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Evolution of Money & Banking Systems

Learn about the history of money, the characteristics of currency, and the development of banking systems from the past to present times. Discover the role of national banks, Federal Reserve, and monetary policies.

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Evolution of Money & Banking Systems

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  1. Chapter 10 Money and Banking

  2. Money • Money is anything that serves 3 purposes: • Medium of Exchange – used when exchanging goods or services

  3. Money • Money is anything that serves 3 purposes: • Unit of Account – means of comparing value of goods and services

  4. Money • Money is anything that serves 3 purposes: • Store of Value – if you hold on to it, it will maintain its value

  5. 6 Characteristics of Currency • Currency – coins and paper bills society uses for money • More useful than bartering because of 6 characteristics

  6. What are the 6 Characteristics?

  7. The 6 Characteristics of Currency • Durability – lasts for a long time • Portability – easy to carry • Divisibility – can be divided into smaller denominations • Uniformity – looks universally the same, difficult to counterfeit

  8. The 6 Characteristics of Currency • Limited Supply • Acceptability – everyone in the economy must accept its value

  9. I’ve been thinking really deep and philosophical like lately.

  10. How did the value of paper currency evolve to its present state?

  11. History of the Value of Money • Commodity Money – beginning of time until about 1600’s, people traded in commodities (salt, cattle, tobacco, pretty rocks) rather than money

  12. History of the Value of Money • Representative Money – starting in 1600’s, people traded paper receipts that represented gold or silver kept in a town safe • Gold and silver were difficult to carry around

  13. History of the Value of Money • Fiat Money – Started in 1930’s, government issued currency and passed laws saying that all people must accept it as payment for debts

  14. On the Back of a Dollar…

  15. On the Back of a Dollar…

  16. An Introduction to Banking From Saturday Night Live

  17. What is a Bank? • Bank – institution for receiving, keeping, and lending money

  18. Brief History • Start of U.S. History (1780’s – 1800’s) • Federalists vs. Anti-Federalists • Federalists favored a national bank • Anti-Federalists believed states should control

  19. Brief History • National Banks were created, and accomplished a number of purposes • Held government tax revenue • Lend and borrow money for government purposes

  20. Brief History • National Banks were created, and accomplished a number of purposes • Issue representative money backed by gold or silver • Watch over states use of representative money

  21. Brief History • Later, because of politics, the national bank is killed Kablamo!

  22. Banking With No National Bank • Problems • Bank runs, panics • High rates of bank failure • Fraud • Many different currencies

  23. The New National Banking System • Federal Reserve Bank – Established in 1913 • Gives short term loans to private banks to prevent failures • Created a national currency – today’s dollars • Federal Reserve controls number of dollars in circulation

  24. The New National Banking System • Federal Reserve Bank – Established in 1913 • Monetary Policy Tools of the Federal Reserve • Open Market Operations – buying/selling government bonds to expand/contract the money supply • Controls the discount rate (primarily the decision of the Chairman of the Federal Reserve Board) • Reserve Requirement Ratio (RRR) – amount of deposits banks must keep in reserve (rarely ever used)

  25. The New National Banking System • Federal Reserve Bank – Established in 1913 • Monetary Policy Goals of the Federal Reserve • Expansionary Policy – Grows the economy, but may cause inflation to go up • Lower the discount rate, encourage borrowing • Buy bonds from investors, injects cash into the economy • Contractionary Policy – Controls inflation, but may cause economic growth to slow • Raise the discount rate, discourage borrowing • Sell bonds to investors, takes cash out of the economy

  26. Hello, I am Ben Bernanke.

  27. I am the current Chairman of the Fed.

  28. Enjoy the rest of your class.

  29. Other Federal Regulations on Banks • Federal Deposit Insurance Corporation (FDIC) – insures customer deposits up to $100,000 in the event of bank failure

  30. Banking Today • Two types of money • M1 - types of money that people can quickly get access to and spend • Liquidity - the ability to convert an asset into cash • M1 has high liquidity

  31. Banking Today • Two types of money • M2 – Everything in M1 plus assets that are not immediately used for purchases • Near Money – term for assets that cannot be used in financial exchanges • Includes savings accounts, mutual funds

  32. Services of the Bank • Place to store your money safely – an Account

  33. Services of the Bank • Types of Accounts • Savings Account – pay a small interest rate, allow you to withdraw cash • Checking Account – pay a very small interest rate, allow you to write checks, withdraw cash, or use a debit card

  34. Services of the Bank • Types of Accounts • Money Market Account – pay a higher interest rate according to the market value, works like a checking account, require high minimum balance • Not insured by the FDIC • Certificate of Deposit (CD) – pay a very high guaranteed interest rate over a certain time, but do not allow you to take money out in that time

  35. Services of the Bank • Loans – banks lend out money and charge interest • Fractional Reserve – banks only keep some of the money deposited

  36. Services of the Bank • Loans – banks lend out money and charge interest • Risk of default – failure of lendee to make payments to the bank

  37. Services of the Bank • Loans – banks lend out money and charge interest • Mortgage – type of loan given to purchase real estate (houses, land)

  38. Services of the Bank • Credit Cards – bank pays for goods you purchase, then bills you for them later, adding interest to what you owe

  39. Interest Rates • Interest – the price paid for the use of borrowed money (usually a percentage rate) • Principal – the amount borrowed • Balance – the amount still owed

  40. Interest Rates • The interest rate can be compounded (added on) in many different ways • Whaddya say we take a look at how it works together?

  41. Interest Rates • Compounded Annually (Once a year) • $100,000 principal, 5% interest rate • What is the total new principal? • $105,000.00!

  42. Interest Rates • Compounded Semiannually (Twice a year) • $100,000 x 2.5% (first compounding) • $102,500.00 • $102,500 x 2.5% (second compounding) • $105,060.00!

  43. Interest Rates • Compounded Monthly (12 times a year) • Anyone want to try calculating this? • Fine then. It’s $105,116.19 • You spend an extra $116.19 just from the way the interest is compounded

  44. More Services of the Bank • Automated Teller Machines (ATMs) – allow you to deposit/withdraw money and see account information without going into the bank • Debit Cards – used to withdraw money, or pay for goods from your checking account

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