economics next chapter 10 copyright © by houghton mifflin harcourt publishing company money and...

Economics

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Chapter 10

Copyright © by Houghton Mifflin Harcourt Publishing Company

Money and Banking


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Economics

Chapter 10

KEY CONCEPT• Money provides a low-cost method of trading one good or service for another. It makes the

system of voluntary exchange efficient.

Chapter 10: Money and Banking

WHY THE CONCEPT MATTERS• Money is important to everyone in our society. What were the last three economic

transactions you completed using money? Imagine what it would have been like to make those purchases without paper bills and coins.


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Economics

Chapter 10

Section-1

Money: Its Functions and Properties

Functions of Money

KEY CONCEPTS• Money—anything people will accept as a medium of exchange — over time, cattle, grain, metals, shells, other objects used as money


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Economics

Chapter 10

Functions of Money

Function 1: Medium of Exchange • Medium of exchange—means through which products can be exchanged • Barter—exchanging goods or services for other goods or services — inefficient: both people must want what the other one has to exchange• Money convenient: allows for precise and flexible pricing of products


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Economics

Chapter 10

Functions of Money

Function 2: Standard of Value • Money serves as a standard of value: — measure of economic worth of goods, services in the exchange process• In United States, the dollar is the standard of value of all products


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Economics

Chapter 10

Functions of Money

Function 3: Store of Value • Money acts as a store of value: — holds its value over time — can set aside for later use because will be accepted in future• Does not function well as store of value when there is significant inflation


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Economics

Chapter 10

Properties of Money

KEY CONCEPTS • Item used as money must possess certain properties — physical properties are characteristics of item itself — economic properties are linked to role money plays in the market


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Economics

Chapter 10

Properties of Money

Property 1: Physical • Durability—sturdy enough to last through many transactions• Portability—small, light, easy to carry• Divisibility—divisible so change can be made — allows for flexible pricing• Uniformity—distinctive features and markings make it recognizable


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Economics

Chapter 10

Properties of Money

Property 2: Economic • Stability of value—purchasing power should be relatively stable• Scarcity—must be scarce to have any value• Acceptability—users must agree that it is valid medium of exchange


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Economics

Chapter 10

Types of Money

KEY CONCEPTS • Money derives value from one of three sources • Commodity money—value based on the material from which it is made• Representative money—paper money backed by something tangible • Fiat money—declared by government to have value, accepted by citizens


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Economics

Chapter 10

Types of Money

Type 1: Commodity Money • Items have value in themselves apart from their value as money — includes gold, precious stones, salt, olive oil; scarce or useful• Coins most common; precious metal in them worth their face value• If item becomes too valuable, people hoard, don’t circulate


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Economics

Chapter 10

Types of Money

Type 2: Representative Money • Can be exchanged for something else of value• Beginnings in Middle Ages: people issued promises to pay in metal — often unsafe or inconvenient to transport gold and silver• Later, governments regulated amount stored of metal needed to back paper • Value changes with metal supply, price; causes inflation, deflation


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Economics

Chapter 10

Types of Money

Fiat Money • Value based on government fiat, or order, saying the money has value• Coins have token amount of precious metal; paper money has no intrinsic value• Government maintains value by controlling supply—keeping it scarce


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Economics

Chapter 10

Money in the United States

KEY CONCEPTS • Narrowest sense, money is item used immediately for transactions• Currency—paper money and coins • Demand deposits—checking accounts; funds become currency on demand• Near money—savings accounts, time deposits; funds become cash easily


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Economics

Chapter 10

Money in the Narrowest Sense • Money in narrowest sense sometimes called transactions money• Currency is about half of transactions money used• Demand deposits are mostly noninterest-bearing checking accounts — traveler’s checks are small part

— negotiable order of withdrawal (NOW), other checkable deposits are rest



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Economics

Chapter 10

Are Savings Accounts Money? • Near money cannot be used directly to make transactions• Savings account: funds can be moved to checking account, withdrawn• Time deposits: — funds deposited for specific period to receive higher interest

— include certificates of deposit (CDs), money market accounts



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Economics

Chapter 10

How Much Money? • Most often cited instruments for measuring money are M1, M2• M1—currency, demand deposits, other checkable deposits — called liquid assets• M2—M1, savings accounts, small time deposits, money market accounts



