UNIT 4: MONEY, BANKING, AND FINANCECh. 10: Money and Banking

Ch. 11: Financial Markets

CHAPTER 10.1

Bell Work: Grab workbook sheets Complete: Unit 1 Warm-up (88 A-C) (105-6 A-E) Complete Ch. 10 Warm-up (89 A-C)

“How does money serve the needs of our society?”

Objectives 3 Uses of Money 6 Characteristics of Money Sources of money’s values

Key Terms http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-3

69833-5/Flash/Ch10/Econ_OnlineLectureNotes_ch10_s1.swf

CH. 10 INTRODUCTION

How does money serve the needs of our society? Provides means for

comparing values of goods/services

Serves as a store of value

W/out wouldn’t be able to get wants/needs

3 USES OF MONEY Money is anything that can serve as……

Medium of Exchange Unit of Account Store of Value

BARTERING

W/out money, we would acquire goods/services through barter

Still used in many parts of world Only in more traditional economies Too difficult to est. value of bartered goods in a

specialized economy Money makes exchange EASIER

Provides means for comparing value of goods/services

Usually Money can serve as good store of value except in times of inflation

CURRENCY

Coins and paper money Past forms of currency

Cattle, salt, precious stones, fur, dried fish Would not work well today b/c they lack at least

one of six characteristics of Money 6 Characteristics of Money

Durability Portability Divisibility Uniformity Limited Supply Acceptability

DURABILITY/PORTABILITY

Durability Money must be able

to withstand physical wear/tear

Portability Needs to be easily

carried Paper/coins are

small/light

DIVISIBILITY/UNIFORMITY

Divisibility Must be easily

divided into small denominations

Uniformity Must be able to be

counted/measured correctly

LIMITED SUPPLY/ACCEPTABILITY

Limited Supply Would lose value if

unlimited Fed. Reserve

regulated supply of money in circulation

Acceptability Must be accepted by

everyone as exchange for goods/services

SOURCES OF VALUE Commodity Money: Objects of value to society Representative Money: Rep. ownership of value Fiat Money: Govt. says it is acceptable Identify this source

http://www.youtube.com/watch?v=7GSXbgfKFWg

LESSON CLOSING

Frontline Video: The Warning http://www.pbs.org/wgbh/pages/frontline/warning

/view/?utm_campaign=viewpage&utm_medium=grid&utm_source=grid

Complete Workbook Pgs. 90,15

HW/Bell Work for tomorrow Complete S.1 Quiz

10.2 BELL WORKBooks/Folders

Complete S.1 Quiz

10.2

“How has the American banking system changed to meet new challenges?”

Objectives Shifts bt. Centralized/decentralized banking

before Civil War How govt. reforms stabilized banking system in

1800s Developments in early 1900s banking Causes of 2 recent banking crises

Key Terms http://www.pearsonsuccessnet.com/snpapp/iText/product

s/0-13-369833-5/Flash/Ch10/Econ_OnlineLectureNotes_ch10_s2.swf

INTRODUCTION

How has the American banking system changed to meet new challenges? Early people distrusted banks Banks have worked a lot to increase American

Trust American Banking has developed to meet needs

of growing and changing population

BANKING BEFORE CIVIL WAR

Early banks were informal businesses that merchants managed in addition to their regular trade

Post Revolution, nations leaders had idea Est. a safe, stable banking system

Led to tireless disagreement on how to organize nat’l banking system

2 Views Federalists: Wanted centralized banking system

National bank Anti-federalists: Opposed plan

Decentralized banking; owned/regulated by each state

1ST BANK OF US

Federalists won the 1st debate in 1791 Est. Bank of U.S. w/20 year charter for operations Anti-federalists argued bank unconstitutional and

was set up only for wealthy Bank functioned well until 1811 when charter

ran out State banks then took over Led to chaos/confusion

Banks issued notes w/out specie to back it up Banks issued different currencies

2ND BANK OF U.S.

To eliminate chaos, 2nd bank chartered in 1816

Stability greatly restored Many still feared

Banks powers 1832, Congress tried

to renew charter Andrew Jackson

vetoed renewal Led to Free Banking

Era

FREE BANKING ERA

State chartered banks expanded from 1837-63

Large number led to many problems Bank runs/panics

Often not enough gold/silver to back notes issued Led to bank runs: people trying to collect all at same

time Wildcat banks (poorly financed/high rate of

failure) Located in remote places where only “wildcats” lived

Fraud New banks would issue notes for gold/silver then run

off Different currencies

Differing currencies from states/cities led to confusion and more fraudulent imitations

STABILITY OF LATER 1800S

Banking Acts of 1863 and 1864 Gave federal govt. power to:

