Chapter 10 Money and Banking

Money Money is anything that serves 3 purposes: Money is anything that serves 3 purposes: –Medium of Exchange – used when exchanging goods or services

Money Money is anything that serves 3 purposes: Money is anything that serves 3 purposes: –Unit of Account – means of comparing value of goods and services

Money Money is anything that serves 3 purposes: Money is anything that serves 3 purposes: –Store of Value – if you hold on to it, it will maintain its value

6 Characteristics of Currency Currency – coins and paper bills society uses for money Currency – coins and paper bills society uses for money –More useful than bartering because of 6 characteristics

What are the 6 Characteristics?

The 6 Characteristics of Currency Durability – lasts for a long time Durability – lasts for a long time Portability – easy to carry Portability – easy to carry Divisibility – can be divided into smaller denominations Divisibility – can be divided into smaller denominations Uniformity – looks universally the same, difficult to counterfeit Uniformity – looks universally the same, difficult to counterfeit

The 6 Characteristics of Currency Limited Supply Limited Supply Acceptability – everyone in the economy must accept its value Acceptability – everyone in the economy must accept its value

I’ve been thinking really deep and philosophical like lately.

How did the value of paper currency evolve to its present state?

History of the Value of Money Commodity Money – beginning of time until about 1600’s, people traded in commodities (salt, cattle, tobacco, pretty rocks) rather than money Commodity Money – beginning of time until about 1600’s, people traded in commodities (salt, cattle, tobacco, pretty rocks) rather than money

History of the Value of Money Representative Money – starting in 1600’s, people traded paper receipts that represented gold or silver kept in a town safe Representative Money – starting in 1600’s, people traded paper receipts that represented gold or silver kept in a town safe –Gold and silver were difficult to carry around

History of the Value of Money Fiat Money – Started in 1930’s, government issued currency and passed laws saying that all people must accept it as payment for debts Fiat Money – Started in 1930’s, government issued currency and passed laws saying that all people must accept it as payment for debts

On the Back of a Dollar…

From Saturday Night Live

What is a Bank? Bank – institution for receiving, keeping, and lending money Bank – institution for receiving, keeping, and lending money

Brief History Start of U.S. History (1780’s – 1800’s) Start of U.S. History (1780’s – 1800’s) –Federalists vs. Anti-Federalists Federalists favored a national bank Federalists favored a national bank Anti-Federalists believed states should control Anti-Federalists believed states should control

Brief History National Banks were created, and accomplished a number of purposes National Banks were created, and accomplished a number of purposes –Held government tax revenue –Lend and borrow money for government purposes

Brief History National Banks were created, and accomplished a number of purposes National Banks were created, and accomplished a number of purposes –Issue representative money backed by gold or silver –Watch over states use of representative money

Brief History Later, because of politics, the national bank is killed Later, because of politics, the national bank is killed

Banking With No National Bank Problems Problems –Bank runs, panics –High rates of bank failure –Fraud –Many different currencies

The New National Banking System Federal Reserve Bank – Established in 1913 Federal Reserve Bank – Established in 1913 –Gives short term loans to private banks to prevent failures –Created a national currency – today’s dollars Federal Reserve controls number of dollars in circulation Federal Reserve controls number of dollars in circulation

The New National Banking System Federal Reserve Bank – Established in 1913 Federal Reserve Bank – Established in 1913 –Monetary Policy Tools of the Federal Reserve Open Market Operations – buying/selling government bonds to expand/contract the money supply Open Market Operations – buying/selling government bonds to expand/contract the money supply Controls the discount rate (primarily the decision of the Chairman of the Federal Reserve Board) Controls the discount rate (primarily the decision of the Chairman of the Federal Reserve Board) Reserve Requirement Ratio (RRR) – amount of deposits banks must keep in reserve (rarely ever used) Reserve Requirement Ratio (RRR) – amount of deposits banks must keep in reserve (rarely ever used)

The New National Banking System Federal Reserve Bank – Established in 1913 Federal Reserve Bank – Established in 1913 –Monetary Policy Goals of the Federal Reserve Expansionary Policy – Grows the economy, but may cause inflation to go up Expansionary Policy – Grows the economy, but may cause inflation to go up –Lower the discount rate, encourage borrowing –Buy bonds from investors, injects cash into the economy Contractionary Policy – Controls inflation, but may cause economic growth to slow Contractionary Policy – Controls inflation, but may cause economic growth to slow –Raise the discount rate, discourage borrowing –Sell bonds to investors, takes cash out of the economy

Hello, I am Ben Bernanke.

