1. Chapter 11 – Money and Banking
Economics
Chapter 11 – Money and Banking

2. Evolution of Money
Barter economy- relies on trade of goods for goods; no money.
Bartering was used before the advent of money! Bartering is still used in some societies and on micro levels.

3. What is Money?
Any substance that functions as a medium of exchange, a measure of value and store of value.

4. What is money?/ Functions of Money
Medium of exchange: money, or other substances generally accepted in exchange.
Measure of value: money, a common denominator to measure value.
Store of value: retains value over time.

5. Money in Early Societies
1. shells, dog teeth, fishhooks
2. commodity money – money that has alternative use. i.e. fishhooks you could also use to fish with.
3. first money- money by government decree, has very little value on its own

6. Money in Colonial America
1. commodity money- gunpowder, corn, tobacco.
2. Wampum 1645 Connecticut set monetary value for wampum- made from shells.
3. Paper currency- some states allowed individuals to print their own paper currency – had to be backed by gold and silver
1775- Continental currency

7. Wampum

8. Money in Colonial America
3. Paper currency- some states allowed individuals to print their own paper currency – had to be backed by gold and silver
1775- Continental currency
4. Specie-
Coins, usually made from silver or gold.
Usually preferred by early settlers over paper money, because they contained gold or silver

9. Origins of the Dollar
New money established by the first Congress. Based on the pesos.
Bullions- ingots or bars of precious metals- or minted into coins.
Mexican pesos smuggled into the US.

10. “Talers”
Pesos divided into 8 bits, resembled the Austrian taler, which sounded like “dollars”.
Franklin and Hamilton decided dollar would be basic monetary unit – standard unit of currency
Instead of divided into 1/8’s (pesos) they divided it into 1/10’s.

11. Characteristics of Money
Portable: easily transferred
Durability: has to last when handled
Divisibility: easily divisible into smaller units
Limited availability- limited supply

12. Class/Homework
How does money advance the exchange of goods and services.
Describe three functions of money.
Name four types of early money.
Describe the four characteristics of money.

13. Early Banking and Monetary Standards
Privately issue bank notes
Congress power to make money (Constitution)
1. Growth of State Banks
2. Abuse in Banks
3. Problems with Currency

14. Growth in State Banks
By 1811 approximately 100 banks existed in the US.
State banks- chartered by the state gov’t
Bank of the United States- chartered by the federal government

15. Abuses in Banking
Wildcat banks- printed money that was not backed by silver or gold

16. Problems with Currency
too many different kinds of money
Temptation to print too much money

17. The Greenback Standard
Congress authorized printing of federal notes called greenbacks.
2. National banks created- issued bank notes or national currency
3. gold certificates- money backed by gold 1863

18. The Greenback Standard
silver certificates- notes backed by silver
treasury coin notes- paper currency redeemable in gold or silver

19. The Gold Standard
1. basic unit of currency equivalent to a set amount of gold
2. Two major advantages:
1. people feel more secure about money
2. prevents government from printing too much money

20. The Gold Standard 3. Disadvantages
1. growing economy needs a growing money supply
2. too many people decided to exchange their notes for gold- deplete govt’s gold reserve
4. US went off gold standard in 1934

21. Inconvertible Fiat Money Standard
1. Money cannot be exchanged for gold or silver though people can own gold.
2. government controls money supply: consists of mostly checking accounts, coins, and currency.

22. Class/Homework
Explain how privately issued bank notes became part of the money supply.
List the five major currencies in use after the Civil War.
Identify the advantages and disadvantages of the gold standard.
Describe the inconvertible fiat money standard that the US uses.

23. Development of Modern Banking

24. National Banking System
1. National Bank requirements:
Use National in the title
Pass stiff inspections
Purchase government bonds
2. Dual Banking
Charter from state and national banks

25. National Banking System
3. Reform:
Took too long to clear checks
Currency backed by bonds were difficult to maintain
No place to go in time of need
4. Federal Reserve System- created 1913
Central bank= lends to other banks
All nat’l banks required to join others are allowed to join
Federal Reserve notes- our money today

26. Banking during the Great Depression
1. Bank Failures
Too many banks between
Start of Depression
25,500 banks had no deposit insurance
Too many runs on the bank
March 5, 1933, FDR called for a bank holiday
Congress checked the banks
10,000 closed or merged with other banks

27. Banking during the Great Depression
Federal Deposit Insurance:
Started protecting at $2,500/per year
Now $250,000/per bank account

28. Other Depository Institutions
1. Commercial Banks
Catered to interest of businesses and commerce
Issued demand deposit accounts (checks)
2. Thrift Institutions
Savings and loan associations
Savings banks

29. Other Depository Institutions
3. Savings Banks:
Depositor- owned financial organization operated for benefit of depositors
Later sold stock; depositors don’t own now
Catered to smaller customers
NOW accounts– interest on checking

30. Other Depository Institutions
4. Savings and Loan Associations
Home mortgages
5. Credit Unions
Owned and operated by and for its members
Costs low
Share drafts– like checking account

31. Class/Homework Why was the Federal Reserve System created?
Explain why the National Banking System was created.
Identify 3 depository institutions.
Complete note cards.

32. Crisis, Reform, and Evolution
Decade of Deregulation
After depression until late 1970’s tremendous amount of regulation’s on banks
1980 deregulation started
Savings banks and savings and loans allowed to pay more interest than commercial banks. Commercial banks felt cheated.

33. Crisis, Reform and Evolution
Commercial banks could issue checking accounts but savings banks could not. The felt cheated.
1980- DIDMCA Act Passed
Regulation Q- max interest rates were phased out.
Now accts could be offered anywhere
All institutions could borrow from Feds not just commercial bansk

34. Crisis, Reform, and Evolution
1982- Garn-St. Germain Act
S and L and savings could issue credit cards, real estate loans and commercial loans.

35. Savings and Loan Crisis
By 1988 only 3000 – caused by bankrupcy and mergers

36. 4 Causes of Failures
Deregulation- s & L not prepared to compete in these new markets
High interest rates- has made loans at 10% in the ‘70s, by the ‘80s rates had gone up to 15% - lost money
Inadequate capital- bad loans hit them hard- not enough in reserve
Fraud- reduced member of inspectors therefore a few companies committed huge fraud

37. Evolution in the 1990’s - 1980s turbulent -1990s caution watchword
Banks merged
Larger accounts
More services
Less differences between commercial banks, savings banks and savings and loans.

38. Class/Homework
Describe the four factors contributing to the S&L crisis.
The FDIC insures deposits up to 250,000 what would you do if you had 2M dollars?