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Economics

Chapter 10

Explain the difference between the terms in each of these pairs: • standard of value and store of value• commodity money and representative money• demand deposits and near money

Reviewing Key Concepts


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Economics

Chapter 10

Section-2

The Development of U.S. Banking

The Origins of Banking

KEY CONCEPTS• Late Middle Ages, Italian merchants stored people’s money; made loans• American colonial merchants followed same practice • Private banks insecure: if merchant’s business failed, deposits lost• After revolution, state banks chartered by state governments — many banks issued own currency, not backed by gold or silver held


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Economics

Chapter 10

Alexander Hamilton: Shaping a Banking System

The First Bank of the United States• In 1789, became first Secretary of the Treasury; proposed national bank• Against strong opposition, First Bank of the United States chartered in 1791 — issued national currency — controlled money supply by refusing state bank money not backed — loaned money to federal government, state banks, businesses


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Economics

Chapter 10

19th-Century Developments

KEY CONCEPTS • 1811, Congress refused to renew charter of First Bank of the U.S. — government had difficulty financing War of 1812 — state banks again issued currency not linked to gold, silver reserves — increased money supply led to inflation during the war


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Economics

Chapter 10


The Second Bank of the United States • 1816, Congress chartered Second Bank of the United States — more resources than First Bank; made money supply more stable• Opponents thought bank too powerful, too close to wealthy — 1832, President Andrew Jackson vetoed renewal of charter


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Economics

Chapter 10

Wildcat Banking• Second Bank’s charter lapsed in 1836; no federal oversight of banking• All banks state banks; issued own paper currency called bank notes• States passed free banking laws; resulted in wildcat banks — susceptible to bank runs leading to panics, economic instability



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Economics

Chapter 10


The Struggle for Stability • In 1863, National Banking Act created national banks chartered by U.S. government — created national currency backed by U.S. Treasury bonds — required minimum amount of capital for national banks, to back currency — taxed state bank notes issued after 1865, taking them out of circulation• 1900, United States adopted gold standard—made dollar equal a set amount of gold


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Economics

Chapter 10

KEY CONCEPTS• National banks, gold standard initially brought stability to banking• Economy still experienced inflation, recession, financial panics• United States needed central decision-making body to manage money supply



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Economics

Chapter 10


A New Central Bank • 1913, Federal Reserve System created; consists of 12 regional banks, one decision-making board — provides financial services to federal government — makes loans to banks that serve the public — issues Federal Reserve notes as national currency — regulates money supply


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Economics

Chapter 10


The Great Depression and the New Deal • 1929, many banks failed due to bank runs• Banking Act of 1933 part of President Franklin Roosevelt’s New Deal — regulated interest rates banks paid; prohibited sale of stocks by banks — Federal Deposit Insurance Corporation (FDIC) insured people’s savings


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Economics

Chapter 10


Deregulation and the S&L Crisis • 1980, 1982 laws lifted federal limits on savings interest rates• Savings and loans associations now operating like commercial banks — made riskier loans • Many S&Ls failed; Congress funded industry restructuring


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Economics

Chapter 10

Financial Institutions in the United States

KEY CONCEPTS• Bank: commercial banks, savings and loan associations, credit unions• State, federal governments charter financial institutions, regulate — amount of money owners must invest in a bank — size of reserves a bank must hold — ways loans may be made


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Economics

Chapter 10


Type 1: Commercial Banks• Privately owned commercial banks are oldest type of banks — initially created to provide business loans — today, checking and savings accounts, loans, investments, credit cards• All national, about 16 percent of state commercial banks belong to the Fed


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Economics

Chapter 10


Type 2: Savings Institutions• S&Ls first chartered by states in 1830s — took savings deposits; provided home mortgage loans — today, provide many of same services as commercial banks• Since 1933, federal government also charters S&Ls — many federally chartered S&Ls call selves savings banks


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Economics

Chapter 10


Type 3: Credit Unions• In 1909, first credit union chartered; 1934, federal system created — offer savings and checking accounts; specialize in auto, mortgage loans — deposits insured by National Credit Union Association (NCUA)• Credit unions have membership requirements — cooperatives: nonprofit organizations owned by, operated for members


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Economics

Chapter 10

Use each of the terms in a sentence that illustrates the meaning of the term: • state bank• national bank• gold standard



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Economics

Chapter 10

Section-3

Innovations in Modern Banking

What Services Do Banks Provide?

