Transcript Money, Banking and Investment.

Money is anything that serves as a
medium of exchange, a unit of account,
and a store of value. (The functions of
money!)
 It is easy to carry and portable.
 Money is often called currency.
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Originally items such as coins made from
precious metals were used for exchange
and they had a direct value based on
metal content.
As time went on bills and paper money
were created.
 Paper money initially represented a
physical value and governments would
store gold, for example, and the paper
represented that gold in storage.
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Money has become very abstract and
factors such as the faith in a nation’s
economic production, the rule of law,
faith in the economic and political
system of a nation, a nations potential
economic future, and how it handles
finance and debt give money its value.
Anything that is used to determine value
during the exchange of goods and
services.
 Barter goods and money are both
mediums of exchange.
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Barter: The direct exchange of one good
or service for another.
 Barter is the earliest and most basic form
of trade that breaks down into the
classic “I will trade you five chickens for
one goat.”
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A unit of account is a means for comparing the
values of goods and services.
For example you can compare the price of a good
in one store to the price of the good in some other
store and gauge the value of that good because we
have prices expressed in our money.
A store of value is something that keeps
its value if it is stored rather than used.
 In essence, you can save your money
and it will keep its value.
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1. Durability: It can withstand physical
wear and tear.
 Coins from the Roman Empire still exist
today, and old pennies turn up all the
time showing examples of durability.
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2. Portability: Money must be easy to
carry and transfer.
 Money is easier to carry than gold bricks.
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3. Divisibility: Money must be easily
divided into smaller denominations and
amounts.
 You will be able to pay specific amounts
this way for a good or service.
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4. Uniformity: Any two units must be the
same in what they can buy.
 The money has a specific measure
everywhere in the nation.
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5. Limited Supply: Too much will bring the
value down, but not enough will increase
its value.
 Balance must be found and the supply
limited.
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6. Acceptability: Everyone accepts the
value of money and it has the same
value store to store and so on.
Commodity Money: Commodities are
objects and commodity money consists of
objects that have value in themselves and
that are also used as money.
 These are the items of barter in most cases.
 These items are not usually easily portable
or divisible and only work in simple
economies.
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Representative Money: Representative
money makes use of objects that have
value because the holder can exchange
them for something else of value.
 Early representative money took the form or
paper receipts for gold and silver.
 To carry gold and silver around was
inconvenient so paper money took its
place.
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Fiat Money: Money that has value
because the government has ordered
that it is an acceptable means to pay
debts.
 It is abstract and is trusted because of
the United States economic production
and potential backs it. (See slide #5!)
 It is also called legal tender and has all
six characteristics of money.
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All the money available in the United
States economy.
 It is divided into several categories, the
main two are M1 and M2.
 This does not mean printing money; it is
how money gets out in the economy
and does its thing!
 We are talking about the expansion of
credit and debt and deposit creation.
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Currency in the hands of the public, in
checking accounts, and in the form of
travelers’ checks.
 M1 consists of assets that have liquidity,
or the ability to be used as, or directly
converted into cash.
 They are “cash like.”
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The money in a checking account is
often called a demand deposit because
checks can be converted to cash or
used as cash and traditionally did not
draw interest until the 1980’s.
Other Checkable Accounts: Checking
accounts that do draw interest.
 Today most accounts with larger
amounts of money in them draw interest.
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Often referred to as “near money,” M2
consists of everything in M1 as well as in
savings accounts, small denomination
time deposits such as CD’s, and money
market mutual funds. M2 is not as liquid.
1. Savings accounts in return for your deposit
draw interest and can be withdrawn
somewhat readily.
 2. Small denomination time deposits like CD’s
are deposits that draw more interest but have
withdraw restrictions based on time.
 3. Money market mutual funds are funds that
pool money from small savers (individuals for
example) to purchase short term government
and corporate securities.
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M1 + M2 + foreign deposits
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A bank is an institution that exists for
receiving, keeping, and lending money.
Before the American Revolution businesses
and merchants were money lenders and
keepers as was the tradition in Europe.
 The major problem with this traditional
system was the safety of your money.
 A merchant could die or go out of
businesses, or they could be untrustworthy
and a depositor could lose everything.
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After the American Revolution one of the
goals of the new nation was a stable and
safe banking system.
 The Federalists in 1789 under
Washington’s Secretary of Treasury
Alexander Hamilton wanted a strong
central government to control the
banking system and wanted to create a
national bank.
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Thomas Jefferson and the AntiFederalists supported a decentralized
system where states controlled banking
within their borders.
 They also considered a federal bank
unconstitutional.
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In 1791 the Federalists were successful in
creating the Bank of the United States with a
20 year charter.
 Order and stability did result but the bank
tended to only loan money to the rich.
 The bank also issued representative
money/bank notes backed by silver and
gold.
