Chapter 11 by wuyunyi


									   Money is accepted by all parties as payment for
    goods and services
   Money can be used to express worth in terms
    that most people can understand
   Money holds its purchasing power until the
    buyer needs it
   The use of money developed in ancient times
    because it made life easier. A good like
    compressed tea leaves is known as commodity
    money. Fiat money is made valuable by
    government decree.
   Tobacco and wampum were once accepted forms
    of currency.
   States passed laws allowing individuals to print
    paper currency, which was backed in local banks
    with gold and silver deposits.
   During the American Revolution, Continental
    dollars were issued but without gold or silver
    backing, which made them virtually worthless by
    the end of the war
   Specie, or gold and silver coins, were commonly
    used in the colonies. Because they were in limited
    supply, they had more value than paper currency.
   When the nation began, the most plentiful coin
    in circulation was the Spanish peso
   Benjamin Franklin and Alexander Hamilton
    differentiated the dollar system from the pesos
    by dividing the dollar into tenths rather than
    the peso’s pieces of eight.
   Money must be portable, or easily transferred
    from one person to another.
   Money must be durable so it lasts when handled
    or stored for long periods.
   Money must be divisible to facilitate all types of
   Money must be in limited supply to retain its
   In 1863 the federal government issued gold
    certificates backed by gold, in large
    denominations for banks to exchange with one
    another. In 1886, it issued silver certificates
    backed by silver.
   In 1900, Congress passed the Gold Standard
    Act, making the basic currency unit, the dollar,
    equivalent to a specific amount of gold. It did
    not change the use of greenbacks or notes, but
    Americans could exchange them for gold
    whenever they wanted.
   The advantages of the gold standard are: (1)
    the security Americans felt about their money;
    and (2) it prevents the government from
    printing too much paper currency.
   The disadvantages of the gold standard are: (1)
    the gold stock may not grow fast enough to
    support a growing economy; (2) people may
    decide to convert their paper to gold, draining
    the government’s gold reserves; (3) the price of
    gold will respond to the market and it may lose
    substantial value; and (4) the political risk of
    failure exists
   The gold standard remained in effect until the
    Great Depression.
   Since 1934 the United States has been on an
    inconvertible fiat money standard
   The money supply of the United States is
    managed by the federal government.
   The tangible component of modern money
    consists of coins and Federal Reserve notes.
    The intangible components include travelers’
    checks, and checking and savings accounts.
   Modern money must also be portable, durable,
    and divisible.
   The National Banking Act (1863) strengthened
    the nation’s financial system by creating a
    system of national banks.
   By 1907 the NSB needed further reforms as the
    nation experienced financial crises and
   Congress responded to the call for reform with
    the Federal Reserve System, or the Fed, the
    nation’s first true central bank—a bank that
    lends to other banks in need
   The Fed was set up like a corporation and any
    bank that joined the system had to purchase
    shares of stock in the system; as a result,
    privately owned banks own the Fed, not the
    government. The Fed, however, is publicly
    controlled. The president appoints and
    Congress approves the Fed’s Board of
   Banks were overextended during the 1920’s,
    and many failed after the Great Depression hit
    in 1929. Banks did not have deposit insurance
    for their depositors, causing depositors’ rush
    on banks to withdraw funds. As a result, many
    more banks failed
   The Federal Deposit Insurance Corporation
    insured customer deposits in the event of a
    bank failure.
   Most of the first American banks were
    commercial banks that catered to business and
    commerce. They had the authority to issue
    checking or demand deposit accounts. A thrift
    institution, on the other had, accepted the
    deposits of small investors but could not offer
    demand deposit accounts (until the 1970s).
   The mutual savings banks were the oldest thrift
    institutions in the United States. They catered
    to the small wage earner, particularly those
    who lived in the industrial northeast and the
    Pacific northwest. In 1972 a savings bank
    introduced the Negotiable Order of
    Withdrawal, or NOW accounts, which were
    checking accounts that paid interest.
    Commercial banks opposed these accounts,
    but they proved popular with consumers.
   A savings and loan association invested the
    majority of its funds in home mortgages. They
    began as cooperative clubs for homebuilders.
    In the 1930s the Federal Home Loan Bank
    Board began supervising and regulating
    savings and loan associations.
   A credit union is a nonprofit service
    cooperative that is owned by and operated for
    the benefit of its members. Contributions are
    generally deducted directly from a worker’s
   Financial institutions were closely regulated
    from the Great Depression through the 1970s.
    Federal regulations included setting maximum
    rates of interest and restricting how institutions
    could lend their funds. The Reagan
    administration deregulated the financial
    system, ushering in a period of competition,
    crisis, and reform.
   Deregulation led to more competition. Any
    financial institution could offer NOW accounts.
    All depository institutions could borrow from
    the Fed, not just commercial banks.
   Deregulation led to a crisis among savings and
    loan associations, which were not experienced
    in competing in the marketplace. Several bad
    loans could force and S & L out of business
    because they kept only about half the reserves
    that commercial banks kept. Deregulation led
    to fewer federal inspectors, encouraging some
    institutions to engage in fraud, which drained
    the Federal Savings and Loan Insurance
    Corporation (FSLIC) of funds paid out in
    insurance claims to depositors.
   In 1989 congress passed the Financial
    Institutions Reform, Recovery, and
    Enforcement Act, which abolished the savings
    and loan industry and its supervisory agency,
    the FHLBB. The FSLIC was dissolved and the
    FDIC took over insurance responsibilities,
    Some savings and loan associations survived
    the crisis.
   In 1980s were years of more bank failures,
    many due to poor management. Failed banks
    made loans without adequate collateral, others
    failed to keep expenses under control, and
    other fell victim to the weak economy.
   In 1990s were years of caution after the
    turbulent 1980s. Stronger federal regulations
    were enacted, and all financial institutions
    were required to strengthen their capital
    reserves. Banks merged with stock and
    security brokerage firms. By 2000 financial
    institutions were healthier.

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