Presentation on theme: "Chapter 11 – Money and Banking"— Presentation transcript:
1Chapter 11 – Money and Banking EconomicsChapter 11 – Money and Banking
2Evolution of MoneyBarter 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.
3What is Money?Any substance that functions as a medium of exchange, a measure of value and store of value.
4What 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.
5Money in Early Societies 1. shells, dog teeth, fishhooks2. 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
6Money 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 silver1775- Continental currency
8Money in Colonial America 3. Paper currency- some states allowed individuals to print their own paper currency – had to be backed by gold and silver1775- Continental currency4. Specie-Coins, usually made from silver or gold.Usually preferred by early settlers over paper money, because they contained gold or silver
9Origins of the DollarNew 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 currencyInstead of divided into 1/8’s (pesos) they divided it into 1/10’s.
11Characteristics of Money Portable: easily transferredDurability: has to last when handledDivisibility: easily divisible into smaller unitsLimited availability- limited supply
12Class/HomeworkHow 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.
13Early Banking and Monetary Standards Privately issue bank notesCongress power to make money (Constitution)1. Growth of State Banks2. Abuse in Banks3. Problems with Currency
14Growth in State BanksBy 1811 approximately 100 banks existed in the US.State banks- chartered by the state gov’tBank of the United States- chartered by the federal government
15Abuses in BankingWildcat banks- printed money that was not backed by silver or gold
16Problems with Currency too many different kinds of moneyTemptation to print too much money
17The Greenback Standard Congress authorized printing of federal notes called greenbacks.2. National banks created- issued bank notes or national currency3. gold certificates- money backed by gold 1863
18The Greenback Standard silver certificates- notes backed by silvertreasury coin notes- paper currency redeemable in gold or silver
19The Gold Standard1. basic unit of currency equivalent to a set amount of gold2. Two major advantages:1. people feel more secure about money2. prevents government from printing too much money
20The Gold Standard 3. Disadvantages 1. growing economy needs a growing money supply2. too many people decided to exchange their notes for gold- deplete govt’s gold reserve4. US went off gold standard in 1934
21Inconvertible 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.
22Class/HomeworkExplain 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.
24National Banking System 1. National Bank requirements:Use National in the titlePass stiff inspectionsPurchase government bonds2. Dual BankingCharter from state and national banks
25National Banking System 3. Reform:Took too long to clear checksCurrency backed by bonds were difficult to maintainNo place to go in time of need4. Federal Reserve System- created 1913Central bank= lends to other banksAll nat’l banks required to join others are allowed to joinFederal Reserve notes- our money today
26Banking during the Great Depression 1. Bank FailuresToo many banks betweenStart of Depression25,500 banks had no deposit insuranceToo many runs on the bankMarch 5, 1933, FDR called for a bank holidayCongress checked the banks10,000 closed or merged with other banks
27Banking during the Great Depression Federal Deposit Insurance:Started protecting at $2,500/per yearNow $250,000/per bank account
28Other Depository Institutions 1. Commercial BanksCatered to interest of businesses and commerceIssued demand deposit accounts (checks)2. Thrift InstitutionsSavings and loan associationsSavings banks
29Other Depository Institutions 3. Savings Banks:Depositor- owned financial organization operated for benefit of depositorsLater sold stock; depositors don’t own nowCatered to smaller customersNOW accounts– interest on checking
30Other Depository Institutions 4. Savings and Loan AssociationsHome mortgages5. Credit UnionsOwned and operated by and for its membersCosts lowShare drafts– like checking account
31Class/Homework Why was the Federal Reserve System created? Explain why the National Banking System was created.Identify 3 depository institutions.Complete note cards.
32Crisis, Reform, and Evolution Decade of DeregulationAfter depression until late 1970’s tremendous amount of regulation’s on banks1980 deregulation startedSavings banks and savings and loans allowed to pay more interest than commercial banks. Commercial banks felt cheated.
33Crisis, Reform and Evolution Commercial banks could issue checking accounts but savings banks could not. The felt cheated.1980- DIDMCA Act PassedRegulation Q- max interest rates were phased out.Now accts could be offered anywhereAll institutions could borrow from Feds not just commercial bansk
34Crisis, Reform, and Evolution 1982- Garn-St. Germain ActS and L and savings could issue credit cards, real estate loans and commercial loans.
35Savings and Loan Crisis By 1988 only 3000 – caused by bankrupcy and mergers
364 Causes of FailuresDeregulation- s & L not prepared to compete in these new marketsHigh interest rates- has made loans at 10% in the ‘70s, by the ‘80s rates had gone up to 15% - lost moneyInadequate capital- bad loans hit them hard- not enough in reserveFraud- reduced member of inspectors therefore a few companies committed huge fraud
37Evolution in the 1990’s - 1980s turbulent -1990s caution watchword Banks mergedLarger accountsMore servicesLess differences between commercial banks, savings banks and savings and loans.
38Class/HomeworkDescribe 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?