1. MONEY AND BANKING

2. Money used to be in the form of coins that were made from precious metals and had value based upon their make up. As time went on paper receipts were used and money was stored with the goldsmiths’. The paper receipts took the form of paper money. Paper money was backed by gold. The government would store gold which would represent the paper money. Faith in the nation’s economic production and potential represents the value of money.

3. THREE USES OF MONEY commonly referred to as currency Money is a medium of exchange Money is a unit of account Money as a store of value MONEY IS ANYTHING THAT SERVES AS A MEDIUM OF EXCHANGE, A UNIT OF ACCOUNT, AND A STORE OF VALUE!

4. MEDIUM OF EXCHANGE Anything that is used to determine value during the exchange of goods and services Bartering and money are both mediums of exchange

5. BARTER The direct exchange of one set of goods or services for another. Barter is still used in many parts of the world and even in the United States. “ I will trade one cow for three pigs and ten chickens.” “ I will trade one cow for three pigs and ten chickens.” “ I will trade my Playstation for your Wii” “ I will trade my Playstation for your Wii”

6. UNIT OF ACCOUNT Money is a means for comparing the values of goods and services. Example – you can compare the price of a good in one store to the price of the same good in a different store and compare the prices because the price is expressed the same way in every store. Example – you can compare the price of a good in one store to the price of the same good in a different store and compare the prices because the price is expressed the same way in every store.

7. STORE OF VALUE Something that keeps its value if it is stored rather than used. You can save your money and it will keep its value. (inflation)

8. SIX CHARACTERISTICS OF MONEY/CURRENCY Durability – it can withstand the physical wear and tear that comes with being used multiple times. There are still coins from the Roman Empire, and there are many old coins that still show up all the time. A dollar bill generally stays in circulation for at least a year. Examples show durability.

9. Portability – money needs to be easy to carry and transfer from one person to another. Coins and paper money are extremely easy to carry around. Look at other items that used to be used and compare their portability to our currency.

10. Divisibility – money must be easily divided into smaller denominations, or units of value. You only have to use as much as necessary for any exchange. “pieces of eight” and a twenty dollar bill “pieces of eight” and a twenty dollar bill

11. Uniformity – any two units must be the same in what they can and will buy. People should be able to count and measure money accurately. People should be able to count and measure money accurately. Money has a specific value everywhere in the nation. Money has a specific value everywhere in the nation. Paying in shells vs. paying with $$$$

12. Limited Supply – having to much money in circulation will bring the value down, but not having enough will increase the value. The Federal Reserve tries to keep a balance of the supply of money. Sand dollars being found somewhere else.

13. Acceptability – everyone must be able to exchange objects that serve as money for goods and services. Coins and paper bills are accepted from place to place in America.

14. SOURCES OF MONEY’S VALUE What makes money valuable? Commodity Money – objects that have value in themselves and are also used as money. Examples – salt, corn, cows. All of these could be used for something else. Exchanging these items and others like it are examples of bartering. Commodity money usually only works in simple economics since the items don’t have all the characteristics of money.

15. Representative Money – objects that have value because the holder can exchange them for something else of value. Early representative money was in the form of paper receipts for gold or silver which were to heavy to carry around. The paper receipts became an early form of paper money. “Not worth a Continental!” IOU

16. Fiat Money – money that has value because the government has ordered that it is an acceptable means to pay debts. United States money today is fiat money. It is also called legal tender and has all six characteristics of money. Federal Reserve controls the supply which is critically in allowing the fiat system to work.

17. THE HISTORY OF AMERICAN BANKING Bank – an institution that exists for receiving, keeping, and lending money.

18. BANKING BEFORE THE CIVIL WAR In the beginning banks were managed by merchants in addition to their regular job. Banks were very informal and they were not completely safe or trustworthy. It is possible that you could lose all your money. Businesses would store money or make loans for a small fee.

19. After the American Revolution is was necessary and important to establish a safe and stable banking system. A strong system was needed to ensure trade with other countries as well as the growth of America.

20. PROBLEM…… TWO DIFFERENT VIEWS (remember America was a young and developing country)  Federalists – wanted a strong central government to control the banking system and wanted to create a national bank. They were led by Alexander Hamilton who was Washington’s Secretary of Treasury.

21. Antifederalists – Led by Thomas Jefferson and they supported a decentralized banking system in which the states would control banking within their borders. Considered a federal bank/national bank unconstitutional.

22. Federalists were successful in creating a strong central bank. In 1791 congress set up the Bank of the United States and the bank was granted a 20 year charter. Bank brought order and stability for a time period. Bank brought order and stability for a time period. Tended to only loan money to the rich. Tended to only loan money to the rich. Held the money that the government collected in taxes Held the money that the government collected in taxes Issued representative money that was backed by gold and silver. Issued representative money that was backed by gold and silver. Ensured state banks had the gold or silver for exchange. Ensured state banks had the gold or silver for exchange. Charter was not renewed in 1811. Charter was not renewed in 1811.

