Banking and money chs 11 12 15
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Banking and Money ( chs . 11-12-15). Notebook and Test – Friday, May 9. Originally, there were barter economies – people traded for what they couldn’t obtain on their own. Money is a medium of exchange, a measure of value, and a store of value.

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Banking and Money ( chs . 11-12-15)

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Banking and money chs 11 12 15

Banking and Money(chs. 11-12-15)

Notebook and Test – Friday, May 9


Evolution of money

  • Originally, there were barter economies – people traded for what they couldn’t obtain on their own.

  • Money is a medium of exchange, a measure of value, and a store of value.

  • The first money was commodity money – a specific good that was used as the standard for trade.

  • Commodity money was replaced by fiat money – government issued money. Accepted because government guaranteed them.

  • Fiat money comes in two types – currency (paper) and specie (coins).

  • Money must be 1) portable, 2) durable, 3)divisible, and 4) limited in its availability.

Evolution of Money


Early banking

  • There have been several monetary standards in US History.

  • Privately issued bank notes caused problems because they were not guaranteed by all banks.

  • States initially had the power to issue currency, but…

    • Too many types

    • Too many different exchange rates

    • Made interstate commerce difficult

  • Constitution gives only CONGRESS the ability to mint money

    • Secure– gives money value

    • Adds uniformity

    • Controls supply to control inflation and counterfeiting.

  • Though it is has been backed by different standards in the past (greenbacks, gold, etc.) US Money is an inconvertible fiat money standard

    • Keeps value

    • Money supply is tightly controlled by the Federal Reserve, the nation’s central bank (Treasury is NOT a bank)

Early Banking


The depression it s changes

  • Dramatic banking expansion between 1880 & 1921 causes most banks to be moderately stable.

  • Too much investment in stocks

  • Too much credit issued

  • After the 10/29/1929 crash, banks did not have enough money on hand to meet demands of depositors – many closed and millions lost savings.

  • The Bank Holiday – 3/5/1933 – every national bank was closed by Federal order until not permitted to reopen until it was proven sound

  • Federal Banking Act (1933) – created the Federal Deposit Insurance Company (FDIC) to protect individuals in the invent of bank failure

    • Individuals insured up to $100,000

    • Monitors banking practices to ensure fairness to consumers

The Depression & It’s Changes


Four types of banks

  • Commercial Banks cater to the interest of business & industry

  • Savings Banks – banks that do not offer demand deposit accounts (DDAs) – accounts whose funds can be withdrawn without institutional approval

    • Insurance & Securities Banks (NW Mutual, Prudential, Metropolitan [MetLife], etc.)

  • Savings and Loans Banks – invest in mortgages and personal loans

  • Credit Union – non profit financial institution that is owned by its members

    • General offered by large employers as a benefit; can absorb clerical costs

Four Types of Banks


The functions of financial systems

1. TO HELP PEOPLE CREATE CAPITAL THROUGH INVESTMENT

  • Give individuals and businesses loans

  • Promote savings for economic growth

  • Savings – the dollars that become available when people abstain from purchasing

    2. TO HELP CONSUMERS CREATED FINANCIAL ASSETS THROUGH SAVING

  • Consumers can save in two main ways:

  • Open a savings account

  • Purchase certificates of deposit (CDs)

    • Depositor loans savings to a financial institution at a high interest rate for a specified amount of time

The Functions of Financial Systems


Non bank financial institutions

  • Finance Companies

    • Loans money to make large purchases such as homes, automobiles, etc.

    • Ex. If you buy a car, the finance company pays the dealership, you pay the finance company.

  • Life Insurance Companies

    • Collects premiums for policies that mature and are payable upon death of policy holder

  • Pension Funds

    • Long term savings plan that employees contribute into for retirement

  • Mutual Funds

    • Company that invests in multiple stocks, then sells stock in itself

  • Real Estate Investment Trusts

    • Companies that lend money to builders and developers

Non Bank Financial Institutions


Should you invest

  • What is the risk versus the return (how much are you going to get back, and what is likelihood you will get it back)?

  • What are your goals, short term and long term?

  • Do you understand the investment?

  • Can you invest consistently?

Should you invest?


Types of investments

  • 401(K) Plans

    • Retirement that both an individual and employer contribute

  • Individual Retirement Funds (IRAs)

    • Retirement that the individual pays

  • Bonds

    • Investments with a fixed interest rate that pay a guaranteed amount on maturity.

  • Corporate Bonds

    • Issued by businesses to generate revenue – investment for share of profit

  • Municipal Bonds

    • Issued by state and local governments to generate revenue

  • Government Savings Bonds

    • Issued by the federal government

  • Treasury Notes/Bills

    • Short term bonds issued by federal government – cost a lot, but high interest yield.

  • Certificates of Deposit

    • Investor lends money to a bank for a specific amount of time for a high interest yield – can not withdraw until contract is up.

Types of Investments


Financial markets

  • Captial Market

    • Money is loaned for more than a year (bonds)

  • Money Market

    • Money is loaned for less than a year (CDs, Treasury Bills)

  • Primary Market

    • Non-transferrable investments such as IRAs and Government Savings Bonds – you can’t sell them

  • Secondary Market

    • Corporate stocks

Financial Markets


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