MONEY AND BANKINGMONEY AND BANKING

Money used to be in the form of coins that Money used to be in the form of coins that were made from precious metals and had were made from precious metals and had value based upon their make up. As time value based upon their make up. As time went on paper receipts were used and went on paper receipts were used and money was stored with the goldsmiths’ .money was stored with the goldsmiths’ .

The paper receipts took the form of paper The paper receipts took the form of paper money. money.

Paper money was backed by gold. The Paper money was backed by gold. The government would store gold which would government would store gold which would represent the paper money.represent the paper money.

Faith in the nation’s economic production Faith in the nation’s economic production and potential represents the value of money. and potential represents the value of money.

THREE USES OF MONEYTHREE USES OF MONEYcommonly referred to as currencycommonly referred to as currency

Money is a medium of exchangeMoney is a medium of exchange

Money is a unit of accountMoney is a unit of account

Money as a store of valueMoney as a store of value

MONEY IS ANYTHING THAT SERVES MONEY IS ANYTHING THAT SERVES AS A MEDIUM OF EXCHANGE, A UNIT AS A MEDIUM OF EXCHANGE, A UNIT OF ACCOUNT, AND A STORE OF OF ACCOUNT, AND A STORE OF VALUE!VALUE!

MEDIUM OF EXCHANGEMEDIUM OF EXCHANGE

Anything that is used to determine value Anything that is used to determine value during the exchange of goods and during the exchange of goods and servicesservices

Bartering and money are both mediums of Bartering and money are both mediums of exchangeexchange

BARTERBARTER

The direct exchange of one set of goods The direct exchange of one set of goods or services for another.or services for another.

Barter is still used in many parts of the Barter is still used in many parts of the world and even in the United States.world and even in the United States. “ “ I will trade one cow for three pigs and ten I will trade one cow for three pigs and ten

chickens.”chickens.” “ “ I will trade my Playstation for your Wii”I will trade my Playstation for your Wii”

UNIT OF ACCOUNTUNIT OF ACCOUNT

Money is a means for comparing the Money is a means for comparing the values of goods and services. values of goods and services. Example – you can compare the price of a Example – you can compare the price of a

good in one store to the price of the same good in one store to the price of the same good in a different store and compare the good in a different store and compare the prices because the price is expressed the prices because the price is expressed the same way in every store.same way in every store.

STORE OF VALUESTORE OF VALUE

Something that keeps its value if it is Something that keeps its value if it is stored rather than used.stored rather than used.

You can save your money and it will keep You can save your money and it will keep its value. (inflation)its value. (inflation)

SIX CHARACTERISTICS OF SIX CHARACTERISTICS OF MONEY/CURRENCYMONEY/CURRENCY

Durability – it can withstand the physical Durability – it can withstand the physical wear and tear that comes with being used wear and tear that comes with being used multiple times. multiple times.

There are still coins from the Roman There are still coins from the Roman Empire, and there are many old coins that Empire, and there are many old coins that still show up all the time. A dollar bill still show up all the time. A dollar bill generally stays in circulation for at least a generally stays in circulation for at least a year. Examples show durability.year. Examples show durability.

Portability – money needs to be easy to Portability – money needs to be easy to carry and transfer from one person to carry and transfer from one person to another. another.

Coins and paper money are extremely Coins and paper money are extremely easy to carry around. Look at other items easy to carry around. Look at other items that used to be used and compare their that used to be used and compare their portability to our currency.portability to our currency.

Divisibility – money must be easily divided Divisibility – money must be easily divided into smaller denominations, or units of into smaller denominations, or units of value.value.

You only have to use as much as You only have to use as much as necessary for any exchange.necessary for any exchange. ““pieces of eight” and a twenty dollar billpieces of eight” and a twenty dollar bill

Uniformity – any two units must be the Uniformity – any two units must be the same in what they can and will buy.same in what they can and will buy. People should be able to count and measure People should be able to count and measure

money accurately.money accurately. Money has a specific value everywhere in the Money has a specific value everywhere in the

nation.nation.

Paying in shells vs. paying with $$$$Paying in shells vs. paying with $$$$

Limited Supply – having to much money in Limited Supply – having to much money in circulation will bring the value down, but circulation will bring the value down, but not having enough will increase the value.not having enough will increase the value.

