1. Chapter 10 – Money and Banking Money is a “medium of exchange,” a store of value and a unit of account Money is a “medium of exchange,” a store of value and a unit of account

2. Qualities of money Durability: Tobacco is a poor money because it deteriorates over time Durability: Tobacco is a poor money because it deteriorates over time Divisibility: A house is a poor money because it can't be broken up into small, equal units Divisibility: A house is a poor money because it can't be broken up into small, equal units Portability: A house generally can't be moved, so it's a poor choice of money Portability: A house generally can't be moved, so it's a poor choice of money Uniformity: Paintings are a poor choice of money because they have different values for paintings, and different values to different people Uniformity: Paintings are a poor choice of money because they have different values for paintings, and different values to different people Limited Supply/Scarcity: Sand dollars (sea shells) are poor choices of money, because anyone can go to to the seashore and pick them up. Limited Supply/Scarcity: Sand dollars (sea shells) are poor choices of money, because anyone can go to to the seashore and pick them up. Acceptability/Intrinsic Value: Ordinary paper is a poor choice of money because it doesn't represent any value to most consumers. Acceptability/Intrinsic Value: Ordinary paper is a poor choice of money because it doesn't represent any value to most consumers.

3. Kinds of money Commodity Money/Specie: Money that is an object of some value to consumers and is traded as such. Examples include: Gold, silver, copper coins, tobacco, whiskey, cotton, corn, etc. Commodity Money/Specie: Money that is an object of some value to consumers and is traded as such. Examples include: Gold, silver, copper coins, tobacco, whiskey, cotton, corn, etc. Representative Money: Money (usually paper) that can be traded for a commodity or something of value. Ex. U.S. Silver certificates, U.S. “greenback” dollars, etc. Representative Money: Money (usually paper) that can be traded for a commodity or something of value. Ex. U.S. Silver certificates, U.S. “greenback” dollars, etc. Fiat Money: Money that has no value other than the demand of government. Ex: U.S. dollar today, most global currencies. Fiat Money: Money that has no value other than the demand of government. Ex: U.S. dollar today, most global currencies.

4. U.S. Banking History 1791: Congress charters the First Bank of U.S. championed by Alexander Hamilton (lasts 20 years). Opposed by Jefferson and Madison 1791: Congress charters the First Bank of U.S. championed by Alexander Hamilton (lasts 20 years). Opposed by Jefferson and Madison 1816: Madison signs 20 year charter for Second Bank of U.S. to cover war debt from War of 1812 1816: Madison signs 20 year charter for Second Bank of U.S. to cover war debt from War of 1812 1836: Andrew Jackson vetoes bill to renew corrupt Second Bank of U.S., despite bank's bribery of Daniel Webster and multi-million dollar lobbying campaign. 1836: Andrew Jackson vetoes bill to renew corrupt Second Bank of U.S., despite bank's bribery of Daniel Webster and multi-million dollar lobbying campaign.

5. U.S. Banking History, cont'd 1836-1862: Free banking era, where Congress mints only gold and silver (lots of bank fraud, failures, but also low taxes and no national debt). States regulate banks, except for a few national banks approved to circulate federal government specie. 1836-1862: Free banking era, where Congress mints only gold and silver (lots of bank fraud, failures, but also low taxes and no national debt). States regulate banks, except for a few national banks approved to circulate federal government specie. 1862: Federal government issues “greenbacks” to float Civil War debt, charters national banks. State chartered banks continue to exist in large numbers. 1862: Federal government issues “greenbacks” to float Civil War debt, charters national banks. State chartered banks continue to exist in large numbers.

6. U.S. Banking History, cont'd 1913: Federal Reserve Bank created (Third National Bank) 1913: Federal Reserve Bank created (Third National Bank) Reaction to the Panic of 1907 Reaction to the Panic of 1907

7. Jekyll Island meeting Organized at 1910 secret meeting at Jekyll Island, Georgia attended by: Organized at 1910 secret meeting at Jekyll Island, Georgia attended by:  Connecticut Senator Nelson W. Aldrich  Assistant Secretary of the Treasury Department A. Piatt Andrew  Paul Warburg (“Daddy Warbucks” in Annie), Kuhn, Loeb, and Co. partner  Senator Nelson Aldrich's his personal secretary Arthur Shelton  J.P. Morgan & Co. partner Henry P. Davison (Morgan was the money guy in Monopoly)  National City Bank president Frank A. Vanderlip

8. Federal Reserve System One central bank with an Open Market Committee, appointed by President and confirmed by Senate One central bank with an Open Market Committee, appointed by President and confirmed by Senate 12 member branches in various parts of the country (including Boston), NY most powerful 12 member branches in various parts of the country (including Boston), NY most powerful Private banks can buy “stock” to become members of the system that pays a fixed interest rate on the stock determined by law (additional Fed profits revert to U.S. Treasury) and borrow from discount window at reduced interest rates, the “Federal Funds Rate” Private banks can buy “stock” to become members of the system that pays a fixed interest rate on the stock determined by law (additional Fed profits revert to U.S. Treasury) and borrow from discount window at reduced interest rates, the “Federal Funds Rate”

9. Powers of the Federal Reserve Bank Loans to banks and foreign central banks at discount rates (to corporations in the last two years) Loans to banks and foreign central banks at discount rates (to corporations in the last two years) Can inflate currency through purchase of government debt Can inflate currency through purchase of government debt Can not print money (job of U.S. Treasury) Can not print money (job of U.S. Treasury)

10. FDIC Federal Deposit Insurance Corporation: Requires all federal banks to pay a subscription and insures depositors of those banks up to $25,000 (in 1936), $250,000 today. Federal Deposit Insurance Corporation: Requires all federal banks to pay a subscription and insures depositors of those banks up to $25,000 (in 1936), $250,000 today.

11. Inflation of Dollar

12. Supply and Demand work on currencies too

13. Is inflation coming?

14. Kinds of banking institutions Commercial banks: loans to a variety of businesses, takes in standard savings, Certificates of Deposit. Commercial banks: loans to a variety of businesses, takes in standard savings, Certificates of Deposit. Savings and Loan: Mostly real estate loans Savings and Loan: Mostly real estate loans  Resolution Trust Corporation: Bailed out S&Ls in 1980s Credit Union: Members (depositers) own bank Credit Union: Members (depositers) own bank  Designed to keep larger part of profit for depositers Investment bank: Capital investment, regulated by Securities and Exchange Administration Investment bank: Capital investment, regulated by Securities and Exchange Administration

15. Banking Fractional Reserve SystemThe system of banking where banks hold only a fraction (usually 1/10) of the money deposited is lent out for interest. Fractional Reserve System: The system of banking where banks hold only a fraction (usually 1/10) of the money deposited is lent out for interest.

16. Money Money definition: a store of value that is exchangeable Money definition: a store of value that is exchangeable Money supply: The amount of all money in the (U.S.) economy Money supply: The amount of all money in the (U.S.) economy

17. Measures of Money

18. M1 Definition: The amount of money in circulation or in demand deposits, such as checking accounts Definition: The amount of money in circulation or in demand deposits, such as checking accounts

19. M2 Definition: M1, plus savings accounts and money market funds

20. Other terms Liquidity: Cash on hand, or readily accessible funds (Banks can have trouble raising liquidity during recessions/depressions) Liquidity: Cash on hand, or readily accessible funds (Banks can have trouble raising liquidity during recessions/depressions) Mortgage: loan for purchase of a property (usually a house) paid off at interest over a fixed interval of time. Mortgage: loan for purchase of a property (usually a house) paid off at interest over a fixed interval of time.