I am the current Chairman of the Fed.

Enjoy the rest of your class.

Other Federal Regulations on Banks Federal Deposit Insurance Corporation (FDIC) – insures customer deposits up to $100,000 in the event of bank failure Federal Deposit Insurance Corporation (FDIC) – insures customer deposits up to $100,000 in the event of bank failure

Banking Today Two types of money Two types of money –M1 - types of money that people can quickly get access to and spend Liquidity - the ability to convert an asset into cash Liquidity - the ability to convert an asset into cash M1 has high liquidity M1 has high liquidity

Banking Today Two types of money Two types of money –M2 – Everything in M1 plus assets that are not immediately used for purchases Near Money – term for assets that cannot be used in financial exchanges Near Money – term for assets that cannot be used in financial exchanges Includes savings accounts, mutual funds Includes savings accounts, mutual funds

Services of the Bank Place to store your money safely – an Account Place to store your money safely – an Account

Services of the Bank Types of Accounts Types of Accounts –Savings Account – pay a small interest rate, allow you to withdraw cash –Checking Account – pay a very small interest rate, allow you to write checks, withdraw cash, or use a debit card

Services of the Bank Types of Accounts Types of Accounts –Money Market Account – pay a higher interest rate according to the market value, works like a checking account, require high minimum balance Not insured by the FDIC Not insured by the FDIC –Certificate of Deposit (CD) – pay a very high guaranteed interest rate over a certain time, but do not allow you to take money out in that time

Services of the Bank Loans – banks lend out money and charge interest Loans – banks lend out money and charge interest –Fractional Reserve – banks only keep some of the money deposited

Services of the Bank Loans – banks lend out money and charge interest Loans – banks lend out money and charge interest –Risk of default – failure of lendee to make payments to the bank

Services of the Bank Loans – banks lend out money and charge interest Loans – banks lend out money and charge interest –Mortgage – type of loan given to purchase real estate (houses, land)

Services of the Bank Credit Cards – bank pays for goods you purchase, then bills you for them later, adding interest to what you owe Credit Cards – bank pays for goods you purchase, then bills you for them later, adding interest to what you owe

Interest Rates Interest – the price paid for the use of borrowed money (usually a percentage rate) Interest – the price paid for the use of borrowed money (usually a percentage rate) Principal – the amount borrowed Principal – the amount borrowed Balance – the amount still owed Balance – the amount still owed

Interest Rates The interest rate can be compounded (added on) in many different ways The interest rate can be compounded (added on) in many different ways Whaddya say we take a look at how it works together? Whaddya say we take a look at how it works together?

Interest Rates Compounded Annually (Once a year) Compounded Annually (Once a year) –$100,000 principal, 5% interest rate –What is the total new principal? –$105,000.00!

Interest Rates Compounded Semiannually (Twice a year) Compounded Semiannually (Twice a year) –$100,000 x 2.5% (first compounding) –$102, –$102,500 x 2.5% (second compounding) –$105,060.00!

Interest Rates Compounded Monthly (12 times a year) Compounded Monthly (12 times a year) –Anyone want to try calculating this? –Fine then. It’s $105, –You spend an extra $ just from the way the interest is compounded

More Services of the Bank Automated Teller Machines (ATMs) – allow you to deposit/withdraw money and see account information without going into the bank Automated Teller Machines (ATMs) – allow you to deposit/withdraw money and see account information without going into the bank Debit Cards – used to withdraw money, or pay for goods from your checking account Debit Cards – used to withdraw money, or pay for goods from your checking account