The Federal Reserve tries to keep a The Federal Reserve tries to keep a balance of the supply of money.balance of the supply of money.

Sand dollars being found somewhere else.Sand dollars being found somewhere else.

Acceptability – everyone must be able to Acceptability – everyone must be able to exchange objects that serve as money for exchange objects that serve as money for goods and services. Coins and paper bills goods and services. Coins and paper bills are accepted from place to place in are accepted from place to place in America.America.

SOURCES OF MONEY’S VALUESOURCES OF MONEY’S VALUEWhat makes money valuable?What makes money valuable?

Commodity Money – objects that have value in Commodity Money – objects that have value in themselves and are also used as money.themselves and are also used as money.

Examples – salt , corn, cows. All of these could Examples – salt , corn, cows. All of these could be used for something else. Exchanging these be used for something else. Exchanging these items and others like it are examples of items and others like it are examples of bartering.bartering.

Commodity money usually only works in simple Commodity money usually only works in simple economics since the items don’t have all the economics since the items don’t have all the characteristics of money. characteristics of money.

Representative Money – objects that have value Representative Money – objects that have value because the holder can exchange them for because the holder can exchange them for something else of value.something else of value.

Early representative money was in the form of Early representative money was in the form of paper receipts for gold or silver which were to paper receipts for gold or silver which were to heavy to carry around. The paper receipts heavy to carry around. The paper receipts became an early form of paper money.became an early form of paper money.

““Not worth a Continental!”Not worth a Continental!”

IOUIOU

Fiat Money – money that has value Fiat Money – money that has value because the government has ordered that because the government has ordered that it is an acceptable means to pay debts.it is an acceptable means to pay debts.United States money today is fiat money. United States money today is fiat money. It is also called legal tender and has all six It is also called legal tender and has all six characteristics of money. characteristics of money. Federal Reserve controls the supply which Federal Reserve controls the supply which is critically in allowing the fiat system to is critically in allowing the fiat system to work. work.

THE HISTORY OF AMERICAN THE HISTORY OF AMERICAN BANKINGBANKING

Bank – an institution that exists for Bank – an institution that exists for receiving, keeping, and lending money.receiving, keeping, and lending money.

BANKING BEFORE THE CIVIL BANKING BEFORE THE CIVIL WARWAR

In the beginning banks were managed by In the beginning banks were managed by merchants in addition to their regular job.merchants in addition to their regular job.

Banks were very informal and they were Banks were very informal and they were not completely safe or trustworthy. It is not completely safe or trustworthy. It is possible that you could lose all your possible that you could lose all your money.money.

Businesses would store money or make Businesses would store money or make loans for a small fee. loans for a small fee.

After the American Revolution is was After the American Revolution is was necessary and important to establish a necessary and important to establish a safe and stable banking system. safe and stable banking system.

A strong system was needed to ensure A strong system was needed to ensure trade with other countries as well as the trade with other countries as well as the growth of America.growth of America.

PROBLEM……PROBLEM……TWO DIFFERENT VIEWSTWO DIFFERENT VIEWS

(remember America was a young (remember America was a young and developing country)and developing country)

Federalists – wanted a strong central Federalists – wanted a strong central government to control the banking system government to control the banking system and wanted to create a national bank. and wanted to create a national bank. They were led by Alexander Hamilton who They were led by Alexander Hamilton who was Washington’s Secretary of Treasury.was Washington’s Secretary of Treasury.

Antifederalists – Led by Thomas Jefferson Antifederalists – Led by Thomas Jefferson and they supported a decentralized and they supported a decentralized banking system in which the states would banking system in which the states would control banking within their borders.control banking within their borders.

Considered a federal bank/national bank Considered a federal bank/national bank unconstitutional.unconstitutional.

