Transcript document

Chapter 10
Money
Catch Me if you can, scene 9
Table of Contents
•
•
•
•
•
•
•
What is Money
Timeline
Federal Reserve
Money Slide Show
Inflation
Could you survive
Taxes
Money
• Anything that serves as a medium of
exchange, a unit of account, and store
of value
• Without money, people get things from
bartering
Barter
• The direct exchange of one set of goods
or services for another
• Usually works only in small populations
http://oneredpaperclip.blogspot.com/
Problem with Bartering
• Have to find someone who wants what
you have AND who you want what they
have
Problem with Bartering
• Both products have to be “equivalent in
the eyes of the owners”
Example
• You have: Cow
• Someone else: 2 Chickens
Currency
• Coins and paper bills used as money
• (historical examples: cattle, salt, dried
fish, furs, precious stones, gold, silver,
porpoise teeth, rice, wheat, shells,olive
oil.)
Bank
• An institution for receiving, keeping and
lending money
Three Uses/ Functions of Money
• Medium of Exchange
• Unit of Account
• Store of Value
Medium of Exchange
• People accept money in trade for goods
and services
Unit of Account
• Also known as VALUE
• A means for comparing the values of
goods and services
Store of Value
• Something that keeps its value if it is
stored or held on to rather than used
• (exception= inflation)
Six Characteristics of Money
•
•
•
•
•
•
Durability
Portability
Divisibility
Uniformity
Limited Supply
Acceptability
Durability
• Can withstand wear and tear
• Used over and over again
• BAD examples: Wheat, Olive oil
Portability
• Can take it anywhere
Bad example: cows, boulder
Divisibility
• Can be easily divided into smaller
denominations
• Bad Example: stones
Uniformity
• Any 2 units of money must be the same
for accuracy
Bad example: fish
Limited Supply
• If too much , then No longer useful
• Bad example: Pebbles, Sand
Acceptability
• Able to exchange the objects that serve
as money for goods and services
Three Sources of Money
• Commodity Money
• Representative Money
• Fiat Money
Commodity Money
• Objects that have value in themselves
and that are also used as money
• Good example: salt, corn, cattle, cotton,
tobacco
Representative Money
• Objects that have value because the
holder can exchange them for
something else of value
• Good example: IOU, silver, gold
Fiat Money
• Legal tender
• Money that has value because the
government has ordered that it is an
acceptable means to pay debts
• Good example: coins, paper money
Timeline
Events in American Banking
Date
Event in American Banking
1776
American Revolution
1775 – To finance the American Revolution, the Continental
1791
Congress printed the nation’s first paper money,
which became known as “Continentals.”
Unfortunately, they produced too much, it led to
Inflation, making it “utterly worthless”—their
phrase was “Not worth a Continental”
1775 –
1791
(cont.)
Debate over Role of Government Bank:
Federalists
2) Anti-Federalists
Strong Central Government
Power to the states
Centralized Banking
System
Decentralized Banking
System
Supported by:
Alexander Hamilton
Supported by:
Thomas Jefferson
(Andrew Jackson)
***It is NOT specifically stated in the Constitution
to establish a national Bank***
1791 Congress established the First National Bank of the
United States, headquartered in Philadelphia, with
Alexander Hamilton in charge!
Most people felt uncomfortable about the Bank.
In 1811, the charter (license to operate) was NOT
renewed.
1819
Congress rules the National Bank is
CONSTITUTIONAL
1816 - In 1816, Congress issued a new charter for the
1836 Second Bank of the United States to eliminate
chaos caused by state banks.
Andrew Jackson was against this. Unfortunately,
in 1828, he became President of the U.S.
When the bank was up for renewal in 1836, he did
NOT renew the charter.
1836 – State-chartered banks and unchartered banks began
1865
issuing Specie (any monetary gold or silver—coins or
bars).
Sometimes referred to as the “Wildcat Era.” Wildcat
banks were located at the edge of town with a high rate
of failure.
Other issues: bank runs, no government regulations,
many currencies.
By 1860: Approximately 8,000
different currencies existed in
the United States
1861 Civil War begins
United States Treasury issues 1st paper currency since
the Continental, called Greenbacks (paper currency for
the North printed with Green ink.) The South’s
currency was backed by cotton.
1863 - Establishment of the National Banking Act of
1893
1863, which allowed the Federal government to
chartered banks and required adequate gold and
silver to cover their banknotes.
An amendment to created a uniform currency
for the nation. Chaos occurred because not only
was there a national bank, but there was also
state banks.