23. Chaos – After the Bank of the United States charter expired. The results were: Issuing of bank notes that could not be backed. Issuing of bank notes that could not be backed. Chartered many banks without thinking of the economic impact it might have. Chartered many banks without thinking of the economic impact it might have. Prices rose rapidly. Prices rose rapidly. Issuing of different currencies by different banks. Issuing of different currencies by different banks. Lack of confidence in the banking system. Lack of confidence in the banking system.

24. The Second Bank of the United States – To eliminate the chaos a second federal bank was created in 1816. ( 20 year charter) Bank was able to restore order and gain back the publics confidence over a period of time. National bank was ruled to be constitutional by the Supreme Court. President Jackson vetoed the renewal of the banks charter. He felt that it could not be trusted.

25. Free Banking Era – 1837-1860 is known as the “Wildcat” era. It was worse then the chaos that occurred between the First and Second Banks of America. The number of banks and currency that were created caused massive amounts of problems.

26. PROBLEMS…. Bank runs and panics Wildcat banks had a high rate of failure due to their location. Located out on the out skirts of town were only the “wildcats” lived. Fraud – “Take the money and run.” Many different currencies and they were not backed.

27. THE CIVIL WAR AND AFTER The federal government was not playing an active role in the banking industry thus confusion and chaos continued up until the Civil War. 1861 the United States issued its first paper money since the Continental. It was called a “greenback.” Both the North and South issued federal currencies.

28. During the war the government worked on restoring economic confidence in the paper currency and passed the National Banking Act of 1863-1864. These acts gave the federal government the ability to: Charter banks Charter banks Require banks to hold enough assets to cover their notes and activities Require banks to hold enough assets to cover their notes and activities Created a single national currency. Created a single national currency.

29. The gold standard – was adopted in the 1870s and it was a system to back the national currency and set the dollars value. The government could only issue currency if it had the gold to back it. The result was that the government was successful in increasing the confidence the public had in the currency.

30. 20 th CENTURY AND BANKING Still lacking a central decision-making authority which made it difficult to eliminate or fix the problems within the banking system. Because of inadequate reserves many banks began to fail and the need for a central bank was emphasized by the failures of banks and businesses.

31. The Federal Reserve Act of 1913 created the Federal Reserve System. This was President Wilson’s Act. This would become our nation’s central banking system. The bank could lend money to other banks in times of need. This would ensure that the banks would not fail and that confidence and trust would be established. The bank could lend money to other banks in times of need. This would ensure that the banks would not fail and that confidence and trust would be established. It became the banker’s bank! It became the banker’s bank!

32. REORGANIZATION 12 regional reserve banks were created throughout the country to help bring about organization and stability. A Federal Reserve Board of Governors appointed by the President runs the system. Allows member banks to borrow money or each bank can issue short-term loans to banks in need. This eliminated many bank failures.

33. The currency we use today was created and it is called a Federal Reserve Note. The Fed controls weather the amount of money available should increase or decrease. The currency we use today was created and it is called a Federal Reserve Note. The Fed controls weather the amount of money available should increase or decrease.

34. The Fed was unable to stop the Great Depression from happening. This proved to be the first big challenge for the Fed. Banks made risky loans to businesses that were unable to pay them back. Banks made risky loans to businesses that were unable to pay them back. Bank runs began Bank runs began Stock market crashed Stock market crashed Banks failed – this led to a lose of customers deposits. Banks failed – this led to a lose of customers deposits. Trust was lost but the Fed still continued to try and restore confidence. Trust was lost but the Fed still continued to try and restore confidence.

36. As president FDR worked to restore confidence in the banking system. He ordered all the banks to close for a “bank holiday” in 1933. Only sound banks were allowed to reopen. Trust was restored when only stable banks could reopen.

37. Federal Deposit Insurance Corporation (FDIC) was created in 1933. The FDIC insures and backs a customers deposit if the bank fails. America then transitioned to fiat money which is backed by the government. Today your money is insured by the FDIC. It can be different amounts depending on the situation.

38. After the Great Depression banks were far more regulated and through the 1960s even far more restrictions such as controlled interest rates occurred. Banks could also only lend money to those who had a history of paying the money back.After the Great Depression banks were far more regulated and through the 1960s even far more restrictions such as controlled interest rates occurred. Banks could also only lend money to those who had a history of paying the money back. In the late 1970s and 80’s banks and businesses were be deregulated.In the late 1970s and 80’s banks and businesses were be deregulated. Deregulation in banks occurred.Deregulation in banks occurred.