 The bank also issued loans and ensured state
banks had the gold and silver for exchange.
The charter was not renewed in 1811.
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Chaos: After the Bank of the United
States charter expired state banks
began issuing different money that
would not have value in another state
and often states and banks could not
back it.
 Numerous banks were formed without
any economic regard.
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The Second Bank of the United States: In
1816 a second federal bank was created to
deal with the chaos the states were
creating.
 The Second Bank was able to restore order
and regain the publics trust over time.
 The Supreme Court also found that a federal
bank was indeed constitutional.
 President Andrew Jackson and his party did
not trust the bank and when the charter was
due to be renewed he vetoed it.
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The Free Banking Era: From 1830 to 1837
the “Wildcat Era” was even worse than
the chaos that occurred between the
First and Second Banks of America.
 States created banks with no economic
regard and massive amounts of
currency were created that could not be
backed.
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Wildcat Banks on the frontier or in the
middle of nowhere were opened that
often failed due to location.
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Fraud was common. “Take the money
and run” scams occurred.
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The currencies as noted were numerous
and not backed.
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Panic and mistrust caused “bank runs” in
which great numbers of people would
panic and try to redeem their money.
No Bank of America was created to deal
with the problems but things settled a bit
after 1837.
 Outbreaks of chaos continued and
confusion.
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Several states left the Union to form the
Confederacy.
Both the North and the South issued
federal currencies that had fiat
characteristics but were not true fiat
currencies yet.
 The US created the “greenback.”
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During the war the US government worked to
restore economic confidence and passed the
National Banking Acts of 1863-64.
 These acts gave the federal government the
ability to:
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1. Charter banks.
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2. Require that banks had the assets to cover
their notes and activities.
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3. Created a single national currency.
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A federal system was still not created.
The gold standard was adopted in 1870
to back the national currency and set
the dollars value.
 The government could only issue
currency if they had the gold to back it
and as a result the currency was a
success.
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The Panic of 1907 resulted from several
long standing New York banks failing
and the need for a federal system to go
with the federal currency was finally
acknowledge by most US politicians.
In 1913 President Wilson’s Federal Reserve Act
created the Federal Reserve System. This
became the nation’s central banking system.
 A central bank could lend money to banks in
times of need to try and keep them from
failing and help build confidence and trust in
banks.
 In other words it was a banker’s bank and a
lender of last resort.
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1. 12 regional Federal Reserve Banks were
created throughout the country to help
bring about organization and stability.
2. A Federal Reserve Board of Governors
appointed by the President runs the system.
 There are seven governors who serve
staggered non renewable turns where
every two years a member rotates out.
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3. Each bank can issue short-term loans to banks
in need.
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4. The currency became a Federal Reserve Note
and the Fed controls the amounts of currency in
circulation and can up it and lower it as needed.
They impact the money supply greatly.
5. The Federal Open Market Committee (FOMC)
is made up of the seven board of governor
members and five of the presidents selected
from the twelve banks.
 Four of the presidents rotate out and the New
York President is always on the committee
because of Wall Street.
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The most well known chairman of the Fed in
recent history was Alan Greenspan who took
office in 1987.
He served both Democrat and Republican
administrations through the longest period of
economic growth in US history.
He raised interest rates in the 1980’s to halt high
inflation and managed small rate adjustments
to drive the course of the economy throughout
his career.
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The current chair of the Fed is Janet
Yellen.
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Provides banking and fiscal services to
the federal government.
It is the US government’s banker and
maintains the checking account for the
Treasury Department.
 It acts as the financial agent for the
Treasury Department selling, transferring,
and redeeming government bonds.
 It also makes interest payments on these
securities.
 It is the only legal body that can issue
money printed by the United States Mint
run by the Treasury Department. Money
is designed and printed at the bureau of
Engraving.
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Check Clearing: The process by which
banks record whose account gives up
money and whose account receives
money when a customer writes a check.
It supervises lending practices and
financial activities of banks and studies
proposed mergers and other activities.
 It also regulates banks and bank holding
companies, or companies that own
more than one bank.
 It protects consumers by enforcing truth
in lending and through consumer
education.
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It is a lender of last resort that allows
other banks to borrow funds in times of
need.
 The discount rate is the amount of
interest the Fed charges for these loans.
 When banks loan each other money
they charge a federal fund rate, only the
fed charges a discount rate.
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The Great Depression that started in 1929
was the Feds first great challenge.
Many problems caused the depression, but
one of them was that banks were engaging
in high risk loans to businesses that were
failing and bank runs began again when
word got out that a bank was having
trouble.
When the stock market crash occurs “The
Great Depression” begins officially.
Trust was lost due to the economic
downturn but the Fed continued to try and
restore confidence.
A major issue was when banks failed
customers deposits were lost.
The 1933 Bank Holiday ordered by F.D.R
closed all the nation’s banks and their books
and records were checked. Only “sound,”
or stable banks were allowed to reopen.