1863 - Meanwhile, Bank runs (unexpected cash
1893
withdrawals) continued to occur because the banks
only carried a small percentage of deposits on hand
and did NOT have enough to cover large amounts
of deposits in a short amount of time.
This caused many banks to fail / go bankrupt!
Establishment of the Gold Standard (A monetary
system in which paper money and coins are equal
to the value of a certain amount of gold)
1893
A banking panic triggered the worst Depression
in history up until this time, which was mainly
caused by:
1) failure of businesses / banks,
2) widespread unemployment
3) falling prices and wages.
1893
The economy stabilized only after the intervention
(cont.)
of the financial mogul J.P. Morgan.
1907
A severe banking panic was caused by
Speculation (definition: practice of buying or selling
stocks, commodities, land, or other assets hoping to
take advantage of an expected rise or fall in price).
J.P. Morgan was called upon to avert disaster.
As a result, people began to ask for a change in the
central banking system.
******** President Woodrow Wilson aided in the
1913
establishment of the Federal Reserve System
********
(FED), the nation’s new decentralized central
banking system
19141920
World War I
Who was the U.S. President
from 1929 – 1933?
• Herbert Hoover
Herbert Hoover
• Hoover Hotel: Cardboard Box
• Hoovervilles: Multiple cardboard boxes
• Hoover Flag: Empty pockets turned
inside out
1929 - October 1929, the stock market Crashed
1933
causing the U.S. to go into the worst
Depression in its history. From 1930 until
1933, 10,000 banks failed! In March 1933,
President Franklin D. Roosevelt (FDR)
declared a bank holiday because he
wanted to close banks to avoid more “runs”
on the banks. Some people believed the
Federal Reserve (FED) was to blame
for not pursuing policies to lessen the
economic severity.
1933 Congress passed the Banking Act of 1933 also
known as Glass-Steagell Act, including:
1) The establishment of the Federal Deposit
Insurance Corporation (FDIC), which created
the government’s responsibility of deposits
(today for up to $100,000) if the bank fails.
2) Placed Open Market Operations under the
Fed.
Also, the gold standard ended.
1935
The Banking Act 1935 called for further
changes to the Fed’s structure, including:
1) The creation of the Federal Open Market
Committee (FOMC) as a separate legal entity
2) Establishment of members’ terms at
14 years.
19391945
World War II
1945
Employment Act added the goal of promoting
maximum employment to list of the Fed’s
responsibilities.
19501953
Korean Conflict
Vietnam Conflict
19571975
(Longest U.S. involvement in history)
Inflation skyrocketed as producer and consumer
1970s
prices rose, especially including the prices of
Oil soared.
The federal deficit more than doubled.
Humphrey-Hawkins Act required the Fed chairman
1978
to report to Congress twice annually on
monetary policy goals and objectives.
1980
Monetary Control Act of 1980 required the Fed to
establish reserve requirements for all eligible
financial institutions
1990’s October 19, 1987, two months after
Alan Greenspan became the Fed Chairman, the
stock market crashed! Greenspan ordered the
Fed to issue a one-sentence statement before
the start of trading on October 20:
“The Federal Reserve, consistent with its
responsibilities as the nation’s central bank,
affirmed today its readiness to serve as a source
of liquidity to supports the economic and
financial system.”
1990’s This decade was marked by generally declining
(cont.)
inflation and the longest peacetime economic
expansion in our country’s history (10 years of
expansion!)
Sept.
11,
2001
Terrorist attacks on New York, Washington,
and Pennsylvania.
The Fed issued a one-sentence statement
reminiscent of its announcement in 1987:
“The Federal Reserve System is open and
operating. The discount window is available
to meet liquidity needs.”
Sept.
11,
2001
(cont.)
In the days that followed, the Fed lowered
interest rates and loaned more than $45 billion
to financial institutions in order to provide
stability to the U.S. economy.
