CHAPTER 10 – MONEY AND BANKING. SECTION 1 – MONEY: ITS FUNCTIONS AND PROPERTIES FUNCTIONS OF...
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Transcript of CHAPTER 10 – MONEY AND BANKING. SECTION 1 – MONEY: ITS FUNCTIONS AND PROPERTIES FUNCTIONS OF...
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CHAPTER 10 – MONEY AND BANKING
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SECTION 1 – MONEY: ITS FUNCTIONS AND PROPERTIES• FUNCTIONS OF MONEY
• MEDIUM OF EXCHANGE• A MEANS THROUGH WHICH GOODS AND SERVICES CAN BE EXCHANGED• MONEY PROVIDES A FLEXIBLE, PRECISE, AND CONVENIENT WAY TO EXCHANGE GOODS AND
SERVICES• STANDARD OF VALUE
• DETERMINES THE ECONOMIC WORTH IN THE EXCHANGE PROCESS• MONEY PROVIDES BOTH A WAY TO EXPRESS AND MEASURE THE RELATIVE COSTS OF GOODS AND
SERVICES AND A WAY TO COMPARE THE WORTHS OF DIFFERENT GOODS AND SERVICES• STORE OF VALUE
• MONEY HOLDS ITS VALUE OVER TIME• CAN BE SAVED FOR LATER USE BECAUSE IT CAN BE EXCHANGED AT ANY TIME FOR GOODS AND
SERVICES
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PROPERTIES OF MONEY• PROPERTY 1 – PHYSICAL
• DURABILITY • STURDY ENOUGH TO LAST THROUGHOUT MANY TRANSACTIONS
• PORTABILITY • NEEDS TO BE SMALL, LIGHT, AND EASY TO CARRY
• DIVISIBILITY • BE DIVISIBLE SO THAT CHANGE CAN BE MADE
• UNIFORMITY • HAVING FEATURES AND MARKINGS THAT MAKE IT RECOGNIZABLE
• PROPERTY 2 – ECONOMIC• STABILITY OF VALUE
• PURCHASING POWER, OR VALUE, SHOULD BE RELATIVELY STABLE• SCARCITY
• MUST BE SCARCE TO HAVE VALUE• ACCEPTABILITY
• PEOPLE MUST AGREE THAT IT IS A VALID MEDIUM OF EXCHANGE
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TYPES OF MONEY
• COMMODITY MONEY – INTRINSIC VALUE BASED ON THE MATERIAL FROM WHICH IT IS MADE
• REPRESENTATIVE MONEY – BACKED BY SOMETHING TANGIBLE• FIAT MONEY – DECLARED BY THE GOVERNMENT AND ACCEPTED BY CITIZENS
TO HAVE WORTH
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SECTION 2 - THE DEVELOPMENT OF US BANKING
• MODERN BANKING AROSE IN ITALY IN THE LATE MIDDLE AGES.• ITALIAN MERCHANTS STORED MONEY OR VALUABLES FOR WEALTHY PEOPLE AND
ISSUED RECEIPTS THAT PROMISED TO RETURN THE PROPERTY ON DEMAND. • MERCHANTS REALIZED THAT ALL DEPOSITORS DID NOT RECLAIM THEIR PROPERTY AT
THE SAME TIME AND COULD LEND SOME OF THE DEPOSITS AND EARN INTEREST ON THOSE LOANS
• IN THE UNITED STATES AFTER THE REVOLUTIONARY WAR, STATE BANKS FORMED AND WERE CHARTERED OR LICENSED BY THE STATE GOVERNMENT AND FOLLOWED PRACTICES THAT TENDED TO CREATE INSTABILITY AND DISORDER
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ALEXANDER HAMILTON
• PROPOSED CHARTERING A PRIVATELY OWNED NATIONAL BANK TO PUT THE GOVERNMENT ON A SOUND FINANCIAL FOOTING
