1. Economics Chapter 13 Money and the Banking System “These documents are being distributed for educational discussion purposes only. They do not reflect any attempt by the North East Independent School District, its trustees, administrators, or teachers, to promote any particular viewpoints or opinions expressed in the documents over any others, nor do the viewpoints or opinions expressed in the documents necessarily reflect those of the NEISD, its trustees, administrators or teachers.”

2. Sect. 1: Money Barter is the direct exchange of goods or services without using money… …it was the main form of exchange in the past and still can be in developing countries …barter is used today in even highly developed societies among individuals …”I will mow your lawn if you will work on my car”… Money is more efficient than barter…

3. Three Functions of Money Money is a medium of exchange; an item that sellers accept as payment for goods and services… …buyers and sellers both recognize and accept it Money is a standard of value; it provides people with a way to measure the relative value of goods and services by comparing their prices… …facilitates record keeping/accounting; allows for the calculation of profits/losses …in the United States our standard of value is the US Dollar

4. Three Functions of Money Money has a store of value; it can be saved and used later… …must be non-perishable …must keep it’s value over time Aids in the accumulation of wealth

5. Characteristics of Money To be used as money an item must have five major characteristics Durability is the ability to be used over and over …metals like gold/silver withstand time and can last hundreds/thousands of years …paper money wears out more quickly, but can be easily replaced …the average life is our US paper money is: $1, 21-mts., $5, 16-mts.; $10, 18-mts; $20, 24-mts; $50, 55-mts; $100, 89-mts SourceSource

6. Characteristics of Money Portability is money’s ability to be carried from one place to another and transferred from one person to another… …US coin and currency is small and lightweight, making it portable Divisibility refers to money’s ability to be divided into smaller units… …the US dollar is divisible by 100 …how is other money divisible? Let’s talk pirate!

7. Divisibility

8. Characteristics of Money Stability in value means that money retains it’s value over time… …can be saved and used later …effects of inflation Acceptability means that people are willing to accept money in exchange for their goods and services… …what do other countries accept?

9. Historical Sources of Money’s Value Commodity Money is an item that has value on it’s own… …gold, silver, rubies, emeralds, diamonds, salt, tobacco, tea Representative Money is an item that gets it’s value because it can be exchanged for something else… …bills of credit for gold/silver Specia is paper money “backed” by stockpiles of silver/gold

10. U.S. Specia Money From 1882-1933 our US government issued Gold Certificates which were backed by stockpiles of gold

11. U.S. Specia Money From 1878-1964 our US government issued Silver Certificates which were backed by stockpiles of silver

12. Historical Representative Money During the American Revolution the Continental Congress issued representative money called Continentals to finance the war against Great Britain.. …because they had little “specia” to back them up they became nearly worthless and merchants often refused to accept them

13. Other Sources of Money’s Value Fiat Money is money that gets it’s value because the government decrees that it has value and it must be accepted for all transactions U.S. currency, coin and paper bills, are fiat money… …coins are made up of copper, zinc, & nickel which has little value (what is its metal value)(what is its metal value) …paper money contains almost no value on it’s own …it’s value stems from citizen’s faith in the U.S. government

14. Coins & Paper Money, What Else? Demand deposits (checking accounts) are counted as fiat money too… …checks are readily accepted by banks and are a medium of exchange, a standard of value, and have a store of value Savings accounts and time deposits are referred to as near money but are not counted as a part of the money supply

15. Sect. 2: History of U.S. Banking Two views of banking were held by the men who formed our U.S. government Federalists, led by Alexander Hamilton, believed that a strong centralized banking system was necessary to develop trade and industry in our new country Anti-federalists, like Thomas Jefferson, opposed a central banking system saying that it gave too much power to the central government and took away power from the states

16. Which side won? Hamilton and the federalists successfully convinced the new congress in 1791 to create the nation’s first central bank, The First Bank of the United States… …it operated under a 20-year charter and had the authority to create bank notes backed by gold and silver (specia) …it also was given the authority to collect money and pay money in behalf of the US government …in 1792 it started minting gold & silver coins and the currency was first called the “dollar”

17. It didn’t last long… The First Bank of the United States did not get it’s charter renewed after 20 years (1811) and state banks sprang up… …confidence in the state banks and the currency they printed was low causing chaos in the banking system Congress chartered the Second Bank of the United States in 1816 and it’s charter failed to be renewed also… …state chartered banks filled the void again