Federalists were successful in creating a strong Federalists were successful in creating a strong central bank. In 1791 congress set up the Bank central bank. In 1791 congress set up the Bank of the United States and the bank was granted of the United States and the bank was granted a 20 year charter. a 20 year charter. Bank brought order and stability for a time period.Bank brought order and stability for a time period. Tended to only loan money to the rich.Tended to only loan money to the rich. Held the money that the government collected in Held the money that the government collected in

taxestaxes Issued representative money that was backed by Issued representative money that was backed by

gold and silver.gold and silver. Ensured state banks had the gold or silver for Ensured state banks had the gold or silver for

exchange.exchange. Charter was not renewed in 1811.Charter was not renewed in 1811.

Chaos – After the Bank of the United States Chaos – After the Bank of the United States charter expired. The results were:charter expired. The results were: Issuing of bank notes that could not be backed.Issuing of bank notes that could not be backed. Chartered many banks without thinking of the Chartered many banks without thinking of the

economic impact it might have.economic impact it might have. Prices rose rapidly.Prices rose rapidly. Issuing of different currencies by different Issuing of different currencies by different

banks.banks. Lack of confidence in the banking system.Lack of confidence in the banking system.

The Second Bank of the United States – To The Second Bank of the United States – To eliminate the chaos a second federal bank eliminate the chaos a second federal bank was created in 1816. ( 20 year charter)was created in 1816. ( 20 year charter)Bank was able to restore order and gain Bank was able to restore order and gain back the publics confidence over a period of back the publics confidence over a period of time.time.National bank was ruled to be constitutional National bank was ruled to be constitutional by the Supreme Court.by the Supreme Court.President Jackson vetoed the renewal of the President Jackson vetoed the renewal of the banks charter. He felt that it could not be banks charter. He felt that it could not be trusted.trusted.

Free Banking Era – 1837-1860 is known Free Banking Era – 1837-1860 is known as the “Wildcat” era. It was worse then the as the “Wildcat” era. It was worse then the chaos that occurred between the First and chaos that occurred between the First and Second Banks of America. Second Banks of America.

The number of banks and currency that The number of banks and currency that were created caused massive amounts of were created caused massive amounts of problems.problems.

PROBLEMS….PROBLEMS….

Bank runs and panicsBank runs and panics

Wildcat banks had a high rate of failure Wildcat banks had a high rate of failure due to their location. Located out on the due to their location. Located out on the out skirts of town were only the “wildcats” out skirts of town were only the “wildcats” lived.lived.

Fraud – “Take the money and run.”Fraud – “Take the money and run.”

Many different currencies and they were Many different currencies and they were not backed.not backed.

THE CIVIL WAR AND AFTERTHE CIVIL WAR AND AFTER

The federal government was not playing an The federal government was not playing an active role in the banking industry thus active role in the banking industry thus confusion and chaos continued up until the confusion and chaos continued up until the Civil War.Civil War.

1861 the United States issued its first paper 1861 the United States issued its first paper money since the Continental. It was called a money since the Continental. It was called a “greenback.”“greenback.”

Both the North and South issued federal Both the North and South issued federal currencies. currencies.

During the war the government worked on During the war the government worked on restoring economic confidence in the paper restoring economic confidence in the paper currency and passed the National Banking currency and passed the National Banking Act of 1863-1864.Act of 1863-1864.

These acts gave the federal government the These acts gave the federal government the ability to:ability to: Charter banksCharter banks Require banks to hold enough assets to cover Require banks to hold enough assets to cover

their notes and activitiestheir notes and activities Created a single national currency.Created a single national currency.

The gold standard – was adopted in the The gold standard – was adopted in the 1870s and it was a system to back the 1870s and it was a system to back the national currency and set the dollars national currency and set the dollars value.value.The government could only issue currency The government could only issue currency if it had the gold to back it. The result was if it had the gold to back it. The result was that the government was successful in that the government was successful in increasing the confidence the public had in increasing the confidence the public had in the currency.the currency.

2020thth CENTURY AND BANKING CENTURY AND BANKING

Still lacking a central decision-making Still lacking a central decision-making authority which made it difficult to authority which made it difficult to eliminate or fix the problems within the eliminate or fix the problems within the banking system.banking system.

Because of inadequate reserves many Because of inadequate reserves many banks began to fail and the need for a banks began to fail and the need for a central bank was emphasized by the central bank was emphasized by the failures of banks and businesses.failures of banks and businesses.

