Money and Banking

Money ▪Medium of Exchange → something that is accepted by all parties involved and is used as payment for a good or service; ▪Measure of Value → having a common denominator which allows individuals to establish worth from one product to another; ▪Store of Value → allows purchasing power to be saved until needed.

Money in the Early Days ▪Barter Economy-a moneyless economy that relies on trade ▪Throughout history people have found many ways to display money; the primary way is the use of Commodity Money, money that has an alternative use as an economic good and has value in and of itself. ▪Over time, people have shifted towards Fiat Money, money by government decree. ▪Examples: tobacco, gunpowder, musket balls, corn, hemp, etc.

▪Read pages , provide a paragraph explaining the basic details of money that existed in colonial America and the origins of the dollar ▪Specie-money in the form of coins made from silver or gold ▪Monetary unit-standard unit of currency

The Basic Characteristics of Money ▪Portability ▪Durability ▪Divisibility ▪Limited Availability Explain why each of the following characteristics is so important when examining money

Early Banking and Monetary Standards ▪A monetary standard is the mechanism designed to keep the money supply portable, durable, divisible, and limited in supply. ▪1811 → Banks in colonial period issued their own currencies and in 1811, there existed around 100 state banks, banks which receive their charter to operate from state governments; they issued their own currencies

▪Problems with State Banks Currencies ▪Different sizes, colors, and denomination (no uniformity) ▪Could print more money when they wanted (not in limited supply) ▪Counterfeiting By Civil War time period, there were 16,000 banks with 10,000 kinds of paper currency.

▪1861 → Congress Authorized printing of $60 million demand notes; which were declared a legal tender, fiat currency that must be accepted in payment of debts. ▪1862 → congress passed the Legal Tender Act, authoriizing the Union government to print $150 million US Notes, new federal fiat currency that also had no gold or silver backing.

▪1963 → over half the currency in circulation were US Notes, or what they called greenbacks. ▪1863 → government issued gold certificates, paper currency backed by gold place on deposit with the US Treasury;

▪1865 → the federal government forced state banks to join the National Banking System creating a national currency, currency of uniform appearances that was backed by the US government bonds; ▪1878 → government introduced Silver Certificates, paper currency backed by silver dollars and bullion place on reserve with the Treasury

▪1882 → the government began printing gold certificates in smaller denominations for the public to use. ▪1890 → the federal government printed the fifth, and final type of paper currency called Treasury coin notes, paper currency issued by the treasury that was redeemable in both gold and silver. ▪1893 → Treasury coin notes were repealed

▪1900 → congress passed the Gold Standard Act, creating the gold standard, a monetary standard under which the basic currency unit is equal to a specific amount of gold; set at $20.67 per ounce. ▪1930s → the depression hit and banks began to fail because people began to withdraw gold because it was safer to hold instead of paper; Abandoned the Gold Standard;

▪1933 → President FDR declared a national emergency, which forced people who had more than $100 worth of gold or gold certificates to file a disclosure to the US Treasury. ▪1934 → US went off the gold standard when it confiscated gold from private citizens. Started the inconvertible fiat money standard, a monetary standard under which the fiat money supply cannot be converted into gold or silver by its citizens.

▪1968 → the last issue of US notes (greenbacks) took place and the retirement of silver certificates. ▪1975 → Americans became allowed to own gold and silver certificates but neither is officially part of the money supply;

The Gold Standard Details ▪Reminder: A monetary standard under which the basic currency unit is equal to, and can be exchanged for, a specific amount of gold; ▪Still used same currencies: greenbacks, National bank notes, gold certificates, silver certificates, and treasury coin notes; now all these notes could be exchanged for gold;

Advantages of the Gold Standard ▪People feel more secure knowing money could be exchanged for gold; ▪It prevented the government from printing too much money;

Disadvantages of the Gold Standard ▪Gold stock may not grow enough to support the growing economy; ▪People could withdraw gold and drain the government’s reserves ▪Gold is not a fixed worth ▪A political risk of failure

