Chapter 11 – Money and Banking Economics Chapter 11 – Money and Banking

Evolution of Money Barter 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.

What is Money? Any substance that functions as a medium of exchange, a measure of value and store of value.

What 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.

Money in Early Societies 1. shells, dog teeth, fishhooks 2. 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

Money 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 silver 1775- Continental currency

Wampum

Money in Colonial America 3. Paper currency- some states allowed individuals to print their own paper currency – had to be backed by gold and silver 1775- Continental currency 4. Specie- Coins, usually made from silver or gold. Usually preferred by early settlers over paper money, because they contained gold or silver

Origins of the Dollar New 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.

“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 currency Instead of divided into 1/8’s (pesos) they divided it into 1/10’s.

Characteristics of Money Portable: easily transferred Durability: has to last when handled Divisibility: easily divisible into smaller units Limited availability- limited supply

Class/Homework How 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.

Early Banking and Monetary Standards Privately issue bank notes Congress power to make money (Constitution) 1. Growth of State Banks 2. Abuse in Banks 3. Problems with Currency

Growth in State Banks By 1811 approximately 100 banks existed in the US. State banks- chartered by the state gov’t Bank of the United States- chartered by the federal government

Abuses in Banking Wildcat banks- printed money that was not backed by silver or gold

Problems with Currency too many different kinds of money Temptation to print too much money

The Greenback Standard 1. 1861- Congress authorized printing of federal notes called greenbacks. 2. National banks created- issued bank notes or national currency 3. gold certificates- money backed by gold 1863

The Greenback Standard 4. 1886- silver certificates- notes backed by silver 5. 1890- treasury coin notes- paper currency redeemable in gold or silver

The Gold Standard 1. basic unit of currency equivalent to a set amount of gold 2. Two major advantages: 1. people feel more secure about money 2. prevents government from printing too much money

The Gold Standard 3. Disadvantages 1. growing economy needs a growing money supply 2. too many people decided to exchange their notes for gold- deplete govt’s gold reserve 4. US went off gold standard in 1934

Inconvertible 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.

Class/Homework Explain 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.

Development of Modern Banking

National Banking System 1. National Bank requirements: Use National in the title Pass stiff inspections Purchase government bonds 2. Dual Banking Charter from state and national banks

National Banking System 3. Reform: Took too long to clear checks Currency backed by bonds were difficult to maintain No place to go in time of need 4. Federal Reserve System- created 1913 Central bank= lends to other banks All nat’l banks required to join others are allowed to join Federal Reserve notes- our money today

Banking during the Great Depression 1. Bank Failures Too many banks between 1880-1921 Start of Depression 25,500 banks had no deposit insurance Too many runs on the bank March 5, 1933, FDR called for a bank holiday Congress checked the banks 10,000 closed or merged with other banks

Banking during the Great Depression Federal Deposit Insurance: Started protecting at $2,500/per year Now $250,000/per bank account

Other Depository Institutions 1. Commercial Banks Catered to interest of businesses and commerce Issued demand deposit accounts (checks) 2. Thrift Institutions Savings and loan associations Savings banks

Other Depository Institutions 3. Savings Banks: Depositor- owned financial organization operated for benefit of depositors Later sold stock; depositors don’t own now Catered to smaller customers NOW accounts– interest on checking

Other Depository Institutions 4. Savings and Loan Associations Home mortgages 5. Credit Unions Owned and operated by and for its members Costs low Share drafts– like checking account

Class/Homework Why was the Federal Reserve System created? Explain why the National Banking System was created. Identify 3 depository institutions. Complete note cards.

Crisis, Reform, and Evolution Decade of Deregulation After depression until late 1970’s tremendous amount of regulation’s on banks 1980 deregulation started Savings banks and savings and loans allowed to pay more interest than commercial banks. Commercial banks felt cheated.

Crisis, Reform and Evolution Commercial banks could issue checking accounts but savings banks could not. The felt cheated. 1980- DIDMCA Act Passed Regulation Q- max interest rates were phased out. Now accts could be offered anywhere All institutions could borrow from Feds not just commercial bansk

Crisis, Reform, and Evolution 1982- Garn-St. Germain Act S and L and savings could issue credit cards, real estate loans and commercial loans.

Savings and Loan Crisis By 1988 only 3000 – caused by bankrupcy and mergers

4 Causes of Failures Deregulation- s & L not prepared to compete in these new markets High interest rates- has made loans at 10% in the ‘70s, by the ‘80s rates had gone up to 15% - lost money Inadequate capital- bad loans hit them hard- not enough in reserve Fraud- reduced member of inspectors therefore a few companies committed huge fraud

Evolution in the 1990’s - 1980s turbulent -1990s caution watchword Banks merged Larger accounts More services Less differences between commercial banks, savings banks and savings and loans.

Class/Homework Describe 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?