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Ch 10 Money.ppt - NSocialStudies

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									                               Chapter 10


Catch Me if you can, scene 9
          Table of Contents
•   What is Money
•   Timeline
•   Federal Reserve
•   Money Slide Show
•   Inflation
•   Could you survive
•   Taxes
• Anything that serves as a medium of
  exchange, a unit of account, and store
  of value

• Without money, people get things from
• The direct exchange of one set of goods
  or services for another

• Usually works only in small populations

    Problem with Bartering
• Have to find someone who wants what
  you have AND who you want what they
     Problem with Bartering
• Both products have to be ―equivalent in
  the eyes of the owners‖
• You have: Cow
• Someone else: 2 Chickens
• Coins and paper bills used as money

• (historical examples: cattle, salt, dried
  fish, furs, precious stones, gold, silver,
  porpoise teeth, rice, wheat, shells,olive
• An institution for receiving, keeping and
  lending money
Three Uses/ Functions of Money
• Medium of Exchange
• Unit of Account
• Store of Value
      Medium of Exchange
• People accept money in trade for goods
  and services
          Unit of Account
• Also known as VALUE
• A means for comparing the values of
  goods and services
           Store of Value
• Something that keeps its value if it is
  stored or held on to rather than used

• (exception= inflation)
    Six Characteristics of Money
•   Durability
•   Portability
•   Divisibility
•   Uniformity
•   Limited Supply
•   Acceptability
• Can withstand wear and tear
• Used over and over again

• BAD examples: Wheat, Olive oil
• Can take it anywhere

Bad example: cows, boulder
• Can be easily divided into smaller

• Bad Example: stones
• Any 2 units of money must be the same
  for accuracy

Bad example: fish
           Limited Supply
• If too much , then No longer useful

• Bad example: Pebbles, Sand
• Able to exchange the objects that serve
  as money for goods and services
   Three Sources of Money
• Commodity Money
• Representative Money
• Fiat Money
        Commodity Money
• Objects that have value in themselves
  and that are also used as money

• Good example: salt, corn, cattle, cotton,
     Representative Money
• Objects that have value because the
  holder can exchange them for
  something else of value

• Good example: IOU, silver, gold
             Fiat Money
• Legal tender
• Money that has value because the
  government has ordered that it is an
  acceptable means to pay debts

• Good example: coins, paper money
Events in American Banking
Date    Event in American Banking

1776    American Revolution
1775 – To finance the American Revolution, the Continental
            Congress printed the nation’s first paper money,
            which became known as “Continentals.”

        Unfortunately, they produced too much, it led to
            Inflation, making it ―utterly worthless‖—their
            phrase was “Not worth a Continental”
1775 –    Debate over Role of Government Bank:
1791      Federalists               2) Anti-Federalists
(cont.)   Strong Central Government        Power to the states

          Centralized Banking              Decentralized Banking
          System                           System

          Supported by:                    Supported by:
             Alexander Hamilton                Thomas Jefferson
                                                (Andrew Jackson)

          ***It is NOT specifically stated in the Constitution
          to establish a national Bank***
1791 Congress established the First National Bank of the
      United States, headquartered in Philadelphia, with
      Alexander Hamilton in charge!

      Most people felt uncomfortable about the Bank.

      In 1811, the charter (license to operate) was NOT
1819    Congress rules the National Bank is

1816 - In 1816, Congress issued a new charter for the
1836 Second Bank of the United States to eliminate
        chaos caused by state banks.

        Andrew Jackson was against this. Unfortunately,
        in 1828, he became President of the U.S.

        When the bank was up for renewal in 1836, he did
        NOT renew the charter.
1836 – State-chartered banks and unchartered banks began
1865   issuing Specie (any monetary gold or silver—coins or

        Sometimes referred to as the “Wildcat Era.” Wildcat
        banks were located at the edge of town with a high rate
        of failure.
        Other issues: bank runs, no government regulations,
        many currencies.
By 1860: Approximately 8,000
different currencies existed in
       the United States
1861 Civil War begins

     United States Treasury issues 1st paper currency since
     the Continental, called Greenbacks (paper currency for
     the North printed with Green ink.) The South’s
     currency was backed by cotton.
1863 - Establishment of the National Banking Act of
       1863, which allowed the Federal government to
       chartered banks and required adequate gold and
       silver to cover their banknotes.

