Money, Banking and Finance

What is money? Money – Anything that people accept for a good or service. Barter – exchange of goods or services without the use of money. Modern governments discourage this because these transactions are difficult to tax. Money has three functions: Standard of value Medium of exchange Store of value

Global Currency Top 10 $ US Dollar € Euro £ British Pound ¥ Japanese Yen $ Canadian Dollar $ Australian Dollar ¥ Chinese Yuan CHF Swiss Franc $ Singapore Dollar $ Hong Kong Dollar

Why does your money have value? Commodity money – this is money whos value is based on the material it is made from. Representative money – This is money that is backed by something tangible. Fiat money – Money declared by a government to have worth.

Banking in the US First Bank of the US 1791-1811 Second Bank of the US 1816-1832, McCulloch v. Maryland 1863 - National Banking Act created system of national banks and taxed state currency. 1900 - adopted the gold standard 1913 - Federal Reserve Act 1933 - Banking Act of 1933, includes Glass Steagall provision separating commercial and investment banks. Also established the Federal Deposit Insurance Commission (FDIC).

Types of Banks Commercial Banks – originally created to provide business loans, they provide basic banking services. Investment Banks – Buy and sell assets through the financial markets Savings and Loans – originally designed for savings accounts and home loans. After deregulation in the 1970’s and 1980’s, the S&L collapsed after many of the new practices proved risky and unsustainable. Credit Union – similar to savings and loans, pooled depositors money to give out home and auto loans. The key difference between them and commercial banks is they are non-profit and have membership requirements.

Federal Reserve Board The Federal Reserve Board (FRB) is an independent regulatory agency for the US government. It is made up of 12 representatives from each of the federal reserve banks. The current head is Janet Yellen. The FRB is in charge of interest rates, which controls inflation.

Federal Reserve Board Monetary Policy– One of the most important jobs that the Federal Reserve Board (FRB) has is to monitor monetary policy in the US. The FRB was established in 1913 to deal with bank panics.. Because banks loan money that people put in savings accounts, they do not have enough money to cover all the withdraws. This results in the bank collapsing. To prevent this from happening, the FRB require banks to put a certain amount of money in reserve account. The amount in this account is based off of the amount of money the bank currently has loaned out. This creates a pool of money that can then be loaned to other banks as they need it.

Federal Reserve Board Interest Rates – One of the most important things that the FRB is in charge of is interest rates. The FRB has the ability to raise or lower interest rates. These interest rates effect the cost of taking out a loan. Think of interest rates this way. The FRB can use these interest rates as a brake or gas pedal for the economy. By raising rates the FRB slows the economy down by making it more expensive to take out loans. By lowering interest rates, the FRB makes it cheaper to take out a loan and therefore can pick up the economy. Why would the FRB want to slow the economy down? An economy that is growing too fast, tends to see inflation occurring at high levels. To combat this the FRB attempts to slow economic growth, but not stop it.

Investments Stocks – Corporations issue stock, this is a part of the company. Companies issue stock in an initial public offering (IPO). Bonds – Companies issue bonds in place of loans as a way to raise money. This is done because loans often come with heavy restrictions.

Investment Terminology Dividend – payment from the company who’s shares you own. This is your percentage of the quarterly profit. Companies do not need to give a dividend. Shares outstanding – this is the total number of shares a company has for sale. Market Cap – this is the current value of a company. It is determined by multiplying shares outstanding by the current price of the stock.

Investment Terminology Futures – contract to by a financial product at a set date in the future for an agreed upon price. Can be a commodity or a stock. Option – Similar to a futures contract, but give the buyer or seller (not at the same time) the option of going through with the transaction. This contract comes with a cost.

Investment Terminology Short Sale – As a general term it’s a strategy of making money by betting something will lose value. For stocks, you sell a stock that you borrow from a stock broker. You will have to replace the stock borrowed at a future date (cover). This strategy is used if you think the stock is going to drop or to hedge another investment. There is not a fixed date on which you have to replace the stock but you are charged interest on the loan and you have to pay them any dividends or stock splits that occur before you pay them back. They also have the right to call in your loan, forcing you to cover it immediately.

Investment Terminology Bonds – Bonds are viewed as safer investment, depending on the rating, than stocks. The trade off is a smaller amount of return on your investment. Bond returns are know unless there is a default. Bonds can be sold on the secondary market. The main driver of bond prices is inflation.