Chapter 10 Money and Banking. 1. Money. 2. The History of American Banking. 3
. Banking Today. How can you make the most of your money? ... Page 11 ...
Chapter 10 Money and Banking 1. 2. 3.
Money The History of American Banking Banking Today How can you make the most of your money?
It’s been a hot day, and you have just gotten schooled at a game of basketball by Mr. Schenk. You arrived at a store to get a drink and you scramble for money in your short pockets but realize you have none. But wait! You forgot that you had a dollar bill in your wallet! Great you can get that drink. Oops! I forgot about the tax! Darn it!
1. Money • •
Serves the needs of individuals in societies Anything that serves as a medium of exchange, a unit of account, and a store of value
The Three Uses of Money • • •
Medium of Exchange -used to determine value during the exchange of goods and services Unit of Account -comparing the values of goods and services Store of Value -keeps its value if its stored rather than spent
Uses of Money
Medium of Exchange
Unit of Account
Store of Value
Six Characteristics of Money Durability
Portability
Acceptability
Characteristics
Limited Supply
Divisibility
Uniformity
Sources of Money’s Value •
•
•
Commodity Money – objects that have value and are used as money Representative Money objects that have value because the holder can exchange them for something of value Fiat Money -objects that have value because government has decreed that they are an acceptable means of paying debt
Money Sources Commodity
Fiat
Representative
2. History of American Banking • Bank -an institute for receiving, keeping, and lending money 120 South Third Street, Philadelphia
This institution has led to many of arguments throughout the years of nation, even today! How!
American Banking Pre Civil War • Two Views of Banking –Anti Federalists and The Federalist • National Bank- a bank chartered by the federal government • The First Bank of the United States • Chaos in American Banking • The Second Bank of the United States • The Free Banking Era -led to first Depression HOW ARE THEY? These two men held Very different Views on how the new nation should satisfy its new banking needs
Stability in the Later 1800’s • Currency in the North and the South – official name was demanded notes, but people called it greenbacks. • National Banking Acts of 1863 and 1864 • The Gold Standard -a monetary system in which our money is backed by gold
Banking in the Early 1900’s • The Federal Reserve System -first centralized bank, or bank that can lend money to other banks in time of need • Member Banks -belongs to the Federal Reserve • Banking –one cause of the Great Depression
Member Banks of The FED
Two Crises For Banking •
•
•
The Saving and Loans Crisis -Deregulation or to remove restrictions on several industries that had ties to a class of banks known as S & L – long term loans at low rates In 2006, problems in the U.S. banking industries began to threaten the housing market and quickly spiraled us into a full-fledge crisis Foreclosures – a seizure of property from borrowers who are unable to repay their loans
Development in American Banking 1780s
The nation has no reliable medium of exchange. Federalists and Anti Federalists disagree
1791
First Bank of the United States is established.
18111816
Period of instability follows expiration of First Bank’s Charter
1816
Second Bank of the United States reestablishes stability
1830s1860s
President Jackson vetoes re charter of Second Bank in 1832, giving rise to the Firs Banking Era
18611863
Civil War makes clear the need for a better monetary and banking system
18631864
National Banking Acts of 1863 and 1864 establish national banking system and uniform national currency
1913
President Wilson signs the Federal Reserve Act
1929
The Great Depression Begins
1933
President Roosevelt helps restore confidence in the nation’s banks by establishing the FDIC
1940s1960s
Period of regulation and long-term stability
1980s
Period of deregulation; saving and loans faced bankruptcies
2000s
In 2007, as a result of the subprime mortgage crisis is a sharp increase in the number of people who lose their homes because they can’t afford their mortgage.
3. Banking Today • The Age of Electronic Banking - Good or Bad!!!
Measuring the Money Supply • Money Supply – all the money available in the U.S. Economy • M1 -money that people can gain access to easily and immediately to pay for goods and services – Liquidity -the ability to be used as cash – Demand deposit -money in checking account can be used on demand • M2 -all assets in M1 plus several additional assets (cant use directly) – Mutual funds -fund that pools money from small savers to purchase short-term government and corporate securities
M1 M1 Components
Billions
Currency
$749.60
Demand Deposits
$305.90
Other Checkable Deposits
$304.0
Traveler’s Checks
$6.7
Total M1 Money
$1,366.2
.5% Currency 55%
22.5%
55%
Demand Deposits 22% Other Checkable Deposits 22.5%
22%
Traveler's Check .005%
M2 M2 Components
Billions
Saving Deposits
$2,902.10
Retail Money Market Funds
$805.0
Small denomination time deposits
$398.7
Total M1
$1,366.20
Total M2
$5,472.0
Saving Deposit 53%
25% 53% 7% 15%
Retail Money Market funds 15% Small demonination time deposits 7% Total M1 25%
Functions of Financial Institutions • • • • • • •
Storing Money -safe place for money Saving Money -saving, checking, CD’s Loans -personal, car, home improvements Mortgages -loan to buy real estate Credit Cards -buy goods and services and promise to pay it back with interest Simple and Compound Interest Banks and Profits The chart at left shows the money earned on a $100 deposit when interest is compounded yearly at 5 percent. How many years does it take for the original deposit to double? After five years, what is the total interest that the deposit-holder will have earned? End of Year
Principal Amount
Interest Earned at 5%
Principal at End of Year
-
$100.00
$5.00
$105.00
1
$105.00
$5.25
$110.25
2
$110.25
$5.51
$115.76
5
$127.63
$6.38
$134.01
10
$162.90
$8.14
$171.04
15
$207.90
$10.39
$218.29
Types of Financial Institutions • • • • •
Commercial Banks -FDIC Saving and Loans Associations -mostly homes Savings Banks-small transaction banks Credit Unions -cooperative lending associates Finance Companies -installment loans to consumers
Money Enters Banks
Money Leaves Bank Interest and Withdrawals From Customers
Deposits from Customers
Interest from Borrowers
Fees for Services
Loans to borrowers
Bank retains Required services
Bank Costs of Doing Business
Electronic Banking • Automated Telling Machines ATM’s and Service Fees • Debit Cards -a card to withdraw money with • Home Banking -Internet to conduct banking • Automated Clearing Houses • Stored-Valued Cards -college students
Chart tracking the number of ATM’s per 100,000 people in a number of countries. Why do you think Poland has more than three times than Russia?
Spain Spain
United States
United States
Italy
Italy Chile
Chile
Brazil
Brazil
South Africa
South Africa
Poland Russia
Poland
Indonesia
Russia
China
0%
30%
60%
90%
SOURCE: Financial Sector Development Indicators, The World Bank
120% 150%
Indonesia China
Development of U.S. Banking Problem
Problem Resolved by
Date
Many different currencies in U.S.
National Banking Acts
Gold did not support U.S. currency
U.S. adopts gold standard
No central decision making authority to regulate banks
Federal Reserve System
1913
No central bank to monitor reserves
Federal Reserve System
1913
No insurance on saving deposits
Federal Deposit Insurance Corporation
1933
No convenient way of getting bank credit for small purchases
First bank issued credit card
1946
Difficult for people to get consumer credit
Development of credit unions
1909
Making deposits and withdrawals outside business hours
Automatic teller machines
1968
1863, 1864
1870s