       An amendment to created a uniform currency
       for the nation. Chaos occurred because not only
       was there a national bank, but there was also
       state banks.
1863 - Meanwhile, Bank runs (unexpected cash
1893   withdrawals) continued to occur because the banks
       only carried a small percentage of deposits on hand
       and did NOT have enough to cover large amounts
       of deposits in a short amount of time.

        This caused many banks to fail / go bankrupt!

        Establishment of the Gold Standard (A monetary
        system in which paper money and coins are equal
        to the value of a certain amount of gold)
1893   A banking panic triggered the worst Depression

          in history up until this time, which was mainly

          caused by:

       1) failure of businesses / banks,

       2) widespread unemployment

       3) falling prices and wages.
1893    The economy stabilized only after the intervention
             of the financial mogul J.P. Morgan.
1907   A severe banking panic was caused by
       Speculation (definition: practice of buying or selling
       stocks, commodities, land, or other assets hoping to
       take advantage of an expected rise or fall in price).

       J.P. Morgan was called upon to avert disaster.

       As a result, people began to ask for a change in the
       central banking system.
******** President Woodrow Wilson aided in the
         establishment of the Federal Reserve System
         (FED), the nation’s new decentralized central
         banking system

1914-    World War I
 Who was the U.S. President
    from 1929 – 1933?

• Herbert Hoover
          Herbert Hoover
• Hoover Hotel: Cardboard Box

• Hoovervilles: Multiple cardboard boxes

• Hoover Flag: Empty pockets turned
  inside out
1929 - October 1929, the stock market Crashed
1933   causing the U.S. to go into the worst
        Depression in its history. From 1930 until
        1933, 10,000 banks failed! In March 1933,
        President Franklin D. Roosevelt (FDR)
        declared a bank holiday because he
        wanted to close banks to avoid more ―runs‖
        on the banks. Some people believed the
        Federal Reserve (FED) was to blame
        for not pursuing policies to lessen the
        economic severity.
1933 Congress passed the Banking Act of 1933 also
      known as Glass-Steagell Act, including:

      1) The establishment of the Federal Deposit
         Insurance Corporation (FDIC), which created
         the government’s responsibility of deposits
         (today for up to $100,000) if the bank fails.

      2) Placed Open Market Operations under the

      Also, the gold standard ended.
1935    The Banking Act 1935 called for further
        changes to the Fed’s structure, including:
          1) The creation of the Federal Open Market
            Committee (FOMC) as a separate legal entity
          2) Establishment of members’ terms at
             14 years.

1939-   World War II

1945    Employment Act added the goal of promoting
          maximum employment to list of the Fed’s
1950-   Korean Conflict
        Vietnam Conflict
        (Longest U.S. involvement in history)

        Inflation skyrocketed as producer and consumer
        prices rose, especially including the prices of
        Oil soared.

        The federal deficit more than doubled.
       Humphrey-Hawkins Act required the Fed chairman
1978      to report to Congress twice annually on
          monetary policy goals and objectives.

1980   Monetary Control Act of 1980 required the Fed to
          establish reserve requirements for all eligible
          financial institutions
1990’s October 19, 1987, two months after

       Alan Greenspan became the Fed Chairman, the
       stock market crashed! Greenspan ordered the
       Fed to issue a one-sentence statement before
       the start of trading on October 20:

       ―The Federal Reserve, consistent with its
       responsibilities as the nation’s central bank,
       affirmed today its readiness to serve as a source
       of liquidity to supports the economic and
       financial system.‖
1990’s This decade was marked by generally declining
        inflation and the longest peacetime economic
       expansion in our country’s history (10 years of
Sept.   Terrorist attacks on New York, Washington,
2001    and Pennsylvania.

        The Fed issued a one-sentence statement
        reminiscent of its announcement in 1987:

           ―The Federal Reserve System is open and
           operating. The discount window is available
           to meet liquidity needs.‖
Sept.     In the days that followed, the Fed lowered
2001      interest rates and loaned more than $45 billion
(cont.)   to financial institutions in order to provide
          stability to the U.S. economy.
• 6.1.12D
The Federal Reserve
    The Federal Reserve (FED)
   Is in charge of the nation’s monetary policy

   Influences Amount of Money and Credit in
    the U.S. economy, which can effect interest
    rates (which can alter the inflation rate)
     Monetary Policy Goals

A) Sustainable economic growth

B) Full employment (4.5 – 5.5% unemployment)

C) Stable prices
    Monetary Policy Tools

A) Open Market Operations

B) Discount Rate

C) Reserve Requirements
    Open Market Operations

• Buying and selling of U.S. securities
            Discount Rate

•   Interest rate charged by the Fed to
    depository institutions on short-term
     Reserve Requirements