39. Savings and Loan Association – Savings and Loans (S&L's) are specialized banks created to promote affordable homeownership. A financial institution, organized cooperatively or corporately, that holds the funds of its members or clients in interest- bearing accounts and certificates of deposit, invests these funds chiefly in home mortgage loans and may also offer checking accounts and other banking services. A financial institution, organized cooperatively or corporately, that holds the funds of its members or clients in interest- bearing accounts and certificates of deposit, invests these funds chiefly in home mortgage loans and may also offer checking accounts and other banking services. http://useconomy.about.com/od/glossary/g/savings_loans.htm http://www.thefreedictionary.com/savings+and+loan+associatio n

40. The deregulation led to the Savings and Loan Crisis of the 1980’s. (S&L) Deregulation Deregulation High Interest Rates High Interest Rates Bad Loans Bad Loans Fraud Fraud All of those were causes of the Savings and Loan Crisis.

41. 1989 – Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) this act abolished the independence of the Savings and Loan industry and restored regulation. (FDIC) They still function like banks but are regulated and watched more.

42. BANKING TODAY Banking today has drastically changed. Banks provide services that were unheard of in the past and transactions are no longer done with just money. Electronic banking, credit, debit, and other services have revolutionized banking. Still the main purpose of the bank is to take deposits and make loans. They also help manage the money supply.

43. MONEY SUPPLY All the money available in the United States economy. Economists divide the money into different categories. The main two are M1 and M2.

44. M1 Represents money that people can easily get their hands on. Immediate access to pay for goods and services. M1 is in the form of checking accounts and traveler's checks. M1 consists of assets that have liquidity, or the ability to be used as, or directly converted to cash.

45. Funds in checking accounts are often referred to as demand deposits. They are called this because they can easily be converted into cash or be used as cash. Traditionally checking accounts did not pay interest, but now many of them are paying interest. Checking accounts that do pay interest are called other checkable accounts.

46. M2 Also called near money. M2 consists of all the assets in M1 plus what's in savings accounts, small denomination time deposits such as CD’s, and money market mutual funds. Savings Accounts – draw a small amount of interest and are not risky. Savings Accounts – draw a small amount of interest and are not risky. CD’s – deposits that draw more interest but have restrictions on the amount of time you have to keep your money in there. CD’s – deposits that draw more interest but have restrictions on the amount of time you have to keep your money in there. Money Market Mutual Funds – a fund that pools money from small savers to purchase short-term government and corporate securities. Money Market Mutual Funds – a fund that pools money from small savers to purchase short-term government and corporate securities. M2 accounts are not liquid.

47. FUNCTIONS OF FINANCIAL INSTITUTIONS Offer a wide range of services and help manage the money supply.

48. SERVICES 1. Storing Money – provide a safe and secure place to store your money. Consumer deposits are protected by the FDIC and insured against such things as robbery and fires. 2. Saving Money – Banks are a place were customers can save their money and collect interest from their accounts. Banks have both saving and checking accounts.

49. 3. Loans – banks provide loans to both consumers and businesses for a fee. They collect interest off the loans which allows them to make money.

50. FRACTIONAL RESERVE SYSTEM SEE PAGE 260.

51. MORTAGES A specific type of loan that is used to buy real estate. Mortgages are given for both residential and commercial purposes and are paid in a certain amount of years. (15- 30)

52. CREDIT CARDS Credit Cards – a card entitling its holder to buy goods and services based on the holder’s promise to pay for these goods and services. You must also pay the service charges and interest fees that come with the credit cards.

53. Interest – the price paid for the use of borrowed money. Interest is how banks make money. Principal – the amount of money borrowed. Simple interest – interest paid only on principal. Compound Interest – interest paid on both principal and accumulated interest.

54. FINANCIAL INSTITUTIONS With deregulation in the 1990s the financial institutions became more similar then dissimilar. Differences still remain but they all have check writing ability now.

55. Commercial Banks – offer checking services, accept deposits, and make loans. Around a third of commercial banks are members of the Fed and they provide the most services and have the largest impact on the economy.

56. Savings and Loan – original institutions that pulled money from its members so they could buy homes. S&Ls now function like regular banks. Mutual Savings Banks – Owned by the depositors. Some of them started to sell stocks so now they depositors don’t own them. They were set up for people who make smaller deposits and engage in smaller transactions.

57. Credit Unions – cooperative lending associations for particular groups and occupations. Interest rates are often lower then traditional banks. Finance Companies – issue installment loans to consumers, such as car loans, and charge higher interest rates traditionally. (charge higher interest rates because customers frequently fail to pay)

58. ELECTRONIC BANKING Computers and technology have drastically changed the banking industry and the way we personally bank!.

59. Automated Teller Machines – ATMs – take in deposits and handle withdraws faster and can be placed in numerous convenient locations.

60. Debit Cards – Similar to a credit card, but functions more like a check and they can be used to withdraw money. For security they require you to use a PIN number. Home Banking – Account managing and transfers can be done at home via the computer. Paychecks and other payments can also be direct deposited by computer now.

61. Automated Clearing House – Located at Fed banks these allow consumers to pay creditors through wire transfers. Stored Value Cards – often called smart cards, SVCs are cards that carry a prepaid balance can carry information. Stored Value Cards – often called smart cards, SVCs are cards that carry a prepaid balance can carry information. Some feel these could replace currency one day.