawal
     Functions of Financial
          Institutions
• Loans
  – Giving deposited money out to
    customers and charging a fee (interest)
    for letting you use the money
• Profitable business
       How Banks Profit
• The largest source of income for banks is
  the interest they receive from customers
  who have taken loans.
• Interest is the price paid for the use of
  borrowed money.
                     Banks Operations
How Banks Make a Profit


                                                    Money leaves bank

Money enters bank                                       Interest and 
                                                       withdrawals to 
                                                         customers
  Deposits from 

                             BANK
   customers
                                                    Money loaned to 
                                                    borrowers:
   Interest from                                    • business loans
     borrowers                                      • home      
                                                      mortgages
                                                    • personal loans
 Fees for services

                                                    Bank’s cost of doing 
                                                    business:
                                                    • salaries
                           Bank retains required    • taxes
                                 reserves           • other costs
     Functions of Financial
          Institutions
• Fractional Reserve Banking
 – A banking system that keeps only a
   fraction of funds on hand and lends out
   the remainder
   Fractional Reserve
        Banking

Customer:          Customer:
 DEPOSIT            DEPOSIT
  $10,000            $8,000




Bank Lends 80%,   Bank Lends 80%,
  Keeps 20%         Keeps 20%
 Lends: $8,000     Lends: $6,400
  Fractional Reserve
       Banking

Customer:         Customer:
 DEPOSIT           DEPOSIT
  $6,400            $5,120




Bank Lends 80%,
  Keeps 20%
    $5,120
           Money Supply
• What effects does fractional baking
  have on the money supply?
  – Original Deposit
    • $10,000
  – By loaning 80%, new money is
    “Created”
  – New Money supply becomes $18,000
  – Then $29,520 after the banks are done.
      Money Supply


Customer:       Customer:
 DEPOSIT         DEPOSIT
  $10,000         $8,000




Customer:       Customer:
 DEPOSIT         DEPOSIT
  $6,400          $5,120
      Types of Financial
         Institutions
• Commercial Banks
 – Checking services, accept deposits,
   and make loans.
• Savings and Loan Associations
 – Originally chartered to lend money for
   home-building in the mid-1800s.
       Types of Financial
          Institutions
• Savings Banks
  – Serve people who make smaller
    deposits and transactions than
    commercial banks like to handle.
• Credit Unions
  – Cooperative lending associations for
    particular groups, usually employees of
    a specific firm or government agency.
      Electronic Banking
• Automated Teller Machines (ATMs)
  – Customers can use ATMs to deposit
    money, withdraw cash, and obtain
    account information.
• Debit Cards
  – Debit cards are used to withdraw
    money directly from a checking
    account.
• Automatic Clearing Houses (ACH)
  – An ACH transfers funds automatically
    from customers' accounts to creditors'
     Electronic Banking
• Home Banking
 – Many banks allow customers to check
   account balances and make transfers
   and payments via computer.
• Stored Value Cards
 – Stored value cards are embedded with
   magnetic strips or computer chips with
   account balance information.

				
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posted:10/10/2013
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