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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

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
  • Give individuals and businesses loans
  • Promote savings for economic growth
  • Savings – the dollars that become available when people abstain from purchasing


  • 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