1. Economics Chapter 10 Section 2 & 3 Notes
Money and Banking
Economics
Chapter 10
Section 2 & 3 Notes

2. Alexander Hamilton: Shaping a Banking System
The First Bank of the United States
In 1789, became first Secretary of the Treasury; proposed national bank
Against strong opposition, First Bank of the United States chartered in 1791
issued national currency
controlled money supply by refusing state bank money not backed
loaned money to federal government, state banks, businesses

3. 20th-Century Developments
A New Central Bank
1913, Federal Reserve System created; consists of 12 regional banks, one decision-making board
provides financial services to federal government
makes loans to banks that serve the public
issues Federal Reserve notes as national currency
regulates money supply

5. 20th-Century Developments
The Great Depression and the New Deal
1929, many banks failed due to bank runs
Banking Act of 1933 part of President Franklin Roosevelt’s New Deal
regulated interest rates banks paid; prohibited sale of stocks by banks
Federal Deposit Insurance Corporation (FDIC) insured people’s savings

6. Financial Institutions in the United States
Type 1: Commercial Banks
Privately owned commercial banks are oldest type of banks
initially created to provide business loans
today, checking and savings accounts, loans, investments, credit cards
All national, about 16 percent of state commercial banks belong to the Fed

7. Financial Institutions in the United States
Type 2: Savings Institutions
S&Ls first chartered by states in 1830s
took savings deposits; provided home mortgage loans
today, provide many of same services as commercial banks
Since 1933, federal government also charters S&Ls
many federally chartered S&Ls call selves savings banks

8. Financial Institutions in the United States
Type 3: Credit Unions
In 1909, first credit union chartered; 1934, federal system created
offer savings and checking accounts; specialize in auto, mortgage loans
deposits insured by National Credit Union Association (NCUA)
Credit unions have membership requirements
cooperatives: nonprofit organizations owned by, operated for members

9. Section 3
Innovations in Modern Banking

10. What Services Do Banks Provide?
Service 1: Customers Can Store Money
Banks store currency in vaults; insured against theft, other loss
Customers also store
money in bank accounts; insured against bank failure
papers and valuables in safe deposit boxes

11. What Services Do Banks Provide?
Service 2: Customers Can Earn Money
Savings accounts, some checking accounts pay interest
Money market accounts, CDs pay higher interest rate

12. What Services Do Banks Provide?
Service 3: Customers Can Borrow Money
Banks lend money through fractional reserve banking
percent of deposit banks must keep is set by Fed
Banks make loans to customers it approves
loans have set time period and interest rate; property is collateral
Credit card purchases are loans; interest charged after one month

13. Banking Deregulation Bank Mergers
Deregulation led to mergers; no more restrictions on interstate banking
Advantages: more competition meant low interest rates, more services
also more branches; economies of scale, especially for technology
Disadvantages: fewer banks to choose from
fear larger banks uninterested in small customers, local communities

15. Banking Deregulation Banking Services
Financial Services Act of 1999 lifted last restriction on banks
Banks, insurance companies, investment companies compete
sell stocks, bonds, insurance, traditional banking services
Customers continue to use different companies for different services

16. Housing Boom and Bust
From 2000 to 2006, house prices in the U.S. skyrocketed. Many factors contributed to this boom, but bank lending practices played a major role.
Deregulation changed banks from local institutions into national megabanks. Instead of collecting payments on a mortgage for 30 years, banks began to sell these loans to other financial institutions for a quick profit.

17. Housing Boom and Bust
Banks became less interested in verifying that clients could repay a mortgage and more interested in making as many mortgage loans as possible. The easy money fueled the housing price bubble.

18. Housing Boom and Bust What’s The Issue?
How did bank lending practices contribute to the real estate boom? Study the sources on pages 312 – 313 of the text.
Use the information to answer questions
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