Economics

Unit 13

Money and the Banking System

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East Independent School District, its trustees, administrators, or teachers, to promote any particular viewpoints or opinions

expressed in the documents over any others, nor do the viewpoints or opinions expressed in the documents necessarily reflect

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Sect. 1: Money

• Barter is the direct exchange of goods or services without using money…

• …it was the main form of exchange in the past and still can be in developing countries

• …barter is used today in even highly developed societies among individuals

• …”I will mow your lawn if you will work on my car”…

• Money is more efficient than barter…

Three Functions of Money

• Money is a medium of exchange; an item that sellers accept as payment for goods and services…

• …buyers and sellers both recognize and accept it

• Money is a standard of value; it provides people with a way to measure the relative value of goods and services by comparing their prices…

• …facilitates record keeping/accounting; allows for the calculation of profits/losses

• …in the United States our standard of value is the US Dollar

Three Functions of Money

• Money has a store of value; it can be

saved and used later…

• …must be non-perishable

• …must keep it’s value over time

• Aids in the accumulation of wealth

Characteristics of Money

• To be used as money an item must have five

major characteristics

• Durability is the ability to be used over and over

• …metals like gold/silver withstand time and can

last hundreds/thousands of years

• …paper money wears out more quickly, but can

be easily replaced

• …the average life is our US paper money is: $1,

21-mts., $5, 16-mts.; $10, 18-mts; $20, 24-mts;

$50, 55-mts; $100, 89-mts Source

Characteristics of Money

• Portability is money’s ability to be carried

from one place to another and transferred

from one person to another…

• …US coin and currency is small and

lightweight, making it portable

• Divisibility refers to money’s ability to be

divided into smaller units…

• …the US dollar is divisible by 100

• …how is other money divisible? Let’s talk

pirate!

Divisibility

Characteristics of Money

• Stability in value means that money

retains it’s value over time…

• …can be saved and used later

• …effects of inflation

• Acceptability means that people are willing

to accept money in exchange for their

goods and services…

• …what do other countries accept?

Historical Sources of Money’s

Value• Commodity Money is an item that has

value on it’s own…

• …gold, silver, rubies, emeralds, diamonds, salt, tobacco, tea

• Representative Money is an item that gets it’s value because it can be exchanged for something else…

• …bills of credit for gold/silver

• Specia is paper money “backed” by stockpiles of silver/gold

U.S. Specia Money

• From 1882-1933 our US government

issued Gold Certificates which were

backed by stockpiles of gold

U.S. Specia Money

• From 1878-1964 our US government

issued Silver Certificates which were

backed by stockpiles of silver

Historical Representative Money

• During the American Revolution the

Continental Congress issued

representative money called Continentals

to finance the war against Great Britain..

• …because they had little “specia” to back

them up they became nearly worthless

and merchants often refused to accept

them

Other Sources of Money’s Value

• Fiat Money is money that gets it’s value because

the government decrees that it has value and it

must be accepted for all transactions

• U.S. currency, coin and paper bills, are fiat

money…

• …coins are made up of copper, zinc, & nickel

which has little value (what is its metal value)

• …paper money contains almost no value on it’s

own

• …it’s value stems from citizen’s faith in the U.S.

government

Coins & Paper Money, What Else?

• Demand deposits (checking accounts) are

counted as fiat money too…

• …checks are readily accepted by banks

and are a medium of exchange, a

standard of value, and have a store of

value

• Savings accounts and time deposits are

referred to as near money but are not

counted as a part of the money supply

Sect. 2: History of U.S. Banking

• Two views of banking were held by the men

who formed our U.S. government

• Federalists, led by Alexander Hamilton,

believed that a strong centralized banking

system was necessary to develop trade and

industry in our new country

• Anti-federalists, like Thomas Jefferson,

opposed a central banking system saying

that it gave too much power to the central

government and took away power from the

states

Which side won?

• Hamilton and the federalists successfully

convinced the new congress in 1791 to create

the nation’s first central bank, The First Bank of

the United States…

• …it operated under a 20-year charter and had

the authority to create bank notes backed by

gold and silver (specia)

• …it also was given the authority to collect money

and pay money in behalf of the US government

• …in 1792 it started minting gold & silver coins

and the currency was first called the “dollar”

It didn’t last long…

• The First Bank of the United States did not

get it’s charter renewed after 20 years

(1811) and state banks sprang up…

• …confidence in the state banks and the

currency they printed was low causing

chaos in the banking system

• Congress chartered the Second Bank of the

United States in 1816 and it’s charter failed

to be renewed also…

• …state chartered banks filled the void again

What’s was wrong with the state

chartered banks?• Lots of state chartered banks printed their

own paper money…

• …the money did not hold it’s face value

(no store of value)

• …money from a bank in one state was not

accepted in other states

• …much of the new paper money was not

backed by reserves of gold or silver

• …even with all the problems, no new

central bank was established

Civil War (1860) to WW I (1913)

• By 1861 there were over 1600 state

chartered banks issuing paper money…

• …most of it had little value

• During the Civil War, congress issued

“greenbacks” that were not backed by

specia…

• …the federal government just “promised”

to repay the note’s face value at some

time in the future

What about the Confederacy?

