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Chapter 10 Money and Banking1. Money2. The History of American Banking3. Banking Today
How can you make the most of your money?
It’s been a hot day, and you have just gotten schooled at a game of basketball by Mr. Schenk. You arrived at a store to get a drink and you scramble for money in your short pockets but realize you have none. But wait! You forgot that you had a dollar bill in your wallet!
Great you can get that drink. Oops! I forgot about the tax! Darn it!
1. Money• Serves the needs of individuals in societies• Anything that serves as a medium of exchange, a unit of
account, and a store of value
The Three Uses of Money• Medium of Exchange -used to determine value during the
exchange of goods and services• Unit of Account -comparing the values of goods and
services• Store of Value -keeps its value if its stored rather than
spent
Uses of Money
Medium of Exchange Unit of Account Store of Value
Six Characteristics of Money
Acceptability
LimitedSupply
Uniformity
Divisibility
Portability
Durability
Characteristics
Sources of Money’s Value
• Commodity Money –objects that have value and are used as money
• Representative Money -objects that have value because the holder can exchange them for something of value
• Fiat Money -objects that have value because government has decreed that they are an acceptable means of paying debt
Commodity
RepresentativeFiat
Money Sources
2. History of American Banking• Bank -an institute for receiving, keeping, and
lending money
This institution has led to many of arguments throughout the years of nation, even today! How!
120 South Third Street, Philadelphia
American Banking Pre Civil War
• Two Views of Banking –Anti Federalists and The Federalist
• National Bank- a bank chartered by the federal government
• The First Bank of the United States• Chaos in American Banking• The Second Bank of the United States• The Free Banking Era -led to first Depression
These two men heldVery different Views on how the new nationshould satisfy its new
banking needs
HOW ARE THEY?
Stability in the Later 1800’s
• Currency in the North and the South – official name was demanded notes, but people called it greenbacks.
• National Banking Acts of 1863 and 1864• The Gold Standard -a monetary system in which our
money is backed by gold
Banking in the Early 1900’s• The Federal Reserve System -first centralized bank, or
bank that can lend money to other banks in time of need• Member Banks -belongs to the Federal Reserve• Banking –one cause of the Great Depression
Two Crises For Banking• The Saving and Loans Crisis -Deregulation or to remove
restrictions on several industries that had ties to a class of banks known as S & L – long term loans at low rates
• In 2006, problems in the U.S. banking industries began to threaten the housing market and quickly spiraled us into a full-fledge crisis
• Foreclosures – a seizure of property from borrowers who are unable to repay their loans
Development in American Banking
In 2007, as a result of the subprime mortgage crisis is a sharp increase in the number of people who lose their homes because they can’t afford their mortgage.
2000s
Period of deregulation; saving and loans faced bankruptcies1980s
Period of regulation and long-term stability1940s-1960s
President Roosevelt helps restore confidence in the nation’s banks by establishing the FDIC
1933
The Great Depression Begins1929
President Wilson signs the Federal Reserve Act1913
National Banking Acts of 1863 and 1864 establish national banking system and uniform national currency
1863-1864
Civil War makes clear the need for a better monetary and bankingsystem
1861-1863
President Jackson vetoes re charter of Second Bank in 1832, giving rise to the Firs Banking Era
1830s-1860s
Second Bank of the United States reestablishes stability1816
Period of instability follows expiration of First Bank’s Charter1811-1816
First Bank of the United States is established.1791
The nation has no reliable medium of exchange. Federalists and Anti Federalists disagree
1780s
Measuring the Money Supply
• Money Supply – all the money available in the U.S. Economy
• M1 -money that people can gain access to easily and immediately to pay for goods and services– Liquidity -the ability to be used as cash– Demand deposit -money in checking account can
be used on demand• M2 -all assets in M1 plus several additional assets
(cant use directly)– Mutual funds -fund that pools money from small
savers to purchase short-term government and corporate securities
M1
$1,366.2Total M1 Money$6.7Traveler’s Checks$304.0Other Checkable Deposits$305.90Demand Deposits$749.60CurrencyBillionsM1 Components
Currency 55%
Demand Deposits 22%
Other CheckableDeposits 22.5%
Traveler's Check.005%
55%22.5%
22%
.5%
M2
$5,472.0Total M2$1,366.20Total M1
$398.7Small denomination time deposits
$805.0Retail Money Market Funds$2,902.10Saving DepositsBillionsM2 Components
Saving Deposit 53%
Retail Money Marketfunds 15%
Small demonination timedeposits 7%
Total M1 25%
53%7%
15%
25%
Functions of Financial Institutions• Storing Money -safe place for money• Saving Money -saving, checking, CD’s• Loans -personal, car, home improvements• Mortgages -loan to buy real estate• Credit Cards -buy goods and services and promise to pay it back with
interest• Simple and Compound Interest• Banks and Profits
$218.29$10.39$207.9015$171.04$8.14$162.9010$134.01$6.38$127.635$115.76$5.51$110.252
$110.25$5.25$105.001$105.00$5.00$100.00-
Principal at End of Year
Interest Earned at 5%
Principal Amount
End of Year
The chart at left shows the money earned on a $100 deposit when interest is compounded yearly at 5 percent. How many years does it take for the original deposit to double? After five years, what is the total interest that the deposit-holder will have earned?
Types of Financial Institutions• Commercial Banks -FDIC• Saving and Loans Associations -mostly homes• Savings Banks-small transaction banks• Credit Unions -cooperative lending associates• Finance Companies -installment loans to consumers
Money Enters Banks Money Leaves Bank
Bank retainsRequired services
Deposits from Customers
Interest from Borrowers
Fees for Services
Interest and WithdrawalsFrom Customers
Loans to borrowers
Bank Costs of Doing Business
Electronic Banking
• Automated Telling Machines ATM’s and Service Fees
• Debit Cards -a card to withdraw money with• Home Banking -Internet to conduct banking• Automated Clearing Houses• Stored-Valued Cards -college students
0% 30% 60% 90% 120% 150%
China
Indonesia
Russia
Poland
South Africa
Brazil
Chile
Italy
United States
Spain
Spain
United States
Italy
Chile
Brazil
South Africa
Poland
Russia
Indonesia
China
Chart tracking the number of ATM’s per 100,000 people in a number of countries. Why do you think Poland has more than three times than Russia?
SOURCE: Financial Sector Development Indicators, The World Bank
Development of U.S. Banking
1968Automatic teller machinesMaking deposits and withdrawals outside business hours
1909Development of credit unionsDifficult for people to get consumer credit
1946First bank issued credit cardNo convenient way of getting bank credit for small purchases
1933Federal Deposit Insurance Corporation
No insurance on saving deposits
1913Federal Reserve SystemNo central bank to monitor reserves
1913Federal Reserve SystemNo central decision making authority to regulate banks
1870sU.S. adopts gold standardGold did not support U.S. currency
1863, 1864National Banking ActsMany different currencies in U.S.
DateProblem Resolved byProblem