1. The Role of Money

3. The Three Uses of Money Money as a Medium of Exchange
Determine value of a good or service
Money as a Unit of Account
Compare the value of goods
Money as a Store of Value
Value even when stored/saved

4. The Three Uses of Money
Money has three main functions. Why is it important to have a means of exchange that is a stable, consistent unit of account?

5. Characteristics of Money
To be successful money must be:
PORTABLE
DURABLE
DIVISIBLE
LIMITED IN SUPPLY

6. Portability
Easily transferred from one person to another

7. Durability
Needs to be able to last when handled and does not deteriorate when being held as a store of value (savings)

8. Divisibility
Money must be easily divisible into smaller units, so that people can use only as much as needed

10. Limited Availability
Money loses its value whenever there is too much of it

11. Sources of Money’s Value
Commodity Money-
Objects that have value in and of themselves: Cattle, Gems, Tobacco

12. Representative Money
Objects that have value solely because the holder can exchange them for something else: IOU, Cashier’s Check or Money Order

13. Fiat Money Dollars, Pesos, Franks, Euros
“Legal Tender”-Has value because a government has declared that it is acceptable means to pay debts.
Dollars, Pesos, Franks, Euros

14. Sources of Money’s Value

15. The Gold Standard

16. Advantages
Limits the power of the government and banks to cause price inflation by excessive use issue of paper money
Creates certainty in international trade by providing a fixed patter of exchange rates
Gold backs up paper currency in circulation

17. Disadvantages
May not provide sufficient flexibility in the supply of money needed
A country cannot isolate its economy from depression or inflation going on in the world

18. Disadvantages Con’t
The price of gold can change dramatically over time
Increased unemployment or decline in economic expansion can make adjustments hard

19. Changes in American Banking

20. American Banking Before the Civil War
Opposing Views of Banking
The First Bank of the United States
Financial Chaos in America: Panics
The Second Bank of the United States
The Free Banking Era: State Chartered Banks
Could not back up the money they printed

21. Alexander Hamilton, a Federalist, was a staunch supporter of a strong federal government and, therefore, of a strong central bank.

22. Stability in the Later 1800s
By 1860, an estimated 8,000 different banks were circulating currency. To add to the confusion, the federal government played no role in providing paper currency or regulating reserves of gold or silver. The Civil War, which erupted in 1861, made existing problems worse.

23. During the Civil War, the Confederate government issued currency such as this bill. After the Confederacy lost the war, this currency became worthless.

24. American Banking

25. Banking in the Early 1900s The Federal Reserve System
Created by President Wilson to ensure a stable flow of money through the economy
Banking and the Great Depression
The Federal Deposit Insurance Corporation (FDIC) was created to protect the money people put in the bank
FDR Reforms: The New Deal
Created a safer and more effective use of assets by the banks

26. The Panic of 1907, illustrated here on a magazine cover at the time, contributed to many people’s belief that the nation needed a central banking system.

27. Two Crises for Banking
As a result of the many bank failures of the Great Depression, banks were closely regulated from 1933 through the 1960s. The government restricted the interest rates banks could pay depositors and the rates that banks could charge consumers for loans. By the 1970s, bankers were eager for relief from federal regulation.

28. Two Crises for Banking The Savings and Loan Crisis:
Volatile interest rate climate of the 1970s
depositors removed their money from banks and deposited it in money market funds.
This increased interest rates, because the funds were not governed by Regulation.
More than 1,000 S&Ls failed by 1989, essentially ending one of the most secure sources of home mortgages

29. Financial “Meltdown,” Bailout, and “Recovery”
Meltdown: the value of financial institutions or assets drops rapidly
Bailout: financial support to a company or country which faces serious financial difficulty or bankruptcy. It may also be used to allow a failing entity to fail gracefully without spreading contagion. A bailout can, but does not necessarily, avoid an insolvency process.

30. The Federal Reserve System

31. A Review of U.S. Banking History

32. One reason why the United States established a central banking system was to avoid financial speculation and panics.

34. Janet Yellen succeeded Ben Bernanke as Chairman of the Fed in 2014.

35. The 12 District Banks are different sizes as measured by their assets
The 12 District Banks are different sizes as measured by their assets. The New York Reserve Bank has a small geographic area but the largest number of assets.