The Federal Reserve Act of 1913 created The Federal Reserve Act of 1913 created the Federal Reserve System. This was the Federal Reserve System. This was President Wilson’s Act. This would President Wilson’s Act. This would become our nation’s central banking become our nation’s central banking system.system. The bank could lend money to other banks in The bank could lend money to other banks in

times of need. This would ensure that the times of need. This would ensure that the banks would not fail and that confidence and banks would not fail and that confidence and trust would be established.trust would be established.

It became the banker’s bank!It became the banker’s bank!

REORGANIZATIONREORGANIZATION

12 regional reserve banks were created 12 regional reserve banks were created throughout the country to help bring about throughout the country to help bring about organization and stability.organization and stability.

A Federal Reserve Board of Governors A Federal Reserve Board of Governors appointed by the President runs the appointed by the President runs the system.system.

Allows member banks to borrow money or Allows member banks to borrow money or each bank can issue short-term loans to each bank can issue short-term loans to banks in need. This eliminated many bank banks in need. This eliminated many bank failures.failures.

The currency we use today was created and it The currency we use today was created and it is called a Federal Reserve Note. The Fed is called a Federal Reserve Note. The Fed controls weather the amount of money controls weather the amount of money available should increase or decrease. available should increase or decrease.

The Fed was unable to stop the Great The Fed was unable to stop the Great Depression from happening. This proved Depression from happening. This proved to be the first big challenge for the Fed.to be the first big challenge for the Fed. Banks made risky loans to businesses that Banks made risky loans to businesses that

were unable to pay them back.were unable to pay them back. Bank runs beganBank runs began Stock market crashedStock market crashed Banks failed – this led to a lose of customers Banks failed – this led to a lose of customers

deposits.deposits. Trust was lost but the Fed still continued to try Trust was lost but the Fed still continued to try

and restore confidence. and restore confidence.

As president FDR worked to restore As president FDR worked to restore confidence in the banking system. He confidence in the banking system. He ordered all the banks to close for a “bank ordered all the banks to close for a “bank holiday” in 1933. Only sound banks were holiday” in 1933. Only sound banks were allowed to reopen.allowed to reopen.

Trust was restored when only stable banks Trust was restored when only stable banks could reopen.could reopen.

Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation (FDIC) was created in 1933. The FDIC (FDIC) was created in 1933. The FDIC insures and backs a customers deposit if insures and backs a customers deposit if the bank fails. the bank fails.

America then transitioned to fiat money America then transitioned to fiat money which is backed by the government.which is backed by the government.

Today your money is insured by the FDIC. Today your money is insured by the FDIC. It can be different amounts depending on It can be different amounts depending on the situation.the situation.

• After the Great Depression banks were far After the Great Depression banks were far more regulated and through the 1960s more regulated and through the 1960s even far more restrictions such as even far more restrictions such as controlled interest rates occurred. Banks controlled interest rates occurred. Banks could also only lend money to those who could also only lend money to those who had a history of paying the money back.had a history of paying the money back.

• In the late 1970s and 80’s banks and In the late 1970s and 80’s banks and businesses were be deregulated.businesses were be deregulated.

• Deregulation in banks occurred.Deregulation in banks occurred.

Savings and Loan Association – Savings Savings and Loan Association – Savings and Loans (S&L's) are specialized banks and Loans (S&L's) are specialized banks created to promote affordable created to promote affordable homeownership.homeownership. A financial institution, organized A financial institution, organized cooperatively or corporately, that holds the cooperatively or corporately, that holds the funds of its members or clients in interest-funds of its members or clients in interest-bearing accounts and certificates of bearing accounts and certificates of deposit, invests these funds chiefly in deposit, invests these funds chiefly in home mortgage loans and may also offer home mortgage loans and may also offer checking accounts and other banking checking accounts and other banking services.services.

http://useconomy.about.com/od/glossary/g/savings_loans.htm

http://www.thefreedictionary.com/savings+and+loan+association

The deregulation led to the Savings and The deregulation led to the Savings and Loan Crisis of the 1980’s. (S&L)Loan Crisis of the 1980’s. (S&L) Deregulation Deregulation High Interest RatesHigh Interest Rates Bad LoansBad Loans FraudFraud

All of those were causes of the Savings All of those were causes of the Savings and Loan Crisis. and Loan Crisis.

