Economics 10/24/11 OBJECTIVE: Demonstration of Chapter#9 and begin examination of money. MCSS E I. Administrative Stuff -attendance -distribution of test II. Chapter#9 Test III. Journal #26 pt.A -Read “Cybernomics Spotlight” p ) What does the future of money look like? 2.) What is a Smart Card? IV. Journal #26 pt.B -notes on money

In the beginning… People traded stuff for other stuff. It was good, but it was inconvenient to carry around a bunch of heavy stuff hoping that the person you wanted to trade with would trade with you. This was the barter economy.

A new medium of exchange Something accepted by all parties as payment for goods and services It included: Gold, Silver, and even Salt (these are commodities) For something to serve as money it MUST have value.

Now we use… Fiat money – money by government decree. It is money because the government says it is.

Brief History of Fiat Money In the U.S. from Revolutionary times until the Civil War paper currency (Fiat) was issued by private banks. At first banks were honest and only printed enough notes they could reasonably back with gold and silver. Then, problems arose.

The Bank of Milewski Printed in Wyandotte, MI $5.00 In Butter & Guns We Trust

Problems 1.) Too many currencies in circulation 2.) Banks could print more money when ever they wanted. Temptation was there. 3.) Counterfeiting

By the time of the Civil War Congress needed money to fight the war, so the idea of greenbacks emerged. At first they had no backing of gold or silver, but they were declared legal tender. In 1862, the Legal Tender Act was passed and $150 million was printed.

National Banks Private banks that got their charter to operate from the Federal Government, not the state governments. They issued a standard national currency backed by war bonds. In 1865 Congress forced the state banks to join the federal system by placing a 10% tax on all privately printed bank notes.

Gold and Silver Certificates Gold certificates – backed by gold in the U.S. Treasury were originally designed to settle accounts between banks and were printed in large denominations. Silver certificates – paper currency backed by silver dollars in the U.S. Treasury.

Silver Certificates “(they) modeled off the popular gold certificates.” In reality, they were issued to prop up falling silver prices, because like all commodities, the price of silver fluctuated. They were popular because people were not happy to carry around the bulky silver dollars being produced by the government. For example: Imaging that there were only pennies. Imaging how inconvenient it would be to go shopping.

Economics 10/25/11 OBJECTIVE: Examine the gold standard. MCSS E I. Journal#27pt.A -Read “Issues in Free Enterprise” p Answer questions (1-3) p.283 II. Return of Chapter#9 Test III. Quiz#15 IV. Journal#27pt.B -notes on the gold standard V. Journal#27pt.C -notes Econ U.S.A. episode#8 “The Banking System”

Silver Certificates “(they) modeled off the popular gold certificates.” In reality, they were issued to prop up falling silver prices, because like all commodities, the price of silver fluctuated. They were popular because people were not happy to carry around the bulky silver dollars being produced by the government. For example: Imaging that there were only pennies. Imaging how inconvenient it would be to go shopping.

The Gold Standard In 1900, Congress passed the Gold Standard Act which fixed the price of gold at $20.67 per ounce. Gold standard – a monetary standard under which the basic currency unit is equal to, and can be exchanged for, a specific amount of gold. People still used the same types of currency (greenbacks, silver certificates, etc) as they did before, but now they could exchange them for gold at the Treasury.

Advantages of the Gold Standard People feel secure about their fiat money if they know they can trade it in for gold. It is supposed to prevent the government from printing too much paper money. In reality, since the chances of everyone trading in their fiat money for gold on the same day is slim, governments just maintain the appearance of it.

Disadvantages of the Gold Standard 1.) If the amount of gold in the treasury does not grow as fast as the economy, the money supply can not expand and economic growth will be restricted. 2.) If everybody trades their money in for gold, the nations gold reserve will disappear. 3.) Since the price of gold changes dramatically over time, any government that tries to fix the price of gold has huge market pressures working against it. 4.) Risk of Political Failure

Political Failure Case Study: Switzerland In 1999, when the Swiss abandon the gold standard, the price they had fixed gold at was about $95 per ounce. Since, gold was in reality $280 per ounce in early 1999, nobody was willing to sell the Swiss gold for $185 less than they could sell it to anybody else. Additionally, the Swiss were also not willing to sell their gold for $95 per ounce either.