36. The Fed’s Roles: Serving the Government
Acting as the Government’s Banker and Agent
Issuing Currency for the Government

37. Mobile banking has become increasingly popular in recent years
Mobile banking has become increasingly popular in recent years. One of the Fed role’s is to process electronic transactions.

38. The Fed’s Roles: Serving the Government
Federal Reserve Notes have various codes and markings that help identify the bill and the issuing bank.

39. The Fed’s Roles: Serving and Regulating Banks
Clearing Checks
Supervising Banking Practices
Acting as Lender of Last Resort
Monitoring Reserves
Conducting Bank Examinations

40. Between 2000 and 2009, consumers’ use of checks decreased while most other types of noncash transactions increased. Analyze Charts What technological developments occurred during these years that made the changes in non-cash transactions possible?

41. Regulating the Money Supply
The Federal Reserve is best known for its role in regulating the nation’s money supply.
setting the discount rate,
setting reserve requirements,
setting the federal funds rate target,
Using open market operations to meet that target.
Economists and the Fed watch several indicators of the money supply.
M1 is a measure of the funds that are easily accessible or in circulation.
M2 includes the funds counted in M1 as well as money market accounts and savings instruments
The Fed compares various measures of the money supply with the likely demand for money to determine when and how to use these tools.

42. The Money Supply
M1 consists of cash and assets that can be directly converted into cash. The term demand deposits refers to money in checking accounts.

43. The Fed requires banks to keep a fraction of their funds on hand and lend the remainder to customers.

44. The Functions of Modern Banks

45. Functions of Financial Institutions
Storing Money
Saving Money
Making Loans
Mortgages
Credit Cards
Interest
Making a Profit

46. Types of Financial Institutions
Commercial Banks
Savings and Loan Associations
Savings Banks
Credit Unions
Finance Companies

47. Electronic Banking Automated Teller Machines Debit Cards Home Banking
Stored-Value Cards

48. Investing

49. Investment and Free Enterprise
Capital projects, such as putting solar panels on the roof of a school, can be worthwhile but require an initial investment.

50. The Financial System
In order for investment to take place, an economy must have a financial system.
A financial system is the network of structures and mechanisms that allows the transfer of money between savers and borrowers.

51. The Financial System Financial Assets Savers and Borrowers
a tangible asset whose value is derived from a contractual claim, such as bank deposits, bonds, and stocks
Savers and Borrowers
Suppliers and Consumers of Capital

52. The Financial System
Individuals' savings is one important part of our financial system.

53. The Financial System

54. Liquidity, Return, and Risk
Used as or converted into Cash
Return
Money an investor receives above the initial investments

55. Liquidity, Return, and Risk
Investors need to think carefully about the level of risk that is right for them. Lower risk investments typically have low rewards. As risk increases however, so does potential reward.

56. Bonds and Other Financial Assets

57. Bonds as Financial Assets
Posters such as this one encouraged Americans to purchase war bonds to help the United States government pay for World War II.

58. Bonds as Financial Assets
Investors can earn money by buying bonds at a discount, called discount from par.

59. Types of Bonds Savings Bonds: Low denomination; issued by USA
Treasury Bonds, Bills, and Notes: issued by US Treasury; no credit risk
Municipal Bonds: issued by State/local govt; finance public project
Corporate Bonds: issued by Corporation for expansion
Junk Bonds: a high-yield, high-risk security; issued by a company seeking to raise capital quickly in order to finance a takeover

60. Types of Bonds
Treasury bonds, notes, and bills represent debt that the government must repay the investor.

61. Other Types of Financial Assets
Certificates of Deposit
savings certificate with a fixed maturity date, specified fixed interest rate
A CD restricts access to the funds until the maturity date of the investment
Money Market Mutual Funds
Funds pool money from small savers to purchase short-term govt or corporate securities

62. Other Types of Financial Assets
Investments with lower risk usually have lower reward as well. Bonds issued by the government are generally less risky than bonds issues by corporations.

63. Stocks

64. A stock split doubles the amount of shares that a stockholder owns.

65. Tracking Stock Performance
Bull Markets
Steady rise in Stock prices in general over a period of time
Bear Markets
A steady drop or stagnation in stock prices in general over a period of time