18. What’s was wrong with the state chartered banks? Lots of state chartered banks printed their own paper money… …the money did not hold it’s face value (no store of value) …money from a bank in one state was not accepted in other states …much of the new paper money was not backed by reserves of gold or silver …even with all the problems, no new central bank was established

19. Civil War (1860) to WW I (1913) By 1861 there were over 1600 state chartered banks issuing paper money… …most of it had little value During the Civil War, congress issued “greenbacks” that were not backed by specia… …the federal government just “promised” to repay the note’s face value at some time in the future

20. What about the Confederacy? The Confederacy also issued it’s own paper money… …it was worthless by the end of the war …the banking system in the nine confederate states originally had 121 chartered banks and only 5 survived at the end of the war

21. Rebuilding the Banking System Congress passed the National Banking Acts of 1863 & 1864 giving the federal government authority to… …charter banks …require banks to hold gold/silver in reserve …issue a single national currency and eliminated the currency printed by individual banks …stabilize the supply of money in the US

22. Other Important Banking Legislation The Coinage Act of 1873 began reducing the countries reliance on silver as specia The Gold Standard Act of 1900 placed the country on a gold standard, where paper money and coins carried the value of a specific amount of gold, they could be redeemed for gold (the gold standard ended in 1934) The public’s confidence in banks increased Still no central banking system was in place

23. WW I to Present In 1913, congress passed the Federal Reserve Act which established the central banking system we have today… …established the Federal Reserve “Fed” as the nation’s central bank …federally chartered banks were required to join the Fed …state chartered banks had the option to join or not join the Fed …By 1996 over 2760 banks had joined the Fed

24. The “Fed”: Success or Failure? Some of both… …successful at providing enough credit to finance WW I …unsuccessful at controlling credit during the 1920’s …overextended credit resulting in high borrower defaults prior and during the depression

25. Roosevelt’s New Deal Reforms The depression started as a financial panic where thousands of people withdrew deposits causing nearly 8000 banks to fail between 1930 & 1933 Elected president in 1932, Roosevelt promised a “New Deal”, a process to restore public confidence in the economy and the nation’s banking system

26. Roosevelt’s New Deal Reforms Roosevelt declared a “banking holiday” where banks were shut down for 4 days and then were only allowed to reopen after federal auditors certified them “financial sound”… …most banks reopened within 2 weeks …audit certification restored confidence in the banking system and businesses/ individuals began to use them again

27. Roosevelt’s New Deal Reforms The Banking Act of 1933 temporarily established the Federal Deposit Insurance Corporation (FDIC) which insured savings accounts up to $5,000 The Banking Act of 1935 made the FDIC permanent and extended the insurance guarantee to all deposits …today deposits are guaranteed to $250,000

28. Sect. 3: US Banking Today Today all commercial banks, mutual savings banks, and savings and loan associations are members of the FED and deposits in them are insured by the FDIC to $250,000 Credit Union deposits are insured by the National Credit Union Administration (NCUA) to the same $250,000 limits as the FDIC insurance fund

29. Types of Banking Institutions: It’s a charter thing, all are FDIC Commercial banks lend money and accept deposits from businesses, other banks, and individuals, make business/consumer loans Savings and Loan Associations originally accepted savings deposits and specialized in making home loans but today they provide the same services offered at banks (many of these financial institutions failed in the 1980’s because of high loan default rates when high interest rates caused many to fail to make payments on their homes) Mutual Savings Banks originally were set up to accept smaller deposits than commercial banks wanted to handle and they concentrated on home lending, today they too offer the services offered at banks

30. What’s up with credit unions? They are not-for-profit financial institutions owned by the people who have deposits there They offer the same services as banks and typically offer lower loan rates and higher deposit rates since they are not-for-profit Deposits at a CU’s are as safe as deposits in banks… …employees of the “Fed” have their own credit union, the FEDFCU!

31. What’s new in banking? ATM machines Debit cards Improved automated clearing house transactions Home banking (internet/smart phones) Bill payment …the list is growing fast

32. Do banks still fail? Over 500 banks have failed since 2000 (list)(list)

33. References Holt Economics; Texas Edition: 2003, Holt, Rinehart and Winston,