Political Failure Case Study: The United States When banks began to fail in the early 1930’s, people began to cash in their U.S. paper currency for gold. So did foreign countries that had U.S. currency. Step#1: With the reality of the U.S. having no gold, the government quit redeeming paper currency for gold. Step#2: On August 28, 1933, FDR declared a national emergency which required all citizens with more than $100 of gold or gold certificates to file a disclosure form with the government.

The U.S. & Gold Step#3: In 1934, the U.S. government fixed the price of gold at $35 per ounce. Step#4: The U.S. then confiscated all the privately owned gold and the U.S. quit exchanging fiat currency for gold. This in effect took the U.S. off the gold standard. The U.S. continued to fix the price of gold at $35 per ounce until 1971.

Inconvertible Fiat Money Standard Inconvertible Fiat Money Standard – a monetary standard under which the fiat money cannot be converted to gold or silver. Now, the government manages the money supply under the Federal Reserve System.

Economics 10/26/11 OBJECTIVE: Examine the U.S. Mint. MCSS E I. Journal#28pt.A -Read “Profiles in Economics” p.291 -Answer question #1 p.291 II. Journal#28pt.B -notes on Gresham’s Law III. Modern Marvels: The U.S. Mint -Answer questions while watching the film

Gresham’s Law Thomas Gresham, was a financial advisor to England’s Queen Elizabeth I. He said that bad money tends to drive good money out of circulation. Good money – currency where the metallic value of the coin is higher than the face value Bad money - currency where the metallic value of the coin is lower than the face value This occurred in 1965, when the U.S. took the silver out of the coins it minted. Those with copper and nickel bases stayed in circulation. Those with silver were hoarded.

Economics 10/27/11 OBJECTIVE: Examine the Federal Reserve Bank. MCSS E I. Journal#29pt.A -Read “The Global Economy” p.297 -Answer questions (1-2) p.297 II. Journal#29pt.B -notes on the Fed III. Journal#29 pt.C -notes Econ U.S.A. episode#8 “The Banking System” NOTICE: Journals Due Tomorrow!

The Federal Reserve The United States’ 1 st true central bank All federal banks were required to join and all state banks were eligible to be members. All members own shares of stock in the system making the Fed privately owned, but it is publicly controlled. The President appoints the Fed’s Board of Governors and the Chairman. All appointments are approved by Congress (checks & balances)

The Great Depression  Despite reforms like the Federal Reserve, many banks were not sound. Deposits were not insured and runs were common. Millions of people lost all of their money. (Including my Great-Grandfather) March 5, 1933 – Bank Holiday. FDR ordered all banks to close until legislation could be passed to make banks stronger.

FDIC The Banking Act of 1933 – (The Glass-Steagall Act) Main point of the Act was the FDIC – Federal Deposit Insurance Corporation. The FDIC insured depositors up to $2500. It is now $100,000 ($250,000 October 2008). Today the FDIC aggressively pursues ways to protect consumers from fraudulent banks. Both symbols from:

Other Depository Institutions Commercial Banks – for businesses and had the power to issue checking accounts Thrift Institutions – accepted deposits of small investors but didn’t have the power to issue checking accounts until the mid-1970s Mutual Savings Bank – owned and operated only for the benefit of their depositors. Page 303

S&L and Credit Unions Savings and Loans – a depository institution that invests a majority of their funds in mortgages. They were regulated by the Federal Home Loan Bank Board Credit Unions – non-profit service that is owned and operated for the benefit of it’s members.

Economics 10/28/11 OBJECTIVE: Examine the Role of the Fed. MCSS E I. Journal#30pt.A -Film: Federal Reserve: The Eye of the Storm -Answer questions (1-8) on the film II. Quiz#16 III. Journal#30pt.B -notes on non-bank financial institutions NOTICE: Journals Due!

The Federal Reserve: The Eye of the Storm 1.) What do people want most in a bank? 2.) What do banks do with the money people deposit in them? 3.) What happens when a bank has more money than it needs? 4.) What emergency economic action did the Fed take in 1992? 5.) What is Fed-Wire? 6.) What was a run on a bank? 7.) How do banks fail today? 8.) In what ways does the Fed ensure that banks don’t fail today?

Nonbank financial institutions Another important group of financial intermediaries includes: nonbank financial institutions– nondepository institutions that channel savings to borrowers. Finance companies, life insurance companies, pension funds, and real estate investment trusts are examples of nonbank financial institutions.