Standards
• 6.1.12D
The Federal Reserve
(FED)
The Federal Reserve (FED)

Is in charge of the nation’s monetary policy

Influences Amount of Money and Credit in
the U.S. economy, which can effect interest
rates (which can alter the inflation rate)
Monetary Policy Goals
A) Sustainable economic growth
B) Full employment (4.5 – 5.5% unemployment)
C) Stable prices
Monetary Policy Tools
A) Open Market Operations
B) Discount Rate
C) Reserve Requirements
Open Market Operations
• Buying and selling of U.S. securities
Discount Rate
•
Interest rate charged by the Fed to
depository institutions on short-term
loans
Reserve Requirements
•
Portions of deposits that banks must
maintain in vaults or on deposits at the
FED
The Business Cycle
Peak
Expansion
Trough
Contraction
Expansionary Monetary Policy Tools
(Easy)
1) Open Market operations: Bond Purchases
2) Discount Rate Decreases
3) Reserve Requirements Decreases
Contractionary Monetary Policy Tools
(Tight)
1) Open Market operations: Bond Sales
2) Discount Rate Increasing
3) Reserve Requirements Increasing
The Federal Reserve System
The Federal Reserve System
Board of Governors
Federal
Reserve
Banks
Member Banks
Federal Open
Market
Committee
(FOMC)
Other Depository Institutions
American People
•
FED Facts…
• Created by the Federal Reserve Act of 1913
• There are 12 Federal Reserve Banks in the U.S.
• Pennsylvania is located in 2 districts (# 3 & 4)
• Northampton is located in District 3
• Money from District 3 goes to Philadelphia
Federal Reserve Banks
• This block is also known as “the
banker’s bank”
• Purposes: Stores currency & coin,
processes checks and electronic
payments
Board of Governors
• Located in: Washington, D.C.
• There are 7 Governors
• Governors are appointed by the President of the U.S., and
confirmed by Congress
• Each Governor serves a 14-year term.
• Guides monetary policy
• The Chairman (currently Ben Bernanke) testifies 2 times a year
to Congress about the nation’s economy
Federal Open Market
Committee (FOMC)
•
Uses the Economic Indicators to
determine the health of the economy.
Federal Open Market
Committee (FOMC)
• Purpose: Monetary Policy
• Promotes: Stable prices & economic growth
• Manages the nation’s: money supply
• Typically meets 8 times a year
• Located in Washington, D.C.
Standards
• 6.2.12 CEF
• 6.5.12 ABDEFGH
Economic Indicators
• The Federal Open Market Committee (FOMC)
looks at the economic indicators to determine
the health of economy…
Economic Indicators
• Leading: Anticipate the direction
economy is headed
• Coincident: Provide information about
current status of economy
• Lagging: Changes due to the business
cycle
Standards
• 6.1.12 C
Money Slide Show
The Life of the Dollar Bill…
• Depository financial institutions order
cash from the Fed to meet their
customer’s, demands and deposit
excess or worn currency.
• The FED sorts currency at the rate of
90,000 notes per hour
Bureau of Engraving and
Printing (BEP)
• Located in Washington, D.C. and Fort
Worth, Texas
• The FED tells the BEP how many bills
of each denomination to print--
What is the largest denomination
of money currently being printed in
the United States?
The answer will appear later…
One Dollar Bill
One Dollar Bill
•
George Washington
George Washington
• Leader during the American Revolution
• Chairman of the Constitutional
Convention and helped in getting the
Constitution ratified.
• In 1789, became America's first
president.
Two Dollar Bill
Thomas Jefferson
•
Thomas Jefferson
(and the signing of the Declaration of Independence)
• "author of the Declaration of
American Independence, of the
Statute of Virginia for religious
freedom, and Father of the
University of Virginia"
--on his tombstone
New Five Dollar Bill
Abraham Lincoln
Abraham Lincoln
• In 1860, Lincoln was nominated for president by the
Republican party on a platform opposing slavery.
• Presidency issues: slavery and states rights, South
Carolina seceded from the Union
• John Wilkes Booth shot Lincoln at Ford's Theater,
Washington, D.C. He died April, 10th 1865.
Old Five Dollar Bill
New Ten Dollar Bill
Old Ten Dollar Bill
Alexander Hamilton
• Opinions of the structure and function of the
national bank
• Hamilton also established an American
philosophy on foreign policy of neutrality
during the French Revolution.
New Twenty Dollar Bill
Security Features
Old Twenty Dollar Bill
Andrew Jackson
Andrew Jackson
• 7th President of the U.S. (1829-1837), First
governor of Florida (1821)
• A founder of the Democratic Party
• Nicknamed, “Old Hickory," because he was
known for his toughness
New Fifty Dollar Bill
Old Fifty Dollar Bill
Ulysses S. Grant
Ulysses S. Grant
• Sent to Mexico and served under General Zachary
Taylor during the Civil War.
• In 1864, President Lincoln named him General-inChief of the Union army.
• In 1869, Grant was elected president of the United
States. His presidency was less successful and had
corruption.
