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Chapter 10
Money and Banking
Money
• Money is anything that serves 3
purposes:
–Medium of Exchange – used
when exchanging goods or
services
Money
• Money is anything that serves 3
purposes:
–Unit of Account – means of
comparing value of goods and
services
Money
• Money is anything that serves 3
purposes:
–Store of Value – if you hold on
to it, it will maintain its value
6 Characteristics of Currency
• Currency – coins and paper bills
society uses for money
–More useful than bartering
because of 6 characteristics
What are the 6 Characteristics?
The 6 Characteristics of Currency
• Durability – lasts for a long time
• Portability – easy to carry
• Divisibility – can be divided into
smaller denominations
• Uniformity – looks universally the
same, difficult to counterfeit
The 6 Characteristics of Currency
• Limited Supply
• Acceptability – everyone in the
economy must accept its value
I’ve been thinking
really deep and
philosophical like
lately.
How did the value of
paper currency
evolve to its present
state?
History of the Value of Money
• Commodity Money – beginning of
time until about 1600’s, people
traded in commodities (salt,
cattle, tobacco, pretty rocks)
rather than money
History of the Value of Money
• Representative Money – starting
in 1600’s, people traded paper
receipts that represented gold or
silver kept in a town safe
–Gold and silver were difficult to
carry around
History of the Value of Money
• Fiat Money – Started in 1930’s,
government issued currency and
passed laws saying that all people
must accept it as payment for
debts
On the Back of a Dollar…
On the Back of a Dollar…
From Saturday Night Live
What is a Bank?
• Bank – institution for receiving,
keeping, and lending money
Brief History
• Start of U.S. History (1780’s –
1800’s)
–Federalists vs. Anti-Federalists
•Federalists favored a national
bank
•Anti-Federalists believed
states should control
Brief History
• National Banks were created, and
accomplished a number of
purposes
–Held government tax revenue
–Lend and borrow money for
government purposes
Brief History
• National Banks were created, and
accomplished a number of
purposes
–Issue representative money
backed by gold or silver
–Watch over states use of
representative money
Brief History
• Later, because
of politics, the
national bank is
killed
Banking With No National Bank
• Problems
–Bank runs, panics
–High rates of bank failure
–Fraud
–Many different currencies
The New National Banking System
• Federal Reserve Bank – Established in
1913
–Gives short term loans to private
banks to prevent failures
–Created a national currency – today’s
dollars
•Federal Reserve controls number of
dollars in circulation
The New National Banking System
• Federal Reserve Bank – Established in 1913
– Monetary Policy Tools of the Federal Reserve
• Open Market Operations – buying/selling
government bonds to expand/contract the
money supply
• Controls the discount rate (primarily the
decision of the Chairman of the Federal
Reserve Board)
• Reserve Requirement Ratio (RRR) – amount of
deposits banks must keep in reserve (rarely
ever used)
The New National Banking System
• Federal Reserve Bank – Established in 1913
– Monetary Policy Goals of the Federal Reserve
• Expansionary Policy – Grows the economy, but
may cause inflation to go up
– Lower the discount rate, encourage borrowing
– Buy bonds from investors, injects cash into the
economy
• Contractionary Policy – Controls inflation, but
may cause economic growth to slow
– Raise the discount rate, discourage borrowing
– Sell bonds to investors, takes cash out of the
economy
Hello, I am Ben
Bernanke.
I am the current
Chairman of the Fed.
Enjoy the rest of your
class.
Other Federal Regulations on Banks
• Federal Deposit Insurance
Corporation (FDIC) – insures
customer deposits up to $100,000
in the event of bank failure
Banking Today
• Two types of money
–M1 - types of money that
people can quickly get access to
and spend
•Liquidity - the ability to
convert an asset into cash
•M1 has high liquidity
Banking Today
• Two types of money
–M2 – Everything in M1 plus assets that
are not immediately used for
purchases
•Near Money – term for assets that
cannot be used in financial
exchanges
•Includes savings accounts, mutual
funds
Services of the Bank
• Place to store your money safely – an
Account
Services of the Bank
• Types of Accounts
–Savings Account – pay a small
interest rate, allow you to withdraw
cash
–Checking Account – pay a very
small interest rate, allow you to
write checks, withdraw cash, or use
a debit card
Services of the Bank
• Types of Accounts
– Money Market Account – pay a higher
interest rate according to the market
value, works like a checking account,
require high minimum balance
• Not insured by the FDIC
– Certificate of Deposit (CD) – pay a very
high guaranteed interest rate over a
certain time, but do not allow you to
take money out in that time
Services of the Bank
• Loans – banks lend
out money and
charge interest
–Fractional
Reserve – banks
only keep some
of the money
deposited
Services of the Bank
• Loans – banks lend
out money and
charge interest
–Risk of default –
failure of lendee
to make
payments to the
bank
Services of the Bank
• Loans – banks lend
out money and
charge interest
–Mortgage – type
of loan given to
purchase real
estate (houses,
land)
Services of the Bank
• Credit Cards – bank pays for goods
you purchase, then bills you for them
later, adding interest to what you owe
Interest Rates
• Interest – the price paid for the
use of borrowed money (usually a
percentage rate)
• Principal – the amount borrowed
• Balance – the amount still owed
Interest Rates
• The interest rate can be
compounded (added on) in many
different ways
• Whaddya say we take a look at
how it works together?
Interest Rates
• Compounded Annually (Once a
year)
–$100,000 principal, 5% interest rate
–What is the total new principal?
–$105,000.00!
Interest Rates
• Compounded Semiannually (Twice
a year)
–$100,000 x 2.5% (first
compounding)
–$102,500.00
–$102,500 x 2.5% (second
compounding)
–$105,060.00!
Interest Rates
• Compounded Monthly (12 times a
year)
–Anyone want to try calculating this?
–Fine then. It’s $105,116.19
–You spend an extra $116.19 just
from the way the interest is
compounded
More Services of the Bank
• Automated Teller Machines (ATMs) –
allow you to deposit/withdraw money
and see account information without
going into the bank
• Debit Cards – used to withdraw
money, or pay for goods from your
checking account