•   Portions of deposits that banks must
    maintain in vaults or on deposits at the
         The Business Cycle



Expansionary Monetary Policy Tools

1) Open Market operations: Bond Purchases

2) Discount Rate Decreases

3) Reserve Requirements Decreases
 Contractionary Monetary Policy Tools

1) Open Market operations: Bond Sales

2) Discount Rate Increasing

3) Reserve Requirements Increasing
The Federal Reserve System
The Federal Reserve System

                 Board of Governors

                    Federal Open
       Federal       Committee
       Reserve        (FOMC)

 Member Banks                Other Depository Institutions

                 American People
                FED Facts…
• Created by the Federal Reserve Act of 1913

• There are 12 Federal Reserve Banks in the U.S.

• Pennsylvania is located in 2 districts (# 3 & 4)

• Northampton is located in District 3

• Money from District 3 goes to Philadelphia
    Federal Reserve Banks
• This block is also known as “the
 banker’s bank”

• Purposes: Stores currency & coin,
 processes checks and electronic
           Board of Governors
• Located in: Washington, D.C.

• There are 7 Governors

• Governors are appointed by the President of the U.S., and
  confirmed by Congress

• Each Governor serves a 14-year term.

• Guides monetary policy

• The Chairman (currently Ben Bernanke) testifies 2 times a year
  to Congress about the nation’s economy
      Federal Open Market
       Committee (FOMC)

•   Uses the Economic Indicators to
    determine the health of the economy.
       Federal Open Market
        Committee (FOMC)
• Purpose: Monetary Policy

• Promotes: Stable prices & economic growth

• Manages the nation’s: money supply

• Typically meets 8 times a year

• Located in Washington, D.C.
• 6.2.12 CEF
• 6.5.12 ABDEFGH
        Economic Indicators
• The Federal Open Market Committee (FOMC)
  looks at the economic indicators to determine
  the health of economy…
       Economic Indicators
• Leading: Anticipate the direction
  economy is headed

• Coincident: Provide information about
  current status of economy

• Lagging: Changes due to the business
• 6.1.12 C
Money Slide Show
  The Life of the Dollar Bill…
• Depository financial institutions order
  cash from the Fed to meet their
  customer’s, demands and deposit
  excess or worn currency.

• The FED sorts currency at the rate of
  90,000 notes per hour
   Bureau of Engraving and
       Printing (BEP)
• Located in Washington, D.C. and Fort
  Worth, Texas

• The FED tells the BEP how many bills
  of each denomination to print--
What is the largest denomination
of money currently being printed in
       the United States?

 The answer will appear later…
One Dollar Bill
One Dollar Bill
George Washington
       George Washington
• Leader during the American Revolution

• Chairman of the Constitutional
  Convention and helped in getting the
  Constitution ratified.

• In 1789, became America's first
Two Dollar Bill
    Thomas Jefferson
         Thomas Jefferson
(and the signing of the Declaration of Independence)

• "author of the Declaration of
  American Independence, of the
  Statute of Virginia for religious
  freedom, and Father of the
  University of Virginia"
  --on his tombstone
New Five Dollar Bill
Abraham Lincoln
             Abraham Lincoln
• In 1860, Lincoln was nominated for president by the
  Republican party on a platform opposing slavery.

• Presidency issues: slavery and states rights, South
  Carolina seceded from the Union

• John Wilkes Booth shot Lincoln at Ford's Theater,
  Washington, D.C. He died April, 10th 1865.
Old Five Dollar Bill
New Ten Dollar Bill
Old Ten Dollar Bill
        Alexander Hamilton
• Opinions of the structure and function of the
  national bank

• Hamilton also established an American
  philosophy on foreign policy of neutrality
  during the French Revolution.
New Twenty Dollar Bill
Security Features
Old Twenty Dollar Bill
Andrew Jackson
           Andrew Jackson
• 7th President of the U.S. (1829-1837), First
  governor of Florida (1821)

• A founder of the Democratic Party

• Nicknamed, ―Old Hickory," because he was
  known for his toughness
New Fifty Dollar Bill
Old Fifty Dollar Bill
Ulysses S. Grant
            Ulysses S. Grant
• Sent to Mexico and served under General Zachary
  Taylor during the Civil War.

• In 1864, President Lincoln named him General-in-
  Chief of the Union army.