KEY CONCEPTS• Banks are like stores where money is bought (borrowed), sold (lent)• Customers can store money, earn money, borrow money• Banks earn money by charging interest or fees


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Economics

Chapter 10


Service 1: Customers Can Store Money • Banks store currency in vaults; insured against theft, other loss• Customers also store — money in bank accounts; insured against bank failure — papers and valuables in safe deposit boxes


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Economics

Chapter 10


Service 2: Customers Can Earn Money • Savings accounts, some checking accounts pay interest• Money market accounts, CDs pay higher interest rate


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Economics

Chapter 10


Service 3: Customers Can Borrow Money • Banks lend money through fractional reserve banking — percent of deposit banks must keep is set by Fed• Banks make loans to customers it approves — loans have set time period and interest rate; property is collateral• Credit card purchases are loans; interest charged after one month


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Economics

Chapter 10

Banking Deregulation

KEY CONCEPTS • Before 1980s, government regulated interest rates paid and charged — required banks to operate in one state; some states limited branches• In 1980s, 1990s, deregulation ended restrictions, changed banking


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Economics

Chapter 10


Bank Mergers • Deregulation led to mergers; no more restrictions on interstate banking• Advantages: more competition meant low interest rates, more services — also more branches; economies of scale, especially for technology• Disadvantages: fewer banks to choose from — fear larger banks uninterested in small customers, local communities


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Economics

Chapter 10


Bank Services • Financial Services Act of 1999 lifted last restriction on banks• Banks, insurance companies, investment companies compete — sell stocks, bonds, insurance, traditional banking services• Customers continue to use different companies for different services


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Economics

Chapter 10

Technology and Banking

KEY CONCEPTS • Technology has led to electronic banking• Automated teller machines (ATMs)—use special cards — customers make transactions without bank officers• Debit cards—used to withdraw cash or make purchases • Stored-value cards—represent money holder has on deposit with issuer


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Economics

Chapter 10

Automated Teller Machines • ATMs—data terminals linked to a bank’s computer network — customer needs personal identification number (PIN) — check balances, make deposits, withdrawals, transfers, loan payments• All ATM networks connected; some banks charge fees• Save banks money: cheaper than human tellers; more “bank” locations



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Economics

Chapter 10

Debit Cards • Debit cards are linked to a bank account• Can be used at ATM machines to make transactions• Can be used to make purchases at retail outlets; also called check cards — price of purchase is immediately deducted from the account — unlike credit cards, can only spend as much as have in account



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Economics

Chapter 10

Stored-Value Cards • Also called prepaid cards—pay for card, use it to pay for products — include transit fare cards, gift cards, telephone cards — convenient: no need to have exact change• Need to compare to cost of checking account or check-cashing service• Not always covered by FDIC insurance that protects customer deposits



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Economics

Chapter 10

Electronic Banking• Electronic banking transactions performed through the Internet — direct deposit, transaction review, transfers, bill paying• Information security and identity theft are problems for banks — must reveal privacy policies; let customers decide what data is shared — developing more sophisticated information security systems



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Economics

Chapter 10

How are these three terms related? How are they different?• automated teller machine• debit card• stored-value card



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Economics

Chapter 10

Student Loans

Background• The high cost of a college education forces 10 million students and 800,000 parents to take

out loans to pay for at least part of college.• Federally guaranteed loans are the main source of funding for college, not banks, S&Ls, or

credit unions. What’s the Issue?

• What is the current situation with student loans? What are the future ramifications of the increasing cost of paying for college?


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Economics

Chapter 10

Thinking Economically1. Compare the financial news presented in documents A and C. What bearing do you think

the information in document A might have on what you learned from document C?2. Document B humorously points to the prominence of student loans in U.S. higher

education. Specifically, what parts of documents A and C support this view?3. In document A, what does the federal government seem to be saying about who should

pay for a college education? With this in mind, what does Figure 10.7 mean for students and parents?

Student Loans {continued}


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Chapter 10

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economics next chapter 10 copyright © by houghton mifflin harcourt publishing company money and...

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