1989 – Congress passed the Financial 1989 – Congress passed the Financial Institutions Reform, Recovery, and Institutions Reform, Recovery, and Enforcement Act (FIRREA) this act Enforcement Act (FIRREA) this act abolished the independence of the abolished the independence of the Savings and Loan industry and restored Savings and Loan industry and restored regulation. (FDIC)regulation. (FDIC)

They still function like banks but are They still function like banks but are regulated and watched more.regulated and watched more.

BANKING TODAYBANKING TODAY

Banking today has drastically changed. Banking today has drastically changed. Banks provide services that were unheard Banks provide services that were unheard of in the past and transactions are no of in the past and transactions are no longer done with just money. longer done with just money. Electronic banking, credit, debit, and other Electronic banking, credit, debit, and other services have revolutionized banking.services have revolutionized banking.Still the main purpose of the bank is to Still the main purpose of the bank is to take deposits and make loans.take deposits and make loans.They also help manage the money supply.They also help manage the money supply.

MONEY SUPPLYMONEY SUPPLY

All the money available in the United All the money available in the United States economy.States economy.

Economists divide the money into different Economists divide the money into different categories. The main two are M1 and M2.categories. The main two are M1 and M2.

M1M1

Represents money that people can easily Represents money that people can easily get their hands on. Immediate access to get their hands on. Immediate access to pay for goods and services.pay for goods and services.

M1 is in the form of checking accounts and M1 is in the form of checking accounts and traveler's checks.traveler's checks.

M1 consists of assets that have liquidity, M1 consists of assets that have liquidity, or the ability to be used as , or directly or the ability to be used as , or directly converted to cash.converted to cash.

Funds in checking accounts are often Funds in checking accounts are often referred to as demand deposits. They are referred to as demand deposits. They are called this because they can easily be called this because they can easily be converted into cash or be used as cash.converted into cash or be used as cash.Traditionally checking accounts did not Traditionally checking accounts did not pay interest, but now many of them are pay interest, but now many of them are paying interest. Checking accounts that do paying interest. Checking accounts that do pay interest are called other checkable pay interest are called other checkable accounts. accounts.

M2M2Also called near money. M2 consists of all the Also called near money. M2 consists of all the assets in M1 plus what's in savings accounts, assets in M1 plus what's in savings accounts, small denomination time deposits such as CD’s, small denomination time deposits such as CD’s, and money market mutual funds. and money market mutual funds. Savings Accounts – draw a small amount of interest Savings Accounts – draw a small amount of interest

and are not risky.and are not risky. CD’s – deposits that draw more interest but have CD’s – deposits that draw more interest but have

restrictions on the amount of time you have to keep restrictions on the amount of time you have to keep your money in there.your money in there.

Money Market Mutual Funds – a fund that pools Money Market Mutual Funds – a fund that pools money from small savers to purchase short-term money from small savers to purchase short-term government and corporate securities.government and corporate securities.

M2 accounts are not liquid.M2 accounts are not liquid.

FUNCTIONS OF FINANCIAL FUNCTIONS OF FINANCIAL INSTITUTIONSINSTITUTIONS

Offer a wide range of services and help Offer a wide range of services and help manage the money supply.manage the money supply.

SERVICESSERVICES

1. Storing Money – provide a safe and 1. Storing Money – provide a safe and secure place to store your money. secure place to store your money. Consumer deposits are protected by the Consumer deposits are protected by the FDIC and insured against such things as FDIC and insured against such things as robbery and fires.robbery and fires.2. Saving Money – Banks are a place 2. Saving Money – Banks are a place were customers can save their money and were customers can save their money and collect interest from their accounts. Banks collect interest from their accounts. Banks have both saving and checking accounts.have both saving and checking accounts.

3. Loans – banks provide loans to both 3. Loans – banks provide loans to both consumers and businesses for a fee. They consumers and businesses for a fee. They collect interest off the loans which allows collect interest off the loans which allows them to make money.them to make money.

FRACTIONAL RESERVE SYSTEMFRACTIONAL RESERVE SYSTEM

SEE PAGE 260.SEE PAGE 260.