New One Hundred Dollar Bill
Old One Hundred Dollar Bill
Benjamin Franklin
• He became well known throughout
Philadelphia.
• A member of the Constitutional Convention
and signer of the Constitution in 1787.
Did you know…
• The $100.00 bill is currently the largest
currency being made today in the U.S.
• The $500, $1000, $5000, and $10000
have not been printed since 1946
The $500 Bill
William McKinley
William McKinley
• 25th President of the U.S.
• He was elected twice, in 1896 and
1900, but was assassinated in 1901
• He was succeeded by his Vice
President, Theodore Roosevelt
The $1,000 Bill
Grover Cleveland
Grover Cleveland
• The only President to serve two
non-consecutive terms.
• 22nd (1885–1889) President of the U.S.
• 24th (1893–1897) President of the U.S.
The $5,000 Bill
James Madison
James Madison
• 4th President of the U.S. (1809–1817)
(during the War of 1812)
• The primary author of the U.S. Constitution in 1787
• Jefferson's Secretary of State
• Handled the Louisiana Purchase, doubling the
nation's size
The $10,000 Bill
Salmon Chase
Salmon Chase
• Treasury Secretary (1861-1864) under
President Lincoln
• Chief Justice of the Supreme Court
The $100,000
Woodrow Wilson
Woodrow Wilson
• 28th President of the U.S. (1913–1921), for 2
terms.
• As President, signed legislation, including the
Federal Reserve System
• His efforts in 1919, included the Treaty of
Versailles, which was rejected by the Senate.
Inflation
Inflation
• A general increase in prices
http://www.bls.gov/bls/inflation.htm
• When you have inflation, does a dollar
buy more or less over time?
Less
What is the result of more
money in the economy?
• Interest rates increase
• Bankers lend more money
• Consumers borrow more money
• Consumers spend more money
• Prices rise
Inflation Rate
• The percentage rate of change in price
level over time
• (CPI new - CPI old) x 100
CPI old
Deflation
• A sustained drop in the price level
Purchasing Power
• The ability to purchase goods and
services
• As prices rise, the purchasing power of
money declines
• As prices decrease, the purchasing
power of money increases
Price Index
• A measurement that shows how the
average price of a standard group of
goods changes over time by comparing
averages from earlier years
Consumer Price Index (CPI)
• The price index determined by
measuring the price of a standard group
of goods meant to represent the “market
basket” of a typical urban consumer
• Computed every month
http://www.bls.gov/bls/inflation.htm
Market Basket
• Monthly expenditures of a family
• Readjusted every 10 years
To determine CPI:
• Cost of market basket in Current Year
Cost of market basket in Base Year
Producer Price Index (PPI)
• Measures the average change over
time in the selling prices received by
domestic producers for their output
Producer Price Index (PPI)
• Examples:
– agriculture, forestry, fisheries, mining,
scrap, and manufacturing
– transportation, retail trade, insurance, real
estate, health, legal, and professional
services.
Types of Inflation
• Creeping Inflation
• Chronic Inflation
• Hyperinflation
Creeping Inflation
• Inflation remains LOW (1-3%)
Chronic Inflation
• Inflation rises steadily from month to
month over a long period of time
Hyperinflation
• Inflation that is out of control
• Can go as high as 100-500% per month
Hyperinflation
Example:
In 1923 Germany, prices skyrocketed
more than 2,000 percent in just one
month.
Today, that would shoot up the price of
bread from $1.00 to $21.00
Causes of Inflation
• Quantity Theory
• Demand-Pull Theory
• Cost-Push Theory
Quantity Theory
• Too much money in an economy causes
inflation
• Should measure real GDP to watch
nation’s productivity
Demand-Pull Theory
• Inflation occurs when demand for goods
and services EXCEEDS existing
supplies
Cost-Push Theory
• Inflation occurs when producers raise
prices in order to meet increased costs
Effects of Inflation
1) Purchasing power of money declines
2) If wages increase to match inflation, a
worker’s real income stays the same
Income and Inflation
• If Income and Inflation increase at the
SAME level, you “break even”
Income
3%
Inflation
3%
Income and Inflation
• If Income increase faster (4%) than
Inflation (2%), you are “making more
money”—purchasing power increases
Income
4%
Inflation
2%
Income and Inflation
• If Income increase slower (2%) than
inflation (3%), you are “making less
money”—purchasing power decreases
Income
2%
Inflation
3%
3) If Interest Rates and Inflation increase at
the SAME level, you “break even”
Interest Rate Inflation
3%
3%
Standards
• 6.1.12 C
• 6.2.12 CEFI
• 6.5.12 DEFGH
Uninsured
• NOT just a problem for the poor or
unemployed.
