1. MONEY & BANKING CURRENCY = Paper Money + Coins
COINS = disks of precious metal - usually gold or silver (specie)
Since ‘65, U.S. doesn’t have any coins…now they are merely tokens.

2. Look at the edges of pennies and nickels and note that these coins have no grooves – the grooves are known as REEDING
Look at the reeded coins -- dimes, quarters and half dollars – and note there is copper sandwiched between a nickel-zinc metal -- k/a CLAD COINS
Before 1965, coins were not
clad, they were made of
900 (90% pure) silver.

3. MONETARY LAWS OF ECONOMICS:
Age old problem of government -- they spend money, they tax to raise additional $, but overtaxing leads to revolution so….
COUNTERFEITING becomes the new solution:
* Gov’t began clipping coins (clipped off edges-used
the shavings to make more coins)
* People noticed & began to use reeding to tell the
difference
* Reeding made clipping obvious so gov’t then came
up with debasing of coins (melted down, base
metal added so could make more coins)
GRESHAM’S LAW eventually develops …. Bad money drives good money out of circulation

4. FUNCTIONS OF MONEY A MEDIUM OF EXCHANGE A UNIT OF ACCOUNT
simply means that a seller will accept it in exchange for a good or service
gold, silver, salt…
without money, people would have to barter
A UNIT OF ACCOUNT
used to compare the value of goods & services in relation to one another
serves as a measure of value
A STORE OF VALUE
holds its value longer than
most goods
Medium of Exchange:
Many parts of the world still use bartering but as an economy becomes more specialized, it becomes too difficult to establish the relative value of items to be bartered. Money, therefore, makes exchanges much easier than bartering.
Store of Value:
Except during periods of inflation, money usually functions as a good store of value

5. CHARACTERISTICS OF MONEY
In the past, people have used many things as currency including cattle, salt, precious stones, fur, and dried fish.
Why would these things NOT serve as good currency in today’s world?
They would lack at least one of the 6 characteristics of money.

6. CHARACTERISTICS OF MONEY
The six characteristics of money are:
Durability
Portability
Divisibility
Uniformity
Limited supply
Acceptability

7. CHARACTERISTICS OF MONEY
Durability
Must be able to use it over and over again
Why is paper $ considered durable?
Portability
An obvious advantage of paper money & coins
Divisibility
Must be easily divisible into smaller units
Uniformity
People must be able to count and measure money accurately

8. Limited Supply Acceptability
Must be limited in supply by nature or government
Value needs to be stable / should remain constant
Amount of $ in circulation and value of that $ have an inverse relationship (e.g., too much $ in circulation, value goes down
Acceptability
Must be acceptable to people as having value
All in society must be able to take the things that serve as money and exchange them for goods and services
Limited Supply
Money would lose its value if there was an unlimited supply of it.
Therefore, the Federal Reserve regulates the amount of money in circulation in the United States.
Fiat Money examples – Continental dollars

9. What Makes Money Valuable?
There are several sources of money’s value depending on whether it is:
Commodity Money
Representative Money
Fiat Money

10. What Makes Money Valuable?
Commodity Money
objects that have value in and of themselves, like cattle, and that are also used as money
Why is it impractical for use?
What characteristics of money is it lacking?
Commodity examples – gunpowder, tea leaves, corn, tobacco, musket balls, cows
Commodity money lacks divisibility and portability

11. What Makes Money Valuable?
Representative Money
objects that have value solely because the holder can exchange them for something else of value.
Early representative money took the form of paper receipts for gold and silver.
People left their gold in goldsmith’s safes and would carry paper ownership receipts to show how much gold they owned.
During the American Revolution, problems arose with Continentals - they were not backed by gold or silver and were therefore useless.

12. FIAT MONEY
Fiat Money has value just because a government has decreed that it is an acceptable means to pay debts.
Today’s U.S. Dollar is a federal reserve note
Not a silver certificate (which was backed up by silver)
It is fiat money - the only thing that gives the dollar value is the legal tender statement
Inconvertible Fiat Money Standard –can’t be converted into gold or silver
Idea of fiat money began with Kublai Khan’s Asian gov’t

