3. Why is a strong banking system essential to a prosperous society?

4. Mark 12:15-17 “…he said to them, “Why put me to the test? Bring me a denarius and let me look at it.” 16 And they brought one. And he said to them, “Whose likeness and inscription is this?” They said to him, “Caesar's.” 17 Jesus said to them, “Render to Caesar the things that are Caesar's, and to God the things that are God's.” And they marveled at him.

6. Money and the Banking System

7. Is money wealth??

8. No

10. Is money wealth?? No Money is just a way to transfer wealth or to give people incentives to produce wealth

11. Is money wealth?? No Money is just a way to transfer wealth or to give people incentives to produce wealth All people have to do is agree on something as an intermediary means of exchange and bingo, money!

15. Money, money, money Money only works because other individuals will supply real goods and services in exchange for that money

16. Money, money, money Money only works because other individuals will supply real goods and services in exchange for that money History of money?

17. Money, money, money Money only works because other individuals will supply real goods and services in exchange for that money History of money? So... The definition of Money: Something generally accepted as a medium of exchange

18. Alternate money

19. Credit cards, debit cards, checks, IOUs, gold

20. Alternate money Credit cards, debit cards, checks, IOUs, gold Barter: lots of this going on at Craigslist

21. Alternate money Credit cards, debit cards, checks, IOUs, gold Barter: lots of this going on at Craigslist “2006 Fender Telecaster Deluxe FMT HH, will trade for clean Lamborghini or Ferrari.”

22. Alternate money Credit cards, debit cards, checks, IOUs, gold Barter: lots of this going on at Craigslist “2006 Fender Telecaster Deluxe FMT HH, will trade for clean Lamborghini or Ferrari.” Bitcoin

24. When money goes bad

25. Inflation

26. Inflation is a general rise in prices

27. Inflation Inflation is a general rise in prices Prices rise when there is more demanded than supplied at a given price

28. Inflation Inflation is a general rise in prices Prices rise when there is more demanded than supplied at a given price So when there is more money, people tend to spend more. Without increase in output, prices simply rise

29. Inflation Inflation can be viewed as general decline in the real value of money, loss of purchasing power

30. Inflation Inflation can be viewed as general decline in the real value of money, loss of purchasing power Rule: more money in society means higher prices

31. Inflation “The big problem with money created by the government is that those who run the government face the temptation to create more money and spend it”

32. $787 billion “porkulus” bill signed by POTUS in 2009

33. Inflation at work What was inflation for the last 10 years?

34. Inflation at work What was inflation for the last 10 years? 24.3%

35. Inflation at work What was inflation for the last 10 years? 24.3% What was inflation for the last 20 years?

36. Inflation at work What was inflation for the last 10 years? 24.3% What was inflation for the last 20 years? 58.4%

37. Inflation in real life Inflation over last 50 years (1964-2014): 657% I.e., if I bought an item for $10,000 in 1964 it would cost $75,735 today

38. Now that’s inflation Inflation in Zimbabwe in 2008: 79 million%

39. Now that’s inflation Inflation in Zimbabwe in 2008: 79 million% per month!

40. Now that’s inflation Inflation in Zimbabwe in 2008: 79 million% per month! Annual rate in 2008….. 89,700,000,000,000,000,000,000%

43. How do politicians use inflation?

44. How do politicians use inflation? Because raising taxes can be political danger, politicians print more money

45. How do politicians use inflation? Because raising taxes can be political danger, politicians print more money Result: prices rise, eroding purchasing power

46. How do politicians use inflation? Because raising taxes can be political danger, politicians print more money Result: prices rise, eroding purchasing power Inflation is in effect a hidden tax… the money that people saved is robbed of purchasing power which is transferred to the government issuing the money

47. “Our economic problems worry me much less than our political solutions, which have a far worse track record.” Dr. Sowell

48. Deflation

49. Deflation Persistent decrease in the general prices of goods and services

50. Deflation Persistent decrease in the general prices of goods and services Can be disastrous: people hold onto money, creating less demand, prices continue to drop

51. Deflation Persistent decrease in the general prices of goods and services Can be disastrous: people hold onto money, creating less demand, prices continue to drop Raises fears of the Great Depression