MORTAGESMORTAGES

A specific type of loan that is used to buy A specific type of loan that is used to buy real estate. Mortgages are given for both real estate. Mortgages are given for both residential and commercial purposes and residential and commercial purposes and are paid in a certain amount of years. (15-are paid in a certain amount of years. (15-30)30)

CREDIT CARDSCREDIT CARDS

Credit Cards – a card entitling its holder to Credit Cards – a card entitling its holder to buy goods and services based on the buy goods and services based on the holder’s promise to pay for these goods holder’s promise to pay for these goods and services.and services.

You must also pay the service charges You must also pay the service charges and interest fees that come with the credit and interest fees that come with the credit cards.cards.

Interest – the price paid for the use of Interest – the price paid for the use of borrowed money.borrowed money.

Interest is how banks make money.Interest is how banks make money.

Principal – the amount of money Principal – the amount of money borrowed. borrowed.

Simple interest – interest paid only on Simple interest – interest paid only on principal.principal.

Compound Interest – interest paid on both Compound Interest – interest paid on both principal and accumulated interest.principal and accumulated interest.

FINANCIAL INSTITUTIONSFINANCIAL INSTITUTIONS

With deregulation in the 1990s the With deregulation in the 1990s the financial institutions became more similar financial institutions became more similar then dissimilar. Differences still remain but then dissimilar. Differences still remain but they all have check writing ability now.they all have check writing ability now.

Commercial Banks – offer checking Commercial Banks – offer checking services, accept deposits, and make services, accept deposits, and make loans. Around a third of commercial banks loans. Around a third of commercial banks are members of the Fed and they provide are members of the Fed and they provide the most services and have the largest the most services and have the largest impact on the economy.impact on the economy.

Savings and Loan – original institutions Savings and Loan – original institutions that pulled money from its members so that pulled money from its members so they could buy homes. S&Ls now function they could buy homes. S&Ls now function like regular banks.like regular banks.

Mutual Savings Banks – Owned by the Mutual Savings Banks – Owned by the depositors. Some of them started to sell depositors. Some of them started to sell stocks so now they depositors don’t own stocks so now they depositors don’t own them. They were set up for people who them. They were set up for people who make smaller deposits and engage in make smaller deposits and engage in smaller transactions. smaller transactions.

Credit Unions – cooperative lending Credit Unions – cooperative lending associations for particular groups and associations for particular groups and occupations. Interest rates are often lower occupations. Interest rates are often lower then traditional banks.then traditional banks.

Finance Companies – issue installment Finance Companies – issue installment loans to consumers, such as car loans, loans to consumers, such as car loans, and charge higher interest rates and charge higher interest rates traditionally. (charge higher interest rates traditionally. (charge higher interest rates because customers frequently fail to pay)because customers frequently fail to pay)

ELECTRONIC BANKINGELECTRONIC BANKING

Computers and technology have Computers and technology have drastically changed the banking industry drastically changed the banking industry and the way we personally bank!.and the way we personally bank!.

Automated Teller Machines – ATMs – take Automated Teller Machines – ATMs – take in deposits and handle withdraws faster in deposits and handle withdraws faster and can be placed in numerous and can be placed in numerous convenient locations.convenient locations.

Debit Cards – Similar to a credit card, but Debit Cards – Similar to a credit card, but functions more like a check and they can functions more like a check and they can be used to withdraw money. For security be used to withdraw money. For security they require you to use a PIN number.they require you to use a PIN number.Home Banking – Account managing and Home Banking – Account managing and transfers can be done at home via the transfers can be done at home via the computer.computer.Paychecks and other payments can also Paychecks and other payments can also be direct deposited by computer now.be direct deposited by computer now.

Automated Clearing House – Located at Automated Clearing House – Located at Fed banks these allow consumers to pay Fed banks these allow consumers to pay creditors through wire transfers.creditors through wire transfers.

Stored Value Cards – often called smart Stored Value Cards – often called smart cards, SVCs are cards that carry a prepaid cards, SVCs are cards that carry a prepaid balance can carry information. balance can carry information.

Some feel these could replace currency Some feel these could replace currency one day.one day.