• The Confederacy also issued it’s own

paper money…

• …it was worthless by the end of the war

• …the banking system in the nine

confederate states originally had 121

chartered banks and only 5 survived at the

end of the war

Rebuilding the Banking System

• Congress passed the National Banking

Acts of 1863 & 1864 giving the federal

government authority to…

• …charter banks

• …require banks to hold gold/silver in

reserve

• …issue a single national currency and

eliminated the currency printed by

individual banks

• …stabilize the supply of money in the US

Other Important Banking

Legislation• The Coinage Act of 1873 began reducing

the countries reliance on silver as specia

• The Gold Standard Act of 1900 placed the

country on a gold standard, where paper

money and coins carried the value of a

specific amount of gold, they could be

redeemed for gold (the gold standard ended

in 1934)

• The public’s confidence in banks increased

• Still no central banking system was in place

WW I to Present

• In 1913, congress passed the Federal

Reserve Act which established the central

banking system we have today…

• …established the Federal Reserve “Fed” as

the nation’s central bank

• …federally chartered banks were required to

join the Fed

• …state chartered banks had the option to join

or not join the Fed

• …By 1996 over 2760 banks had joined the

Fed

The “Fed”: Success or Failure?

• Some of both…

• …successful at providing enough credit to

finance WW I

• …unsuccessful at controlling credit during

the 1920’s

• …overextended credit resulting in high

borrower defaults prior and during the

depression

Roosevelt’s New Deal Reforms

• The depression started as a financial

panic where thousands of people withdrew

deposits causing nearly 8000 banks to fail

between 1930 & 1933

• Elected president in 1932, Roosevelt

promised a “New Deal”, a process to

restore public confidence in the economy

and the nation’s banking system

Roosevelt’s New Deal Reforms

• Roosevelt declared a “banking holiday”

where banks were shut down for 4 days

and then were only allowed to reopen after

federal auditors certified them “financial

sound”…

• …most banks reopened within 2 weeks

• …audit certification restored confidence in

the banking system and businesses/

individuals began to use them again

Roosevelt’s New Deal Reforms

• The Banking Act of 1933 temporarily

established the Federal Deposit Insurance

Corporation (FDIC) which insured savings

accounts up to $5,000

• The Banking Act of 1935 made the FDIC

permanent and extended the insurance

guarantee to all deposits

• …today deposits are guaranteed to

$250,000

Sect. 3: US Banking Today

• Today all commercial banks, mutual

savings banks, and savings and loan

associations are members of the FED and

deposits in them are insured by the FDIC

to $250,000

• Credit Union deposits are insured by the

National Credit Union Administration

(NCUA) to the same $250,000 limits as

the FDIC insurance fund

Types of Banking Institutions:

It’s a charter thing, all are FDIC• Commercial banks lend money and accept deposits from

businesses, other banks, and individuals, make

business/consumer loans

• Savings and Loan Associations originally accepted

savings deposits and specialized in making home loans

but today they provide the same services offered at

banks (many of these financial institutions failed in the

1980’s because of high loan default rates when high

interest rates caused many to fail to make payments on

their homes)

• Mutual Savings Banks originally were set up to accept

smaller deposits than commercial banks wanted to

handle and they concentrated on home lending, today

they too offer the services offered at banks

What’s up with credit unions?

• They are not-for-profit financial institutions

owned by the people who have deposits

there

• They offer the same services as banks and

typically offer lower loan rates and higher

deposit rates since they are not-for-profit

• Deposits at a CU’s are as safe as deposits

in banks…

• …employees of the “Fed” have their own

credit union, the FEDFCU!

What’s new in banking?

• ATM machines

• Debit cards

• Improved automated clearing house

transactions

• Home banking (internet/smart phones)

• Bill payment

• …the list is growing fast

Do banks still fail?

• 547 banks have failed since 2000 (list)

References

• Economics: Texas Edition: 2016. McGraw Hill Education

• Holt Economics; Texas Edition: 2003, Holt, Rinehart and

Winston