Chapter 11 Spring 2016

The Evolution of Money Barter Economy – A moneyless economy that relies on trade Money – A substance that serves as a medium of exchange, a measure of value, and a store of value Medium of Exchange – Something accepted by all parties as payment for goods and services Measure of Value – A common denominator that can be used to express worth in terms that most individuals understand Store of Value – The Property that allows purchasing power to be saved until needed Commodity Money – Money that has an alternative use as an economic good, or commodity Fiat Money – Money by government decree

The Evolution of Money Specie – Money in the form of coins made from silver or gold Pesos in America – When George Washington became president the most common form of currency was the peso Ben Franklin and Alexander Hamilton were put in charge to change this and came up with the dollar Characteristics of Money Portability – Easy to carry and transfer Durability – Duh Divisibility – Again…duh Limited Availability – Wait for it……………Duh

Early Banking and Monetary Standards Monetary Standard – The mechanism designed to keep the money supply portable, durable, divisible and limited in supply Article 1, Section 10…No State can make their own money This was enforced until the Civil War The Civil War was when the government started producing paper money Problems with Currency Each bank had their own money Banks could print more money even if they didn’t have it Counterfeiting

Early Banking and Monetary Standards The Greenback Standard – When the Federal Government started producing legal tender Legal Tender – Fiat currency that must be accepted in payment for debts 1862 – Legal Tender Act – Federal Government started making money known as “Greenbacks” This becomes known as a national currency A 10% tax was levied on all other currency Gold and Silver Certificates – Legal Tender backed by its worth in Gold or Silver Treasury Coin Notes – Could be exchanged for Gold or Silver Gold Standard – The concept that all legal tender must not exceed the amount of gold we have as a nation

Early Banking and Monetary Standards Disadvantages of the Gold Standard Gold stock may not grow fast enough People may decide to cash in all their gold Price of gold changes Political Failure Abandoning the Gold Standard FDR during the Depression Nixon in the 70’s

The Development of Modern Banking 1913 – Federal Reserve created – A central bank that can lend to other banks – Created by Woodrow Wilson Issued Federal Reserve Notes Banking during the Great Depression Banks expanded too quickly 10,000 of 25,000 banks failed A “Run on the Bank” bankrupted many banks FDR declared a national “Bank Holiday” FDIC created – (Glass-Stegal Act) Federal Deposit Insurance When created $2,500 was insured for every customer Increased to $100,000 Now it’s $250,000

The Development of Modern Banking Commercial Banks – Banks strictly for business and commerce Time Deposits – Money cannot be removed for a certain amount of time Checking Accounts – Also known as Demand Deposits NOW (Negotiable Order of Withdrawal) accounts – A checking account that pays interest Savings and Loans (S&L) – Banks that invest the majority of their funds into home mortgages Credit Union – A nonprofit bank for only its members Deregulation by Reagan– The removal or relaxation of government restrictions on business Led to the Savings and Loans crisis in the 1980’s Many S&L’s changed their name to avoid scandal (WAMU)

The Development of Modern Banking M1 = Cash, coin and demand deposits M2 = M1 + Small Time Deposits + Savings Deposits M3 = M2 + Large Time Deposits (No longer exists)

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