• In 1869, Grant was elected president of the United
  States. His presidency was less successful and had
New One Hundred Dollar Bill
Old One Hundred Dollar Bill
         Benjamin Franklin
• He became well known throughout

• A member of the Constitutional Convention
  and signer of the Constitution in 1787.
          Did you know…
• The $100.00 bill is currently the largest
  currency being made today in the U.S.

• The $500, $1000, $5000, and $10000
  have not been printed since 1946
The $500 Bill
William McKinley
         William McKinley
• 25th President of the U.S.

• He was elected twice, in 1896 and
  1900, but was assassinated in 1901

• He was succeeded by his Vice
  President, Theodore Roosevelt
The $1,000 Bill
Grover Cleveland
        Grover Cleveland
• The only President to serve two
  non-consecutive terms.

• 22nd (1885–1889) President of the U.S.
• 24th (1893–1897) President of the U.S.
The $5,000 Bill
James Madison
              James Madison
• 4th President of the U.S. (1809–1817)
  (during the War of 1812)

• The primary author of the U.S. Constitution in 1787

• Jefferson's Secretary of State

• Handled the Louisiana Purchase, doubling the
  nation's size
The $10,000 Bill
Salmon Chase
          Salmon Chase
• Treasury Secretary (1861-1864) under
  President Lincoln

• Chief Justice of the Supreme Court
The $100,000
Woodrow Wilson
           Woodrow Wilson
• 28th President of the U.S. (1913–1921), for 2

• As President, signed legislation, including the
  Federal Reserve System

• His efforts in 1919, included the Treaty of
  Versailles, which was rejected by the Senate.
• A general increase in prices

• When you have inflation, does a dollar
  buy more or less over time?

   What is the result of more
   money in the economy?
• Interest rates increase
• Bankers lend more money
• Consumers borrow more money
• Consumers spend more money
• Prices rise
           Inflation Rate
• The percentage rate of change in price
  level over time

• (CPI new - CPI old) x 100
         CPI old
• A sustained drop in the price level
        Purchasing Power
• The ability to purchase goods and

• As prices rise, the purchasing power of
  money declines

• As prices decrease, the purchasing
  power of money increases
            Price Index
• A measurement that shows how the
  average price of a standard group of
  goods changes over time by comparing
  averages from earlier years
 Consumer Price Index (CPI)
• The price index determined by
  measuring the price of a standard group
  of goods meant to represent the ―market
  basket‖ of a typical urban consumer

• Computed every month

           Market Basket
• Monthly expenditures of a family
• Readjusted every 10 years
        To determine CPI:

• Cost of market basket in Current Year
  Cost of market basket in Base Year
  Producer Price Index (PPI)
• Measures the average change over
  time in the selling prices received by
  domestic producers for their output
  Producer Price Index (PPI)
• Examples:
  – agriculture, forestry, fisheries, mining,
    scrap, and manufacturing

  – transportation, retail trade, insurance, real
    estate, health, legal, and professional
         Types of Inflation
• Creeping Inflation
• Chronic Inflation
• Hyperinflation
        Creeping Inflation
• Inflation remains LOW (1-3%)
          Chronic Inflation
• Inflation rises steadily from month to
  month over a long period of time
• Inflation that is out of control
• Can go as high as 100-500% per month
In 1923 Germany, prices skyrocketed
  more than 2,000 percent in just one

Today, that would shoot up the price of
 bread from $1.00 to $21.00
       Causes of Inflation
• Quantity Theory
• Demand-Pull Theory
• Cost-Push Theory
         Quantity Theory
• Too much money in an economy
  causes inflation

• Should measure real GDP to watch
  nation’s productivity
      Demand-Pull Theory
• Inflation occurs when demand for goods
  and services EXCEEDS existing
        Cost-Push Theory
• Inflation occurs when producers raise
  prices in order to meet increased costs
Effects of Inflation
1) Purchasing power of money declines
2) If wages increase to match inflation, a
      worker’s real income stays the same
       Income and Inflation
• If Income and Inflation increase at the
  SAME level, you ―break even‖

          Income     Inflation
            3%           3%
      Income and Inflation
• If Income increase faster (4%) than
  Inflation (2%), you are ―making more
  money‖—purchasing power increases

         Income    Inflation
           4%          2%
      Income and Inflation
• If Income increase slower (2%) than
  inflation (3%), you are ―making less
  money‖—purchasing power decreases

         Income    Inflation
           2%         3%
3) If Interest Rates and Inflation increase at
      the SAME level, you ―break even‖

