Money and Banking Chevalier Spring 2015

Money

The Evolution of Money What is money? It is not just a Dollar Bill, or a Euro, or a Pound. It is any substance that serves as a MEDIUM OF EXCHANGE, MEASURE OF VALUE, OR STORE OF VALUE

What is the function of money?

Medium of Exchange Accepted by all parties as payment for goods and services Gold, silver, salt (salarium)

Measure of Value A common denominator can be used to express worth in terms that most individuals can understand. Purpose of price tags A basis for comparison

Store of Value The property that allows purchasing power to be saved until needed. Shouldn’t have to be paid and then turn around and suddenly spend; money should hold its value

Early Money-Why use money? Commodity money Barter economies Fiat money (serves everybody’s self interests)

Money in America George Washington created the dollar from the ‘peso’ 8 ths and 10 ths

Characteristics of Money Portable- easily transferred Durable- won’t deteriorate as a store of value Divisible- can be transferred into smaller units (change) Limited in supply-money will lose value if there is too much of it

Privately Issued Bank Notes Americans distrusted paper currency Counterfeiting, inflation, 100’s of different types of notes in circulation By the Civil War, 1,600 banks had issued >10K types of notes. US Gov’t only minted silver and gold coins.

Money During the Civil War Civil War and the rise of the greenback Called legal tender United States notes Both fiat currencies

Money During the Civil War Civil War and the National Banking System The move to one common currency 10% tax on state issued currencies Gold Certificates and silver certificates

The Gold Standard Added security Was supposed to prevent government from printing too much money Could also restrict economic growth People could convert whenever Price of gold will change if not fixed

Today Inconvertible fiat money standard M1, M2, and M3 Money today is: Portable Durable Divisible Limited availability

The Federal Reserve System first central bank- a bank that can lend to other banks in times of need. Privately owned, publically controlled Federal reserve notes came into existence

Banking in the Depression 10K of 25K banks across the country failed Runs on the banks Insecurity No depositor’s insurance

Glass-Steagall Act FDIC- 250,000 for one person at one bank Protects consumers against fraudulent banks

Types of Depository Institutions Commercial Banks Demand Accounts Thrift Institutions (DA’a after 1970’s)

Savings Banks NOW accounts- demand accounts that earn interest (Negotiable Order of Withdrawal) Owned by Depositors (mutual savings banks)

Savings and Loan Associations S&L Invests a majority of its funds in home mortgages Cooperative clubs for homebuilders Association members would deposit a regular sum and take turns building homes

Credit Unions Non-profit (tax incentives) Share-draft accounts (lure for Credit unions) Act as NOW accounts

The S&L crisis Deregulation by Reagan Interest rates, what services they could offer, borrowing from the FED Bad loans and interest rates led to failures on a grand scale, not prepared for this Changed names to avoid scandal (WAMU)