52. The Banking System

53. Why have banks at all?

54. Safety… economies of scale in guarding money

55. Why have banks at all? Safety… economies of scale in guarding money Enable business to achieve economy of scale by financing much more than individual businesses could on their own

56. Why have banks at all? Safety… economies of scale in guarding money Enable business to achieve economy of scale by financing much more than individual businesses could on their own And you can make money from a bank: people acting in their own self interest lead to a more prosperous society

57. What is the U.S. banking system??

58. A group of private institutions that transfer savings from people to others who want to borrow

59. What is the U.S. banking system?? A group of private institutions that transfer savings from people to others who want to borrow There are about 7,042 FDIC-insured banks and S&Ls in the U.S.

60. What is the U.S. banking system?? A group of private institutions that transfer savings from people to others who want to borrow There are about 7,042 FDIC-insured banks and S&Ls in the U.S. That’s down from about 8,430 in ‘08

61. Top U.S. banks JP Morgan Chase Bank of America Citi Group Wells Fargo Goldman Sachs Honest George’s Bank, Used Car Parts and Pet Boutique

62. What is the U.S. banking system?? Banking system enables millions of people to spend money belonging to millions of other people for purchases and investments

63. What is the U.S. banking system?? Banking system enables millions of people to spend money belonging to millions of other people for purchases and investments Banking system affects total demand in the economy as a whole by adding to the money supply through “fractional reserve banking”

64. So, how do banks work?

65. Fractional Reserve Banking A system that enables banks to only have on hand a fraction of the total reserves needed to cover all deposits

66. Fractional Reserve Banking A system that enables banks to only have on hand a fraction of the total reserves needed to cover all deposits Since all depositors won’t demand their money at once, banks lend out the rest and earn interest and fees

67. Fractional Reserve Banking A system that enables banks to only have on hand a fraction of the total reserves needed to cover all deposits Since all depositors won’t demand their money at once, banks lend out the rest and earn interest and fees Fractional reserve banking creates “new” money to create wealth

68. Fractional Reserve Banking U.S. Required Reserve Ratio is 10% on demand deposits (all deposits except savings accounts and CDs), above $79.5 million Down from 12.3% in 1968

69. Fractional Reserve Banking U.S. Required Reserve Ratio is 10% on demand deposits (all deposits except savings accounts and CDs), above $79.5 million Down from 12.3% in 1968 So if a bank has $500 million in deposits, it must maintain $50 million in cash in its vaults or in a Federal Reserve Bank

70. What economics looks like in college M1= Mb*mm mm= (1+c)/c+R M1 is money supply; Mb is monetary base; mm is money multiplier; c is currency ratio; R is reserve ratio

72. Fractional reserve banking Ratio varies by country

73. Fractional reserve banking Ratio varies by country 0% in Australia, Canada, Mexico to 19.5% in China, to 30% in Lebanon

74. Fractional reserve banking Ratio varies by country 0% in Australia, Canada, Mexico to 19.5% in China, to 30% in Lebanon Enough!!! How exactly does fractional reserve banking create wealth???????

75. Federal Reserve System A central bank created in 1913 by Congress to control all private banks

76. Federal Reserve System A central bank created in 1913 by Congress to control all private banks Role is to prevent banking panics… runs on the bank

77. Federal Reserve System A central bank created in 1913 by Congress to control all private banks Role is to prevent banking panics… runs on the bank Tells banks what reserves they can hold

78. Federal Reserve System A central bank created in 1913 by Congress to control all private banks Role is to prevent banking panics… runs on the bank Tells banks what reserves they can hold Insure deposits through the FDIC (Federal Deposit Insurance Corp.)... thus prevent “runs” on banks

79. The Fed Sets interest rates on loans to banks, thus indirectly controlling interest rates throughout the banking system

81. The Fed Sets interest rates on loans to banks, thus indirectly controlling interest rates throughout the banking system Operates 12 Federal Reserve Banks throughout the country that work with private banks to distribute funds, extend credit, process U.S. money, etc.

82. Assignment for April 1 Read and study Chapter 17 of Basic Economics: “Government Functions”