Development of Modern Banking ▪In 1913, Congress decided it was time to create a bank that could lend to other banks in time of need, or what they called a ____Central Bank____. They created what was called the _____Federal Reserve System_____as the nation’s first centralized banking system. The FED was created as a corporation meaning that any bank that joined had to purchase ____Shares of Stock____ in the system. Because it is a corporation, the government does not necessary own the FED but _____Privately Owned Banks_____ own it and the ___President____ appoints the Fed’s Board of Governors and its chairperson. The system created _____Federal Reserve Notes_____, paper currency issued by the Fed that eventually replaced all other types of federal currency. ▪At the start of the Great Depression, about 25,000 banks existed; which did not allow for much confidence in the banking system. It was not uncommon for people to make a ___Run on the Bank_____ to withdraw their funds from a bank before it failed. This made the situation worse and caused more banks to fail. President Roosevelt attempted to alleviate the situation with a __Bank Holiday___ on March 5 th, 1933, where all banks were required to close down for the day. By 1934, 15,000 banks had either closed down or were forced to merge with ____Stronger Partners____. ▪The Federal Deposit Insurance Corporation was created in 1933 with the ____Banking Act_____, also known as the ______Glass Steagall Act___. In addition to strengthening the banking system as a whole, the FDIC created insurance on customer deposits if banks were to fail. This did not give money back to the people who lost it during the Great Depression, but it did provide a sense of __Security____ in banking for the future. People now worried less about their _____Safety of their Deposits____.

Chapter 15: The Fed and Monetary Policy ▪Use the diagram to explain the structure of the Federal Reserve banking system. Provide all the information provided asked for under the components which make up the FED.

Regulatory Responsibilities of the Fed… 1. Monitoring the reserves the member banks are required to keep on hand either in the Fed or as cash in the vault ▪Used to clear checks ▪And to control money supply 2. Bank Holding Companies – Corporations which own one or more banks; these companies were originated because some bankers tried to get around the banking laws. The Fed will regulate on these corporations.

Regulatory Responsibilities… ▪3. International Operations – foreign banks control about 20 percent of all banking assets of which the US. Fed can regulate as necessary. There are banks from 60 different countries and about 500 branches operating in the United States. Comparatively, the Fed also monitors about 800 branches of US fed member banks operating in foreign countries. ▪4. Member Bank Mergers – must have approval of the Fed for a merger. -If the surviving bank is a state member bank, the Fed must approve the merger -If two national banks merge, the Comptroller of the Currency, a Treasury department official must approve the merger -If two nonmember state banks merge, the FDI must approve the merger

Other Federal Reserve Services ▪Clearing Checks – Examine the figure on page 412, and explain/draw the process of clearing a check.

Other Federal Reserve Services ▪Consumer Legislation – Regulation Z → the authority of the Fed to extend truth-in-lending disclosures to individuals who borrow. ▪Maintaining currency and coins ▪Financial Services to the Government – does for the Government what our banks do for us (but to an extreme).

Vocabulary of Monetary Policy ▪Use the following paper to provide explanations for all the terminology found which help understand Monetary Policy. As you read, simply show you understanding of the concepts by writing out explanations in your own words.

Monetary Policy ▪Controlling the supply of money in order to effect the cost and availability of borrowing money;

Fractional Reserve System ▪Keeping a fraction of the money people have deposited on hand as legal reserves (money held as cash in the vault or as deposits in the Fed); ▪The percentage set aside of every deposit placed in legal reserves is call the reserve requirement; usually around 10%; ▪Excess reserves is the money the bank has beyond the required reserve;

How do banks operate? ▪A bank has Liabilities – debts they owe; ▪And Assets – property, possessions and claims on others. ▪When liabilities and assets are diagramed together, they create a balance sheet; ▪Balance sheets helps establish the banks net worth, the amount the assets of the bank outweigh the liabilities;

Deposits and Loans ▪Deposits is the money in the bank which they must give back; ▪With excess reserves, the bank makes loans; they cannot start the next day without the proper amount of required reserves;

Other banking functions ▪Purchasing Government Bonds ▪Savings accounts/ time deposits – interest bearing accounts; ▪Certificates of deposit (CDs)

Monetary Expansion ▪Money multiplies as it is continuously loaned out from person to bank to a new person to a new bank and so on. ▪Remember, each bank can loan out a percentage of every deposit made which adds up over time;

Tools of Monetary Policy ▪Easy money policy – increases the supply of money which will decrease interest rates and will stimulate an economy; ▪Tight Money Policy – decreases the supply of money which will increase interest rates and slow an economy;

Tools of Monetary Policy ▪Change the reserve requirement – allows for more or less loans; ▪Use Open Market Operations – buying or selling of government securities; this puts more or less money into the reserves of the banks. ▪Discount Rate – interest rate the Fed charges banks to borrow from them; again, will entice banks to borrow or not to borrow;