• THIS BANK WOULD ISSUE A NATIONAL CURRENCY AND HELP CONTROL THE MONEY SUPPLY BY REFUSING TO ACCEPT CURRENCY FROM STATE BANKS THAT WAS NOT BACKED BY GOLD OR SILVER
• CONSTITUTION DID NOT SPECIFICALLY AUTHORIZE THE ESTABLISHMENT OF A NATIONAL BANK – HOWEVER, HAMILTON ARGUED THAT THE CONSTITUTION IMPLIED THAT THE FEDERAL GOVERNMENT COULD ESTABLISH A NATIONAL BANK
• 1791 – FIRST NATIONAL BANK WAS CHARTERED
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19TH CENTURY DEVELOPMENT• 2ND BANK OF THE UNITED STATES - 1816
• JACKSON VETOED THE RENEWAL OF ITS CHARTER IN 1832 DUE TO HIS MISTRUST AND SAW THE CENTRAL BANK AS TOO POWERFUL AND TOO CLOSELY ALIGNED WITH THE RICH
• WILDCAT BANKING• STATE BANKS THAT ISSUED ITS OWN CURRENCY (BANK NOTES)• ANYONE COULD OPEN A BANK• THESE BANKS DID NOT HAVE SUFFICIENT RESERVES WHICH RESULTED IN FINANCIAL PANICS AND ECONOMIC
INSTABILITY • STRUGGLE FOR STABILITY
• 1863 – CONGRESS PASSED THE NATIONAL BANKING ACT – LED TO THE CREATION OF A SYSTEM OF NATIONAL BANKS – PROVIDED FOR A NATIONAL CURRENCY BACKED BY THE US TREASURY BONDS AND REGULATED THE MINIMUM AMOUNT OF CAPITAL REQUIRED FOR NATIONAL BANKS
• GOLD STANDARD – A SYSTEM THAT BACKS THE BASIC MONETARY UNIT WITH A SET AMOUNT OF GOLD• MONEY WAS UNIFORM AND BACKED BY SOMETHING OF INTRINSIC VALUE, AND LIMITED BY THE SUPPLY OF GOLD
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20TH CENTURY DEVELOPMENTS
• THE STRUGGLE FOR STABILITY• 1913 – CONGRESS PASSES THE FEDERAL RESERVE ACT – ESTABLISHED THE FEDERAL RESERVE SYSTEM – A TRUE
CENTRAL BANK – MAKES LOANS TO BANKS THAT SERVE THE PUBLIC, ISSUES FEDERAL RESERVE NOTES AS THE NATIONAL CURRENCY, AND REGULATES THE MONEY SUPPLY TO ENSURE THAT MONEY RETAINS ITS PURCHASING POWER
• THE GREAT DEPRESSION AND THE NEW DEAL• 1929 – MANY BANKS FAILED AND DEPOSITORS LOST THEIR MONEY• BANKING ACT OF 1933 – INSTITUTED REFORMS SUCH AS REGULATING INTEREST RATES THAT BANKS COULD PAY
AND PROHIBITING BANKS FROM SELLING STOCKS• FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) – PROVIDED FEDERAL INSURANCE SO THAT IF A BANK FAILED,
PEOPLE WOULD NO LONGER LOSE THEIR MONEY• DEREGULATION AND THE SAVINGS AND LOAN CRISIS
• 1982 – CONGRESS LIFTED THE LIMITS ON INTEREST RATES• DEREGULATION OF BANKS
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FINANCIAL INSTITUTES IN THE UNITED STATES
• COMMERCIAL BANKS• PROVIDE LOANS TO BUSINESSES• PRIVATELY OWNED • CHECKING AND SAVINGS ACCOUNTS• INVESTMENT ASSISTANCE• CREDITS CARDS
• SAVINGS AND LOANS• TAKE SAVINGS DEPOSITS AND PROVIDE HOME MORTGAGE LOANS• RAISE FINANCING THROUGH THE SALE OF STOCK
• CREDIT UNIONS• COOPERATIVE SAVINGS AND LENDING INSTITUTIONS• MORTGAGES • AUTO LOANS• DEPOSIT INSURANCE THROUGH THE NATIONAL CREDIT UNION ASSOCIATION (NCUA) INSTEAD OF THE FDIC• MEMBERSHIP REQUIREMENTS