Money and Banking Chapter 11

Goals & Objectives 1. 3 functions of money major types of money in early societies characteristics of money. 4. Privately issued bank notes. 5. Inconvertible monetary standard. 6. Great Depression causes & effects major forms of depository institutions. 8. S&L crisis of 1980’s & Housing crisis of 2007.

The Evolution of Money Barter Economy: moneyless economy that relies on trade. Barter Economy: moneyless economy that relies on trade. Value, Utility & Wealth: paper money alone may NOT have value nor create individual wealth. Value, Utility & Wealth: paper money alone may NOT have value nor create individual wealth. –Real Wealth: Goods & Services sold or traded in a free market.

Bartering is a Crime?

Functions of Money 1. Medium of exchange: something of value accepted by all parties. 1. Paper currency, gold, food, oil, salt, etc… 2. Measure of Value: common denominator used to express worth/value. 1. Store of Value: property that allows purchasing power to be saved until needed.

Value Collapse of Fiat Money

Early Societies & Money 1. Commodity money: alternative use as an economic good. (Weapons, food). 2. Fiat money: money by government decree. 1. Continental dollars: Paper money: individually printed currency backed by gold & silver : Liberty Dollar

Commodity Resources as Money

Early Societies & Money 4. Specie: silver or gold coins. ( ’s) Emerging Money: 1. Bitcoin: 2009; crypto-currency. Electronic currency involving no banks nor government.

Bitcoin: Value, Utility & Wealth

Characteristics of Money 1.Portable: easily transferred 2.Durable: 3.Divisible: 4.Limited Availability: too much in circulation devalues currency.  Trillion Dollar Coin: threat by Democratic party to bypass Congressional negotiation over the debt-ceiling.

Origins of the Dollar 1.Spanish peso: 1789; silver bullion- ingots or bars, and coins. 2.Rum: for slaves & molasses. 3.Pesos or “pieces of eight”: instead of divisions of 8, Ben Franklin & Hamilton used divisions of 10 for American Dollars.

Early Banking and Monetary Standards  Monetary Standard: the role of the Federal Reserve….  Article I, Section 10 “ No State shall coin money: emit bills of credit; make anything but gold and silver coin a tender in payment of debts ”

The Greenback Standard  Greenbacks: Legal tender; Gov’t printed money for the 1 st time with no gold or silver backing: fiat currency.  Legal tender: Government required acceptance of currency.  U.S. Notes: 1862 $150 million. ½ money in circulation.  Confederate States of America: Fiat money.

Greenbacks lose Value  National Banking System: Privately owned banks received operating charters from federal government.  Backed by U.S. bonds: IOU’s + interest  1865: End of the War Between the States  State Banks forced into the national banking system. 10% tax on all privately issued banknotes.  Private banking system abolished.

Gold & Silver Certificates  1863: paper currency backed by gold placed into the U.S. Treasury.  Reduction of supply in 1882  1878: paper currency backed by silver on reserve with the U.S. Treasury.  1886: Silver Dollars in circulation

The Gold Standard  1900 Congress passes Gold Standard Act: price set at $20.67 per ounce Currency can be exchanged for gold for the 1 st time. ADVANTAGES: 1.Money is more secure 2.Restricts the government and politics 3.Helps maintain value

The Gold Standard  DISADVANTAGES: 1.Restricts rapid economic growth 2.Drains governments gold reserves. 3.Political risk of failure if gold prices drop.

Abandoning the Gold Standard  1933: FDR declared a national emergency  1934: Gold Reserve Act: Banks, citizens forced to turn over their gold certificates.  Government literally “ CONFISCATES ” gold by force. People move to: Numismatic Coins

Monetary/Financial Coup d’etat

The Inconvertible Fiat Money Standard 1934: Government money can NOT be converted into gold. 1934: Government money can NOT be converted into gold. Gold Certificates: $10,000 fine and imprisonment for refusal to obey: F.D. Roosevelt’s Executive Order 6102 Gold Certificates: $10,000 fine and imprisonment for refusal to obey: F.D. Roosevelt’s Executive Order : Silver certificates become worthless. 1968: Silver certificates become worthless.

The Development of Modern Banking ► 1. The Federal Reserve System: 1913 ► FRN ’ s were backed by gold from  Nations Central Bank: Created by America’s wealthy elite: Rockefeller, Morgan, DuPont, Mellon, Woodrow Wilson  Modeled on Germany’s Monarchical Central Banking System  Jefferson & Jackson vetoed 1 st & 2 nd National Banks

Jefferson’s Anti-National Bank

Jackson’s Anti-National Bank

Bank Holiday ► 1913: Government creates Central Banking System: Federal Reserve Act  1930: 25,500 Banks existed. ► Run on the bank:  1933: FDR: Bank Holiday: 10,000 banks go bankrupt. Federal Reserve suspends Gold Standard and converts dollars to fiat currency.  Government confiscates gold from individuals, banks, business, etc…Financial Coup d'etat

FDIC & 4 Banking Institutions ► Federal Deposit Insurance Corporation  Glass-Steagall Act: 1933: ► $250,000 per account government insurance. ► Commercial Banks: Power to issue checking accounts. Demand Deposits: ► Savings Banks: For depositors only.  NOW accounts: checking that pays interest. ► Savings & Loan Associations: Bank heavily invested into mortgages. 1934: Federal Home Loan Bank Board created to regulate and supervise S&L’s. ► Credit Unions: Nonprofit service cooperative, owned by and operated for its depositors.

Government Regulation & Deregulation ► Regulation: : Government limited interest paid on checking & savings accounts. ► Deregulation: : Removed interest regulations and spread NOW accounts beyond Savings Banks. All depository institutions could borrow from the Federal Reserve.

S & L Crisis: CRA; Community Reinvestment Act of 1977 ► 1977: Government Required Loans to unqualified borrowers with no or poor credit and limited income.  Community Reinvestment Act: Crisis Problems: 1. Government loan requirements: Gov’t Regulation 2. High Interest Rates on low interest loans. Gov’t Regulation 3. Small capital reserves.

Financial Institutions Reform, Recovery, and Enforcement Act ► 1989: FIRREA; $300 Billion dollar FDIC bailout to failed S&L’s cost every man, woman and child in America $1, ► FDIC: Bank takeovers: Forced sell or merger done secretly to prevent shareholders from having adequate information to sell stock.  Creditors: could sue in court for lost dividends.