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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