 A stable bank could return to business and
banks with too many problems and losses
were closed for good. This created trust.
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Later in 1933 the Federal Deposit
Insurance Corporation (FDIC) was
created to insure and back customer
deposits if a bank fails.
 The true transformation to fiat money
begins with the Bank Holiday and the
creation of the FDIC because we start to
wean off the gold standard and the
government is making guarantees about
money and the economy.
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The United States was able to tell the
people banks were sound and stable
after the Bank Holiday and that your
money needs to be working for you and
is safer in a bank. If a bank was open
after the Bank Holiday you could “trust it”
and if anything happened to that bank
and it could not cover your losses (up to
$250,000 today) the FDIC insurance will
kick in. These sort of things create a fiat
atmosphere and a major change to of
nation. (See slide #5 again!)
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Post Depression banking is far more regulated and
through the 1960’s even more restrictions such as
controlled interest rates occurred.
Greenspan is famous for his use of interest rates!
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He raised interest rates in the 1980’s to halt high
inflation and managed small rate adjustments to
drive the course of the economy throughout his
career.
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As a result in the 1970’s and 80’s banks and business
pushed for deregulation.
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Removal of regulation (deregulation) occurred as a
result.
Banks are required under the fractional
reserve system to hold funds in reserve and
must continually report this information to
the Fed.
 The Fed conducts regular bank
examinations and financial reviews to
makes sure banks are following the law.
 The Fed does this by conducting surprise
visits and examining records and books.
 The net worth, or total assets minus total
liabilities, will be calculated and examined.
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The RRR is the money held onto by banks
to cover withdraw needs.
 It is a percentage the bank must hold on
to and it can be raised or lowered by the
Fed.
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The rest of the money is loaned out
creating economic activity.
 If you only were dealing with one deposit
the amounts you could loan from it
would be small, but multiple deposits are
put together and loaned out.
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Example: Tommy deposits $1000 into Greedy National Bank.
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For this example we will set the current RRR at 10%.
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Greedy National Bank keeps $100 in reserve.
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Greedy National Bank loans Peter $900.
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Peter buys a $900 engine for his car from Bart.
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Bart deposits the money in Fleece Bank.
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Fleece Bank keeps $90 in reserve.
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Fleece loans Gomer $810 for a scuba suit.
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The $900 loan and the $810 loan combined equal $1710.
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The money supply overall was increase by $1710 through this
process. The new money is created from DEBT!
a. Storing Money: The FDIC protects
consumer deposits and the deposits are
stored in secure facilities and are insured
against things like theft and fire.
 If the bank can not cover the losses the
FDIC will.
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b. Saving Money: Banks are an outlet
where consumers can save money and
where consumers can make their money
work for them by drawing interest.
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c. Checking: Checking accounts give
you access to your money.
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d. Loans: Banks provide loans to
consumers and businesses for a fee.
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A specific type of loan that is used to
buy real estate is a mortgage, and it can
be commercial or personal.
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Banks issue cards that entitle its holder to
buy goods and services based on the
holders promise to pay for these goods
and services and the service charges
and interest fees that come with it.
Interest: The price paid for the use of
borrowed money.
 Interest is how banks make profit.
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Principal: The amount of money
borrowed.
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Debit Cards: Similar to a credit card a
debit card functions more like a check
and can be used to withdraw money.
Home Banking: Account managing and
transfers can be done at home via the
computer.
 Paychecks and other payments can also
be direct deposited by computer now.
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With deregulation the differences in banks have
virtually disappeared and all have check writing
ability now.
The deregulation of the 70’s and 80’s also led to the
Savings and Loan (S&Ls) Crisis of the 1980’s.
S&Ls: Institutions that originally pulled deposits of
members into large funds where members could
draw interest and then pull money to buy homes.
With deregulation they started to function more like
conventional banks.
Fraud occurred at high levels within institutions and
they were operating with inadequate capital.
Risky and bad loans were issued, and interest rates
skyrocketed.
As a result of the crisis the 1989 Financial
Institutions Reform, Recovery, and
Enforcement Act (FIRREA) abolished the
independence of the savings and loan
industry and restored regulation.
 They still function like banks but are
regulated and watched more.
 Banking today is covered in the next
section.
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Commercial Banks: These banks provide
services to businesses only.
 Around a third of commercial banks are
members of the Fed and they provide
the most services and have the largest
impact on the US economy.
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Credit Unions: Credit unions are
cooperative lending associations for
particular groups and occupations.
 Interest rates are often lower than traditional
banks.
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Finance Companies: Finance companies
issue installment loans to consumers, such
as car loans.
 Some finance companies specialize in high
risk customers and generally charge the
highest interest rates of all institutions, but if
you have good credit you can get some of
your best loan rates from them.
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