     Interest Rate Inflation
            3%         3%
• 6.1.12 C
• 6.2.12 CEFI
• 6.5.12 DEFGH
• NOT just a problem for the poor or

• 80% of the uninsured were in working

• Families with incomes of $75,000 and
  up, 13.5 MILLION people were withOUT
  insurance for part of 2002 and 2003
          Uninsured by Age
         Age                               Percentage
        0 –17                                    36.7
      18 – 24                                    50.3
      25 – 44                                    32.9
      45 – 54                                    20.7
      55 – 64                                    17.3

Brock, Fred. Live well on less than you think. 2005. Page 88.
Could you survive in Poverty?
• I know which churches and sections of town have the
  best rummage sales

• I know which grocery stores’ garbage bins can be
  accessed for throw-away food

• I know how to get someone out of jail

• I know how to physically fight to defend myself
Could you survive in Poverty?
• I know how to get a gun, even if I have a police

• I know what problems to look for in a used car

• I now how to live without electricity and a phone

• I can entertain a group with my personalities and my
Could you survive in Poverty?
• I know how to move in half a day

• I know how to get and used food stamps

• I know where the free medical clinics are

• I can get by without a car
Middle Class
Could you survive in the Middle Class?
 • I know / my parents know where to go to sign me up
   for Baseball, Dance class, and / or Music class, etc.

 • I know how to properly set a table

 • I know which stores are most likely to carry the
   brands I wear

 • I know how to order at a nice restaurant
Could you survive in the Middle Class?
 • I know how to get my money out of my savings

 • I talk to my parents about higher education / trade
   school / after high school

 • I know my parents will help (or try to help me) with
   my homework

 • I know how to get a library card
Could you survive in the Middle Class?
 • I know how to help my parents decorate for the
   different holidays

 • My parents repair items in my house almost
   immediately when they break—or my parents know a
   repair service and call it

 • I have a driver’s license and either use my parent’s or
   my own car
 Could you survive in Wealth?
• I can read a menu in French, English, and another

• I have several favorite restaurants in different
  countries of the world

• During the holidays, I know my parents will hire a
  decorator to identify the appropriate themes and
  items with which to decorate the house
 Could you survive in Wealth?
• My parents have at least two residences that are
  staffed and maintained

• I have at least 2 or 3 ―screens‖ that keep people who
  I do not wish to see away from me

• My parents fly our own plane or a company plane
 Could you survive in Wealth?
• My parents know how to enroll me in the preferred
  private schools

• My parents are on the boards of at least 2 charities

• I / my parents support or buy the work of a particular
       Review Questions
1. What is money and bartering—and
   why don’t we barter that much?
2. What are the 3 uses / functions of
3. Name the 3 sources of money, provide
   an example of each, and which type
   do we currently have in the U.S.?
        Review Questions
4. List the 6 characteristics of money and
  1 BAD example of each—what is the
  ―good example‖?
5. What is the difference between inflation
  and deflation—what happens to the
  purchasing power of money when each
         Review Questions
6. What is the difference between the 2
  price indexes—CPI and PPI—and what
  do they show / represent?
7. List the 3 types of inflation in the order
  of severity
8. List, identify, and give an example of
  each of the inflation theories
9. What are the 3 effects of inflation?
  TWO (2) Types of Spending

• Mandatory Spending – Required by law

• Discretionary Spending – government
  planners can make choices
          Types of Budgets
• Balanced Budget – Revenues are EQUAL to

• Budget Surplus – Revenue in MORE than

• Budget Deficit – Revenue is LESS than
      Types of Economics
• Classical Economics
• Demand Economics
• Supply-Side Economics
     Classical Economics
• Idea that free markets can regulate
   Supply-Side Economics
• A school of economics that believes tax
  cuts can help an economy by raising
  Demand-side Economics
• A school of economics that believes
  government spending and tax cuts help
  an economy by raising demand
    Keynesian Economics
• A form of demand-side economics that
  economics that encourages government
  action to increase or decrease demand
  or output
    John Maynard Keynes
• Ideas that government intervention
  might be needed to pull an economy out
  of depression
Fiscal Policy
         The Business Cycle



  Expansionary Fiscal Policy Tools

1) Government spending: Increasing

2) Taxes: Cutting
  Contractionary Fiscal Policy Tools

1) Government spending: Decreasing

2) Taxes: Raising
              Fact Act
• Can check your credit score ONE time a
  year without penalty
• 6.1.12 D
• 6.2.12 GHIJKL
• 6.5.12 DE

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