• 80% of the uninsured were in working
families
• Families with incomes of $75,000 and
up, 13.5 MILLION people were withOUT
insurance for part of 2002 and 2003
Uninsured by Age
Age
Percentage
0 –17
36.7
18 – 24
50.3
25 – 44
32.9
45 – 54
20.7
55 – 64
17.3
Brock, Fred. Live well on less than you think. 2005. Page 88.
Poverty
Could you survive in Poverty?
• I know which churches and sections of town have the
best rummage sales
• I know which grocery stores’ garbage bins can be
accessed for throw-away food
• I know how to get someone out of jail
• I know how to physically fight to defend myself
Could you survive in Poverty?
• I know how to get a gun, even if I have a police
record
• I know what problems to look for in a used car
• I now how to live without electricity and a phone
• I can entertain a group with my personalities and my
stories
Could you survive in Poverty?
• I know how to move in half a day
• I know how to get and used food stamps
• I know where the free medical clinics are
• I can get by without a car
Middle Class
Could you survive in the Middle Class?
• I know / my parents know where to go to sign me up
for Baseball, Dance class, and / or Music class, etc.
• I know how to properly set a table
• I know which stores are most likely to carry the
brands I wear
• I know how to order at a nice restaurant
Could you survive in the Middle Class?
• I know how to get my money out of my savings
account
• I talk to my parents about higher education / trade
school / after high school
• I know my parents will help (or try to help me) with
my homework
• I know how to get a library card
Could you survive in the Middle Class?
• I know how to help my parents decorate for the
different holidays
• My parents repair items in my house almost
immediately when they break—or my parents know a
repair service and call it
• I have a driver’s license and either use my parent’s or
my own car
Wealth
Could you survive in Wealth?
• I can read a menu in French, English, and another
language
• I have several favorite restaurants in different
countries of the world
• During the holidays, I know my parents will hire a
decorator to identify the appropriate themes and
items with which to decorate the house
Could you survive in Wealth?
• My parents have at least two residences that are
staffed and maintained
• I have at least 2 or 3 “screens” that keep people who
I do not wish to see away from me
• My parents fly our own plane or a company plane
Could you survive in Wealth?
• My parents know how to enroll me in the preferred
private schools
• My parents are on the boards of at least 2 charities
• I / my parents support or buy the work of a particular
artist
Review Questions
1. What is money and bartering—and
why don’t we barter that much?
2. What are the 3 uses / functions of
money?
3. Name the 3 sources of money, provide
an example of each, and which type
do we currently have in the U.S.?
Review Questions
4. List the 6 characteristics of money and
1 BAD example of each—what is the
“good example”?
5. What is the difference between inflation
and deflation—what happens to the
purchasing power of money when each
happens?
Review Questions
6. What is the difference between the 2
price indexes—CPI and PPI—and what
do they show / represent?
7. List the 3 types of inflation in the order
of severity
8. List, identify, and give an example of
each of the inflation theories
9. What are the 3 effects of inflation?
TWO (2) Types of Spending
• Mandatory Spending – Required by law
• Discretionary Spending – government
planners can make choices
Types of Budgets
• Balanced Budget – Revenues are EQUAL to
spending
• Budget Surplus – Revenue in MORE than
spending
• Budget Deficit – Revenue is LESS than
spending
Types of Economics
• Classical Economics
• Demand Economics
• Supply-Side Economics
Classical Economics
• Idea that free markets can regulate
themselves
Supply-Side Economics
• A school of economics that believes tax
cuts can help an economy by raising
supply
Demand-side Economics
• A school of economics that believes
government spending and tax cuts help
an economy by raising demand
Keynesian Economics
• A form of demand-side economics that
economics that encourages government
action to increase or decrease demand
or output
John Maynard Keynes
• Ideas that government intervention
might be needed to pull an economy out
of depression
Fiscal Policy
The Business Cycle
Peak
Expansion
Trough
Contraction
Expansionary Fiscal Policy Tools
(Loose)
1) Government spending: Increasing
2) Taxes: Cutting
Contractionary Fiscal Policy Tools
(Tight)
1) Government spending: Decreasing
2) Taxes: Raising
Fact Act
• Can check your credit score ONE time a
year without penalty
Standards
• 6.1.12 D
• 6.2.12 GHIJKL
• 6.5.12 DE