Download Chapter 10 Money and Banking

Chapter 10 Money and Banking
1.
2.
3.
Money
The History of American Banking
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
Durability
Portability
Acceptability
Characteristics
Limited
Supply
Divisibility
Uniformity
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
Money Sources
Commodity
Fiat
Representative
2. History of American Banking
• Bank -an institute for receiving, keeping, and
lending money
120 South Third Street,
Philadelphia
This institution has led to many of arguments throughout
the years of nation, even today! How!
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
HOW ARE THEY?
These two men held
Very different Views
on how the new nation
should satisfy its new
banking needs
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
Member Banks of The FED
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
1780s
The nation has no reliable medium of exchange. Federalists and
Anti Federalists disagree
1791
First Bank of the United States is established.
18111816
Period of instability follows expiration of First Bank’s Charter
1816
Second Bank of the United States reestablishes stability
1830s1860s
President Jackson vetoes re charter of Second Bank in 1832, giving
rise to the Firs Banking Era
18611863
Civil War makes clear the need for a better monetary and banking
system
18631864
National Banking Acts of 1863 and 1864 establish national banking
system and uniform national currency
1913
President Wilson signs the Federal Reserve Act
1929
The Great Depression Begins
1933
President Roosevelt helps restore confidence in the nation’s banks
by establishing the FDIC
1940s1960s
Period of regulation and long-term stability
1980s
Period of deregulation; saving and loans faced bankruptcies
2000s
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.
3. Banking Today
• The Age of Electronic Banking - Good or Bad!!!
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
M1 Components
Billions
Currency
$749.60
Demand Deposits
$305.90
Other Checkable Deposits
$304.0
Traveler’s Checks
$6.7
Total M1 Money
$1,366.2
.5%
Currency 55%
22.5%
55%
Demand Deposits 22%
Other Checkable
Deposits 22.5%
22%
Traveler's Check
.005%
M2
M2 Components
Billions
Saving Deposits
$2,902.10
Retail Money Market Funds
$805.0
Small denomination time
deposits
$398.7
Total M1
$1,366.20
Total M2
$5,472.0
Saving Deposit 53%
25%
53%
7%
15%
Retail Money Market
funds 15%
Small demonination time
deposits 7%
Total M1 25%
Functions of Financial Institutions
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•
•
•
•
•
•
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
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?
End of Year
Principal
Amount
Interest Earned
at 5%
Principal at End
of Year
-
$100.00
$5.00
$105.00
1
$105.00
$5.25
$110.25
2
$110.25
$5.51
$115.76
5
$127.63
$6.38
$134.01
10
$162.90
$8.14
$171.04
15
$207.90
$10.39
$218.29
Types of Financial Institutions
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•
•
•
•
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
Interest and Withdrawals
From Customers
Deposits from Customers
Interest from Borrowers
Fees for Services
Loans to borrowers
Bank retains
Required
services
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
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?
Spain
Spain
United States
United States
Italy
Italy
Chile
Chile
Brazil
Brazil
South Africa
South Africa
Poland
Russia
Poland
Indonesia
Russia
China
0%
30%
60%
90%
SOURCE: Financial Sector Development
Indicators, The World Bank
120% 150%
Indonesia
China
Development of U.S. Banking
Problem
Problem Resolved by
Date
Many different
currencies in U.S.
National Banking Acts
Gold did not support
U.S. currency
U.S. adopts gold standard
No central decision
making authority to
regulate banks
Federal Reserve System
1913
No central bank to
monitor reserves
Federal Reserve System
1913
No insurance on saving
deposits
Federal Deposit Insurance
Corporation
1933
No convenient way of
getting bank credit for
small purchases
First bank issued credit card
1946
Difficult for people to
get consumer credit
Development of credit unions
1909
Making deposits and
withdrawals outside
business hours
Automatic teller machines
1968
1863, 1864
1870s