13. The obligation of a certificate states how much of a specific commodity the government of a country will "pay to the bearer." On most large-size Silver Certificates, the obligation reads: "This certifies that there have/has been deposited in the Treasury of the United States of America (number) silver dollar(s) payable to the bearer on demand." On small-sized Silver Certificates beginning with Series 1934, in order to denote current location of deposit, it was changed to read: "This certifies that there is on deposit in the Treasury of the United States of America (number) dollar(s) in silver payable to the bearer on demand."
the Silver Certificates began to disappear from circulation during the 1940s and 1950s. The amount of Silver Certificates in circulation depended directly upon the amount of silver bullion in the Treasury vaults. As people redeemed the certificates for bullion or silver dollars, the notes were shredded, because the notes had lost their backing and could not be recirculated unless there was more silver being produced. The price of silver was also rising. In 1960, it was nearing $1.29, which meant that silver dollars were worth more than $1. This meant that people would receive their silver dollars and melt them down for the bullion, thereby reducing the amount of silver in circulation, which was already falling.
In March 1964, Secretary of the Treasury C. Douglas Dillon halted redemption of Silver Certificates for Silver Dollars. In the 1970s, large numbers of the remaining silver dollars in the mint vaults were sold to the collecting public for collector value. All redemption in silver ceased on June 24, 1968.

14. History of Legal Tender
Kublai Khan’s gov’t – “amount” of gold just written on paper….refusal to accept = severe punishment
French 200 years ago, phony $ with legal tender statement … refusal = guillotine
U.S. in Revolutionary gov’t – refusal to accept its “Continental Dollars” = treason and thrown in jail
Now in U.S., refusal to accept Federal Reserve Notes in payment = cancellation of the debt.

15. History of Banking in the U.S.
Originally, merchants served as bankers in America
After the American Revolution, the new nation’s leaders decided that they needed to establish a safe, stable banking system.
This need led to a tireless disagreement on how to organize the national banking system.

16. Opposing Views of the B.U.S.
Federalists
Favored a centralized banking system
Proposed a national bank in 1789
Alexander Hamilton, Sec. of .Treasury
Antifederalists
Favored a decentralized banking system in which states established and regulated banks within their borders
Thomas Jefferson favored this plan

17. First Bank of the United States
Federalists won - in 1791 Congress established the Bank of the United States (B.U.S.)
Had power to create national currency, manage federal gov’ts funds & monitor other banks in country
Antifederalists, led by Jefferson, argued that the Bank was unconstitutional and that it benefitted only the wealthy.
BUT, when Jefferson later became P, he continued the Bank & it functioned until 1811, when its charter (authority to operate) ran out.
State banks then took over for the B.U.S.
Major chaos and confusion for the next 5 years.
20 year charter
State banks issued notes that were not backed up by gold or silver – no banking regulations – different currencies – inflation by printing up too much money

18. The Second B.U.S.
To eliminate the chaos, Congress chartered the Second B.U.S. in Declared constitutional by SCOTUS in 1819.
Economic stability was restored but many, such as President Andrew Jackson, were still wary of the Bank’s powers.
In 1832 Congress tried to renew the Bank’s charter
President Andrew Jackson vetoed the renewal and killed the bank.
Claimed it was a monopoly, unconstitutional, favored only the rich, etc.
Another 20 year charter

19. From Free Banking to Stability
State-charted banks flourished once again from 1837 to 1863 – the “Wildcat Era”
Huge numbers of banks caused a variety of problems:
Bank runs and panics
Wildcat banks (inadequately financed / high rate of failure)
Fraud
Many different currencies (different values)
National Banking Acts passed in 1863 and 1864 to remedy the problems

20. From Free Banking to Stability
National Banking Acts of 1863 and 1864 gave the federal government the power to:
Charter banks
Require that banks hold an adequate amount of gold and silver reserves
Issue a national currency
In the 1870s the nation adopted the gold standard
set a definite value for the dollar
Currency had the value of certain amounts of gold, e.g., one dollar =one ounce of gold

21. Banking in the Early 1900s
Still had problems in spite of having a national currency and being on a standard – the gold standard.
There still was no central decision-making authority in banking.
Panic of 1907
In 1913, the Federal Reserve Act established the Federal Reserve System, which reorganized the federal banking system
Objectives:
Describe the shifts between centralized and decentralized banking before the Civil War.
Explain how government reforms stabilized the banking system in the later 1800s.
Describe developments in banking in the early 1900s.
Explain the causes of two recent banking crises.