Charter Banks Require banks to hold adequate amount of gold/silver

reserves Issue a national currency

1870s Nation adopted gold standard

Set a definite value for the dollar 1 oz. gold =$20 Gave public a stable currency and gained public

confidence

BANKING OF EARLY 1900S

Problems persisted despite stabilizing efforts Led to Federal Reserve Act of 1913

Est. Federal Reserve System; reorganizing bank system 12 regional Reserve Banks

All nat’l charted banks required to be members Federal reserve board

People to supervise banks; appt. by president Short-Term Loans

Each regional reserve allowed member banks to borrow to meet short term demands; helped prevent failures in face of panics

Federal Reserve notes Created currency used today, allowed them to

increase/decrease supply as needed

BANKING AND GREAT DEPRESSION

Fed. Was unable to prevent Great Depression

FDR acted to restore system in 1930s Est. FDIC to insure

customer deposits if bank failed

Changed currency to Fiat money so Fed could better control the supply

TWO CRISES FOR BANKING

1970s-1980s Many industries Deregulated Led to crises for S/L;

wasn’t prepared for competitions

High interest rates and risky loans added on

1989 congress passed legislation to abolish independence of S/L industry

Mortgage companies and banks lent $ to people who couldn’t afford to pay them off

Interest rates increased and led to foreclosures

Ripple effect hit banks and creditors hard and led to recession

Led to 2008 Bailout of banks, auto-makers, and financial firms

Savings/Loan Sub-Prime Mortgage

LESSON CLOSING

Workbook pages 91 and 23

S2 Quiz for tomorrow Finish “Warning Video”

10.3 BELL WORK•Watch 2 Online Sources

• Visual Glossary• Action Graph

•Finish Sect. 2 Quiz

10.3

“What banking services to financial institutions provide?”

Objectives How money supply in U.S. is measured Functions of Financial institutions Different types of Financial Institutions Changes brought by electronic banking

Key Terms http://

www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch10/Econ_OnlineLectureNotes_ch10_s3.swf

INTRODUCTION

What banking services do financial institutions provide? Financial Institutions

Provide electronic services Issue credit cards Make loans to businesses Provide mortgages to prospective home buyers Manage ATM machines

MEASURING MONEY SUPPLY

To keep track of different types economists divide money into categories

M1 represents money that people can gain access to easily. Have liquidity (converted to cash easily) Currency held by public Deposits in checking accounts Traveler’s checks

M2: all assets in M1 plus several additional assets. Cannot be converted to cash as easily Called Near Money; Savings, mutual funds, CDs

FUNCTIONS OF FINANCIAL INSTITUTIONS

Provide wide range of services Storing money

Provide safe place to store money Saving Money

Offer people ways to save money though: Savings accounts Checking accounts Money market accounts, allow people to save and

write limited amount of checks CDs, offer guaranteed rate of interest but cannot be

removed for period of time

FUNCTIONS OF FINANCIAL INSTITUTIONS

Loans Lend money to people and charge interest on

loans Loans help consumers:

Buy homes, pay for college, start/grow businesses Many banks loan money to other financial

institutions/individuals Called Fractional Reserve Banking

Mortgages/Credit Cards Specific type of loan to buy real estate Banks also issue credit cards

Owners can buy goods/services w/promise to repay Often have high interest rate

SIMPLE AND COMPOUND INTEREST

Interest is price paid for use of borrowed money

Principal is amount borrowed Simple Interest

Amount of interest paid only on the principal Compound interest

Amount paid on both principal and gained interest

Interest is how banks make money! They take in more than they pay out

TYPES OF FINANCIAL INSTITUTIONS

•Offer checking accounts, accepts deposits, and makes loans

Commercial Banks

•Allows people to save/borrow enough for own homes

Savings/Loan Assoc.

•Owned by depositors who make smaller deposits than commercial bank would take

Savings Banks

•Cooperative lending assoc.’s est. for particular groups

Credit Unions

•Make installment loans to consumers

Finance Companies

ELECTRONIC BANKING

•ATMs allow customers to deposit/withdraw cash, and obtain information

ATMS•Debit cards can be used at an ATM or in a store to purchase goods. Require PIN for security

Debit Cards

•More people using internet to check balances, transfer money, automatically deposit checks, and pay bills

Home Banking

•Automated clearing houses allow consumers to pay bills w/out writing checks

ACHs

•Carry money on them to be used in that store up on a phone (w/minutes)

Store-value Cards

Has Increased with the increasing importance of computers

LESSON CLOSING

Finish Online Videos How the Economy Works Case Study

Finish Any of Open workbook Test Friday

Review/Work Day tomorrow