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CHAPTER - MONEY AND THE
BANKING SYSTEM
• Characteristics of
Money
• Money and Banking in
History
• Deregulation
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Money
• FUNCTIONS
•- medium of exchange
•- standard of value
•- store of value
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Money
• New Necessary
Characteristics of Money
Security
Anonymous
Portable
Infinite duration
Two-way
Off line capable
Divisible
Wide acceptability
User friendly
Money
• Commodity money
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Money
• Representative money
BONDS
CHECKS
EARLY BILL OF CREDIT
MONEY
• Fiat money
Money
• Currency
Counterfeit Cash
•
By the end of the Civil War,
between one-third and one-half
of all U.S. paper currency in
circulation was counterfeit. On
July 5, 1865, the Secret Service
was created under the U.S.
Treasury Department. In less
than a decade, counterfeiting
was sharply reduced. In the
past ten years the breakdown
of denominations counterfeited
has changed dramatically. The
total of known $50 and $100
notes counterfeited has
increased by sixty percent.
Money and the Banking System
Section 2
• US vs. States Rights
Federalists
Alexander Hamilton
Anti-Federalists
Thomas Jefferson
History of Banking
• First Bank of the
United States
1791-1811 - 20 year charter
- Regulation of state banks
- - Dollar as official US unit
of currency
Lost charter in 1811 = (+) state banks (x3) - chaos b/c
insufficient reserves
(McCulloch v. Maryland, 17 U.S. 316 (1819) (USSC+) IMPLIED CONGRESSIONAL
POWERS The US Supreme Court would be the umpire in the federal system, and
states couldn't tax the national government and Congress has implied powers.)
History of Banking
• Second Bank of the
United States
• Restored order but
distrusted and not
popular w/ state banks
1816-1836 - 20 year
charter
First Historical Period of
Banking 1780-1860
• First Bank of the United States
(1811-1816 - x3 increase in state banks)
- 1791 - 1811
• Second Bank of the United States 1816-1836
- 20 year charter
(By 1837 - x2 increase in state banks)
• Banking Crisis of 1837 -economic recession
History of Banking
• Andrew Jackson vetoed the bill
extending the National
Bank - one year later Banking Crisis of
1837 (due to the absence of
federal regulation provided by
Bank of US)
Second Historical Period of
Banking 1860-1913
Banking Acts of 1863 and 1864
- to bring uniformity
and stability back to the banking system
• Dual banking system
State Banks - chartered
by states
National Banks chartered by Federal
government
• Supreme national currency eliminated 1600 state
bank currencies
Gold Standard Act of 1900 - paper money backed
by gold - (repealed in 1934)
Third Historical Period of Banking
1913 - Present
• To establish reform and
regulation
• The Federal Reserve
System - 1913 - to act as
the nations central bank
• All national banks
required to join
• 12 Fed Reserve banks
across the country
• Independent of President - exercise
monetary policy - Prime lending rate
Modern Banking Reforms
• New Deal - during Great Depression, FDR ordered nations banks
closed and audited to discourage runs
• Banking Act of 1933 est. Federal Deposit Insurance Corp (FDIC)
insures deposits up to $100,000 (also FSLIC for Savings and
Loans)
Bank Run
FDR
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Modern Banking
• Types of Banks
Mutual Savings - small farmers
and seamen’s banks in rural areas
Commercial -the most number of financial services
and accounts
Savings and
Loan - mostly
home mortgages
but many financial
services
Credit Union large businesses and
labor unions, owned by
depositors
Deregulation
Section 3
• Depository Institutions
Deregulation and
Monetary Control Act
1980
•
•
•
•
- regional and national banks
- flexibility in interest rates (+
competition)
- SandLs get checking accounts
- ATMs, Achs, POS terminals, debit
cards, electronic home banking,
digital cash
Occurs when the government
lifts some of its restrictions on
an industry
Deregulation
Section 3
Depository Institutions Deregulation and Monetary Control Act (1980)
Varied interest rates
Open checking accounts, CD’s, card services, etc…
by all institutions
Allowed Internet Banking
Increased reserves by all
-No reserves are required on
the first $6.6 million. Between $6.6 million and $45.4
million, deposits are subject to a 3% reserve. Above $45.4
million they are subject to a 10% reserve.
Fun Fact
•
The largest note ever printed by
the Bureau of Engraving and
Printing was the $100,000 Gold
Certificate, Series 1934. These
notes were printed from
December 18, 1934 through
January 9, 1935 and were
issued by the Treasurer of the
United States to Federal
Reserve Banks only against an
equal amount of gold bullion
held by the Treasury. These
notes were used for
transactions between FRBs and
were not circulated among the
general public.