22. What is the Federal Reserve?
The central banking system of the U.S. – it is a corporation
The Fed is both public and private
Owned by privately-owned banks, not the government
BUT, controlled to a small degree by the government (members of its Board of Governors are picked by the President & confirmed by Congress)
Generally though, it acts independently
Duties:
to conduct the nation's monetary policy
supervise and regulate banking institutions
maintain the stability of the financial system
provide financial services to depository institutions and the U.S. government
Central bank = a bank that can lend to other banks

23. Banking and the Great Depression
The Fed, however, was unable to prevent the Great Depression.
President Franklin Roosevelt acted to restore the banking system in the 1930s – Banking Holiday
Established the FDIC, which insured customer deposits if a bank failed (amount insured is now $250,000)
FDR also changed the American currency to fiat money – no more gold standard
the Fed could adequately control the money supply
Banks loaned too much $ to risky businesses, brokers

24. The Savings and Loan Crisis
In the late 1970s and 1980s, Congress passed laws to deregulate several industries.
This deregulation led to a crisis for the Savings and Loan industry, which was unprepared for the intense competition it faced after deregulation.
High interest rates and risky loans added to the crisis.
In 1989, Congress passed legislation that abolished the independence of the Savings and Loan industry.
Banks heavily regulated after G Dep – restricted interest rates, etc.

25. The Sub-Prime Mortgage Crisis
Mortgage companies and banks began to loan people money who could not afford to pay these loans back – “subprime” loans. WHY?
When interest rates rose, many people couldn’t afford to pay their mortgages, which led to foreclosures.
The ripple effect of the mortgage crisis hit banks and creditors hard
Contributed to U.S. economy in a recession by 2008/2009.
Bush bailout in 2008 ($700 billion)
Obama stimulus in 2009 – recovery has been slow …
Can charge higher interest rates on risky loans – 25% of all loans by 2005

26. BANKING TODAY What banking services do financial institutions provide?
Checking & Savings Accounts
Issue credit cards
Make loans to businesses
Personal loans to individuals
Provide mortgages to prospective home buyers
Manage ATM machines

27. Measuring the Money Supply
2 categories of money supply:
M1 represents money that people can gain access to easily. It has great liquidity. This includes:
Currency
Deposits in checking accounts (demand deposits)
Traveler’s checks M1

28. M2
M2 consists of all the assets in M1 plus several additional assets – like deposits in savings accounts. These funds cannot be used as cash directly, but can be converted to cash fairly easily.
What is the difference between M1 and M2?
Answer: M2 has all of the same assets as M1 but it also includes deposits in savings accounts, deposits in money market mutual funds, and small denomination time deposits.

29. Functions of Financial Institutions
Storing money
They provide a safe place to store $
Saving money
They offer people ways to save money through:
Checking accounts
Savings accounts
Money market accounts, which allow people to save and write a limited number of checks
Riskier than savings accounts because they are NOT insured by the federal gov’t
CDs, which offer a guaranteed rate of interest but cannot be removed until after a specified period of time.

30. Loans Banks loan $ and charge interest Typical consumer loans:
Buy homes (mortgages)
Pay for college
Start and grow businesses
Fractional reserve banking: bank keeps a fraction of its funds on hand and lends out the rest.
See pages for example of how banks “grow” money to loan out

31. Mortgages and Credit Cards
A mortgage is a specific type of loan that is used to buy real estate.
Traditional mortgage = 30 years
Mortgage interest is deductible on income tax return
Credit cards entitle their owners to buy goods and services based on a promise to pay.
High interest rates!
Do NOT just make the
minimum payments!

32. Simple and Compound Interest
Banks pay simple interest only on the principal of a deposit.
Compound interest is interest paid on both principal and accumulated interest.
According to the table, after five years, what is the total interest that the deposit-holder will have earned?
Answer: $22.14

33. How Banks Make a Profit

34. Types of Financial Institutions
Commercial Banks
Offer checking accounts, accept deposits, and make loans
Savings and Loan Associations
Allow people to save up and borrow enough for their own homes
Savings Banks
Owned by depositors who make smaller deposits than a commercial bank would handle
Credit Unions
Cooperative lending associations established for particular groups
Finance Companies
Make installment loans to consumers

35. Electronic Banking
ATMs allow customers to deposit money, withdraw cash, and obtain information.
Debit cards can be used at an ATM or in a store to purchase goods.
a PIN required for security reasons.
Home banking—More and more people use the Internet to check balances, transfer money, automatically deposit paychecks, and pay bills.
How does a debit card work?
How is it different from a credit card?
can be used at an ATM or in a store to purchase goods.

36. ACHs and Stored-Value Cards
Automated Clearing Houses (ACHs) allow consumers to pay bills without writing checks.
Stored-value cards carry money on them and can be used by college students on campus or by people using a phone card with stored minutes, metro cards, etc.
ACH: Direct debit payment of consumer bills such as mortgages, loans, utilities, insurance premiums, rents, and any other regular payment – Also direct deposit of payroll, social security and other government payments, and tax refunds