Chapter 13 Money and Banking 2010

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Chapter 13 Money and Banking 2010 Powered By Docstoc

     Chapter 13
How is Money different from
   Money is anything that people commonly
    accept in exchange for goods and
   Money was developed to overcome
    problems associated with bartering.
   Suppose that you go shopping and
    decide to buy a jacket.
   When you pay for the jacket you hand
    the clerk a chicken.
   The clerk refuses to accept the chicken,
    so you offer him 12 oranges, a picture of
    your mother and a coffee mug.
   The clerk refuses all of these as well.
   Finally, you open your wallet and offer
    the clerk several pieces of paper with a
    picture of an 18th century politician and
    the number 10 printed in green.
   The clerk accepts these pieces of paper
    because they have a guaranteed
    standard of value in the U.S.
   In the U.S., money has 3 basic functions
    which make it a more efficient system
    than barter.
Medium of Exchange
   Any item that sellers accept as payment
    for goods and services
   Ex. – If you have a part time job in a
    restaurant, you will be paid in money
    rather than in barbeque sauce. You then
    can use the money to buy anything you
    want. (Including barbeque sauce.)
Standard of Value
   A measure of the relative value of goods
    and services
   Ex. – People can compare the worth of
    items such as a CD and a pizza. If the
    CD cost $10 and a pizza cost $5, a
    consumer knows that the relative value
    of the CD is twice that of the pizza.
Store of Value
   Money can be saved or stored for later
   For money to serve as a store of value, 2
    conditions must be met
    • Must be non-perishable – can’t rot over time
        while being saved.
    •   Must keep its value over time.
5 Major Characteristics of
   Durability
   Portability
   Divisibility
   Stability
   Acceptability
   Refers to money’s ability to be used over
    and over again.
   The ability to be carried from one place
    to another.
   Refers to money’s ability to be divided
    into smaller units.
   In value
   Money must be stable in value.
   Encourages saving and maintains
    money’s purchasing power.
   Means that people are willing to accept
    money in exchange for their goods and
Once Again…
   Money must have and must retain it’s
How does money get its value?
   Economists have identified 3 sources of
    value for money.
    • Commodity Money
    • Representative Money
    • Fiat Money
Commodity Money
   An item that has value of its own and is
    used as money.
    • Ex. – Precious metals, gems, salt in ancient
      Rome, tobacco and beaver pelts in early
Representative Money
   An item that has value because it can be
    exchanged for something valuable.
    • Ex. – During the American Revolution the
      Continental Congress issued representative
      money, called Continentals, to finance the war
      for independence against Great Britain.
      Merchants accepted these and would trade
      them in to the government for gold or silver
This is a Continental
Fiat Money
   An item that has value because a
    government fiat, or decree, says that it
    has value.
    • Ex. – The majority of nations today use a form
      of fiat money called currency (paper bills and
      coins) for money.
The U.S. Relies on Fiat Money
   It’s money takes on the form of coins,
    paper money, and checks.
   Coins are made by the U.S. mint.
   Paper money is printed by the Bureau of
    Engraving and Printing in Washington
   Checking accounts make up th largest
    segment of U.S. money supply.
History of U.S. Banking
Pre-Civil War (1780’s-1860)
   This was the time of experimentation
    and debate in U.S. Banking
   Some wanted a national banking
    system and some wanted states to
    regulate banks within their borders.
   2 National Banks were formed, one in
    1791 and the other in 1816. (Both
    eventually failed.
   The major problem with banking during
    this period was that states issued their
    own currency and some states used
    pieces of dollar bills to represent
    fractional amounts.
    • Ex. – if you visited a store in the 1830’s and
      paid for a 25 cent item with a $1 bill, the clerk
      might cut the bill into 4 pieces and return 3 of
      them to you as change.
Civil War to WWI (1860-1913)
   The federal government created a dual
    banking system made up of state and
    national banks
   During the Civil War, Congress issued
    currency to pay for the North’s war
   This new currency was called
    greenbacks or U.S. notes and was not
    backed by gold or silver
   The Confederate States also issued their
    own money, which was worthless by the
    end of the war.
WWI to the Present (1913 –
   In 1913 Congress passed the Federal Reserve
    Act, establishing the Federal Reserve System
    (commonly called the “Fed”)
   The Fed became the nation’s central bank, and
    all nationally chartered banks were required to
   State chartered banks could choose to join or
   During the 1920’s about 7,000 banks
    closed because they were poorly
   At the time if a bank closed the people
    who had money in the bank lost all of
    their money (people lost confidence in
   When Franklin D. Roosevelt was elected
    in 1932, he issued a “Bank Holiday” in
    which he closed down every bank in the
    U.S. for 4 days.
   FDR then sent out inspectors to
    determine which banks were strong
    enough to reopen.
   Almost all were reopened, and people
    began to put their money back into the
   FDR also created the Federal Deposit
    Insurance Corporation (FDIC) to insure
    bank deposits up to $5,000 ( today =
U.S. Banking Today
   3 major type of financial institutions have
    emerged as the U.S. banking system
    has evolved.
Commercial Banks
   Nearly 10,000 commercial banks exist in
    the U.S.
   Their main functions are to lend money,
    accept deposits, and transfer funds
Saving and Loans Associations
   Established to lend money and accept
Mutual Savings Banks
   Set up to serve people who whished to
    make small deposits that large
    commercial banks did not want to

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