money and banking chevalier spring 2015. money the evolution of money what is money? it is not just...
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Money and BankingChevalier
Spring 2015
Money
The Evolution of Money
• What is money?• It is not just a Dollar Bill, or a Euro, or a
Pound.
• It is any substance that serves as a MEDIUM OF EXCHANGE, MEASURE OF VALUE, OR STORE OF VALUE
What is the function of money?
Medium of Exchange
• Accepted by all parties as payment for goods and services
• Gold, silver, salt (salarium)
Measure of Value
• A common denominator can be used to express worth in terms that most individuals can understand.
• Purpose of price tags• A basis for comparison
Store of Value
• The property that allows purchasing power to be saved until needed.
• Shouldn’t have to be paid and then turn around and suddenly spend; money should hold its value
Early Money-Why use money?
• Commodity money• Barter economies• Fiat money (serves everybody’s self
interests)
Money in America
• 1789- George Washington created the dollar from the ‘peso’
• 8ths and 10ths
Characteristics of Money
• Portable- easily transferred• Durable- won’t deteriorate as a store of
value• Divisible- can be transferred into
smaller units (change)• Limited in supply-money will lose value
if there is too much of it
Privately Issued Bank Notes
• Americans distrusted paper currency• Counterfeiting, inflation, 100’s of different
types of notes in circulation• By the Civil War, 1,600 banks had
issued >10K types of notes.• US Gov’t only minted silver and gold
coins.
Money During the Civil War
• Civil War and the rise of the greenback
• Called legal tender• United States notes
• Both fiat currencies
Money During the Civil War
• Civil War and the National Banking System
• The move to one common currency• 10% tax on state issued currencies
• Gold Certificates and silver certificates
The Gold Standard
• Added security• Was supposed to prevent government
from printing too much money
• Could also restrict economic growth• People could convert whenever• Price of gold will change if not fixed
Today
• Inconvertible fiat money standard• M1, M2, and M3• Money today is:
• Portable• Durable• Divisible• Limited availability
The Federal Reserve System
• 1913- first central bank- a bank that can lend to other banks in times of need.
• Privately owned, publically controlled
• Federal reserve notes came into existence
Banking in the Depression
• 10K of 25K banks across the country failed• Runs on the banks• Insecurity• No depositor’s insurance
Glass-Steagall Act
• FDIC- 250,000 for one person at one bank
• Protects consumers against fraudulent banks
Types of Depository Institutions
• Commercial Banks• Demand Accounts
• Thrift Institutions (DA’a after 1970’s)
Savings Banks
• NOW accounts- demand accounts that earn interest (Negotiable Order of Withdrawal)
• Owned by Depositors (mutual savings banks)
Savings and Loan Associations S&L
• Invests a majority of its funds in home mortgages
• Cooperative clubs for homebuilders
• Association members would deposit a regular sum and take turns building homes
Credit Unions
• Non-profit (tax incentives)
• Share-draft accounts (lure for Credit unions)• Act as NOW accounts
The S&L crisis
• Deregulation by Reagan
• Interest rates, what services they could offer, borrowing from the FED
• Bad loans and interest rates led to failures on a grand scale, not prepared for this
• Changed names to avoid scandal (WAMU)