1. Money and Banking
Chapter 10

2. Money
Anything that serves as a medium of exchange, a unit of account, and a store of value

3. Three Uses of Money Money as a Medium of Exchange
Money as a Unit of Account
Money as a Store of Value

4. Money as a Medium of Exchange
Is anything that is used to determine value during the exchange of goods and services.
Without money, people must barter; this is exchanging goods and services for other goods and services.

5. Money as a Unit of Account
A means for comparing the values of goods and services.

6. Money as a Store of Value
German Inflation
Something that keeps its value if it is stored rather than used.
Does not work when economy experiences period of rapid inflation.

7. Coins and paper bills used as money
Currency
Coins and paper bills used as money

8. The Six Characteristics of Money
Durability
Portability
Divisibility
Uniformity
Limited Supply
Acceptability

9. Durability
Must be able to withstand physical wear and tear.

10. Portability
People need to take money with them.

11. Different denominations
Divisibility
Easily divided into smaller portions.
Spanish doubloons
Different denominations

12. Uniformity
Must be the same in what they will buy.

13. Limited Supply
Money must be limited in supply.

14. Acceptability
Everyone must be able to exchange the objects that serve as money.

15. Sources of Money’s Value
Commodity Money
Representative Money
Fiat Money

16. Commodity Money
Objects that have value in themselves and that are also used as money

17. Representative Money
Objects that have value because the holder can exchange them for something else of value

18. Fiat Money
Money that has value because the government has ordered that it is an acceptable means to pay debts

19. The History of American Banking
Chapter 10 section 2

20. American Banking Before the Civil War
Banking debate started as part of larger debate about role of government in new nation.

21. Two views of Banking Federalist Anti-FEDERALIST
Strong central government.
Led by Alexander Hamilton.
National Bank
Power in the hands of the states.
Led by Thomas Jefferson.
Decentralized banking system

22. The First Bank of the United States
Federalists successful, Bank of the United States set up by Congress in 1791.
20 year charter
Helped bring order and stability to American banking.

23. The First Bank of the United States
Bank only functioned until 1811.
Jefferson argued that it was not a power given to Congress by the Constitution.
1804

24. Chaos in American Banking
Banks issuing their own notes.
Inflation and mistrust.

25. Second Bank of the United States
Chartered by Congress in 1816 to end chaos
Another 20 year charter
Renewal vetoed by President Jackson in 1832

26. Free Banking Era
Bank runs and panics: widespread panic in which great numbers of people try to redeem their paper money.
Wildcat banks: banks with high rate of failure.
Fraud: banks collected gold / silver, issued notes, and fled.
Many different currencies.

27. The later 1800s
8,000 banks issuing currency, no federal government currency.

28. Currency in the North and South
1861 US Treasury issues its first paper currency. “greenbacks”
South issues currency backed by cotton

29. The Gold Standard
The gold standard, a monetary system in which paper money and coins are equal to the value of a certain amount of gold, was adopted in the 1870s.

30. The Federal Reserve System
This is the nation’s central banking system.
It serves as the nations central bank, it can lend to other banks in times of need.
It is made up of member banks, that belong to the Federal Reserve System.

31. Banking Reforms
1933 Congress passed act to create Federal Deposit Insurance Corporation (FDIC), this is the government agency that insures customer deposits if a bank fails.

32. Banking Today
Chapter 10 section 3

33. Measuring the Money Supply
The Money Supply: all the money available in the U.S. economy

34. M1
M1 represents money that people can gain access to easily and immediately to pay for goods and services, liquidity.
Currency
Demand Deposits
Other checkable deposits
Traveler’s checks

35. M2 Consists of all of M1 plus many other assets. M1 Savings deposits
Small denomination time deposits
Retail money market funds

36. Functions of Financial Institutions
Storing Money
Saving Money
Loans
Mortgages
Credit Cards
Simple and Compound Interest

37. Functions of Financial Institutions
Loans
Based upon fractional reserve system, banks only have to hold a certain % of what we deposit.
Mortgages
A loan to buy real estate, usually in 15, 25, or 30 year increments.
Simple and Compound Interest
Interest is the price paid for the use of borrowed money. Principal is the amount of money borrowed. Simple paid on principal only, compound on principal and interest.

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

39. Electronic Banking ATM Debit Card Home Banking
Automatic Clearing House: automatic bill paying
Stored Value Cards: phone cards, id cards, gift cards

40. Many Forms of Money
Item 1 = $10-25
Item 2 = $25-50
Item 3 = $50-100