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Economics. Chapter 11 – Money and Banking. Evolution of Money. Barter economy- relies on trade of goods for goods; no money. Bartering was used before the advent of money! Bartering is still used in some societies and on micro levels. What is Money?.

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Chapter 11 – Money and Banking

evolution of money
Evolution of Money
  • Barter economy- relies on trade of goods for goods; no money.

Bartering was used before the advent of money! Bartering is still used in some societies and on micro levels.

what is money
What is Money?

Any substance that functions as a medium of exchange, a measure of value and store of value.

what is money functions of money
What is money?/ Functions of Money
  • Medium of exchange: money, or other substances generally accepted in exchange.
  • Measure of value: money, a common denominator to measure value.
  • Store of value: retains value over time.
money in early societies
Money in Early Societies
  • 1. shells, dog teeth, fishhooks
  • 2. commodity money – money that has alternative use. i.e. fishhooks you could also use to fish with.
  • 3. first money- money by government decree, has very little value on its own
money in colonial america
Money in Colonial America
  • 1. commodity money- gunpowder, corn, tobacco.
  • 2. Wampum 1645 Connecticut set monetary value for wampum- made from shells.
  • 3. Paper currency- some states allowed individuals to print their own paper currency – had to be backed by gold and silver
  • 1775- Continental currency
money in colonial america1
Money in Colonial America
  • 3. Paper currency- some states allowed individuals to print their own paper currency – had to be backed by gold and silver
  • 1775- Continental currency
  • 4. Specie-
    • Coins, usually made from silver or gold.
    • Usually preferred by early settlers over paper money, because they contained gold or silver
origins of the dollar
Origins of the Dollar
  • New money established by the first Congress. Based on the pesos.
  • Bullions- ingots or bars of precious metals- or minted into coins.
  • Mexican pesos smuggled into the US.
  • Pesos divided into 8 bits, resembled the Austrian taler, which sounded like “dollars”.
  • Franklin and Hamilton decided dollar would be basic monetary unit – standard unit of currency
  • Instead of divided into 1/8’s (pesos) they divided it into 1/10’s.
characteristics of money
Characteristics of Money
  • Portable: easily transferred
  • Durability: has to last when handled
  • Divisibility: easily divisible into smaller units
  • Limited availability- limited supply
class homework
  • How does money advance the exchange of goods and services.
  • Describe three functions of money.
  • Name four types of early money.
  • Describe the four characteristics of money.
early banking and monetary standards
Early Banking and Monetary Standards
  • Privately issue bank notes
    • Congress power to make money (Constitution)
    • 1. Growth of State Banks
    • 2. Abuse in Banks
    • 3. Problems with Currency
growth in state banks
Growth in State Banks
  • By 1811 approximately 100 banks existed in the US.
  • State banks- chartered by the state gov’t
  • Bank of the United States- chartered by the federal government
abuses in banking
Abuses in Banking
  • Wildcat banks- printed money that was not backed by silver or gold
problems with currency
Problems with Currency
  • too many different kinds of money
  • Temptation to print too much money
the greenback standard
The Greenback Standard
  • 1. 1861- Congress authorized printing of federal notes called greenbacks.
  • 2. National banks created- issued bank notes or national currency
  • 3. gold certificates- money backed by gold 1863
the greenback standard1
The Greenback Standard
  • 4. 1886- silver certificates- notes backed by silver
  • 5. 1890- treasury coin notes- paper currency redeemable in gold or silver
the gold standard
The Gold Standard
  • 1. basic unit of currency equivalent to a set amount of gold
  • 2. Two major advantages:
    • 1. people feel more secure about money
    • 2. prevents government from printing too much money
the gold standard1
The Gold Standard
  • 3. Disadvantages
    • 1. growing economy needs a growing money supply
    • 2. too many people decided to exchange their notes for gold- deplete govt’s gold reserve
  • 4. US went off gold standard in 1934
inconvertible fiat money standard
Inconvertible Fiat Money Standard
  • 1. Money cannot be exchanged for gold or silver though people can own gold.
  • 2. government controls money supply: consists of mostly checking accounts, coins, and currency.
class homework1
  • Explain how privately issued bank notes became part of the money supply.
  • List the five major currencies in use after the Civil War.
  • Identify the advantages and disadvantages of the gold standard.
  • Describe the inconvertible fiat money standard that the US uses.
national banking system
National Banking System
  • 1. National Bank requirements:
    • Use National in the title
    • Pass stiff inspections
    • Purchase government bonds
  • 2. Dual Banking
    • Charter from state and national banks
national banking system1
National Banking System
  • 3. Reform:
    • Took too long to clear checks
    • Currency backed by bonds were difficult to maintain
    • No place to go in time of need
  • 4. Federal Reserve System- created 1913
    • Central bank= lends to other banks
    • All nat’l banks required to join others are allowed to join
    • Federal Reserve notes- our money today
banking during the great depression
Banking during the Great Depression
  • 1. Bank Failures
    • Too many banks between 1880-1921
    • Start of Depression
      • 25,500 banks had no deposit insurance
      • Too many runs on the bank
    • March 5, 1933, FDR called for a bank holiday
      • Congress checked the banks
      • 10,000 closed or merged with other banks
banking during the great depression1
Banking during the Great Depression
  • Federal Deposit Insurance:
    • Started protecting at $2,500/per year
    • Now $250,000/per bank account
other depository institutions
Other Depository Institutions
  • 1. Commercial Banks
    • Catered to interest of businesses and commerce
    • Issued demand deposit accounts (checks)
  • 2. Thrift Institutions
    • Savings and loan associations
    • Savings banks
other depository institutions1
Other Depository Institutions
  • 3. Savings Banks:
    • Depositor- owned financial organization operated for benefit of depositors
    • Later sold stock; depositors don’t own now
    • Catered to smaller customers
    • NOW accounts– interest on checking
other depository institutions2
Other Depository Institutions
  • 4. Savings and Loan Associations
    • Home mortgages
  • 5. Credit Unions
    • Owned and operated by and for its members
    • Costs low
    • Share drafts– like checking account
class homework2
  • Why was the Federal Reserve System created?
  • Explain why the National Banking System was created.
  • Identify 3 depository institutions.
  • Complete note cards.
crisis reform and evolution
Crisis, Reform, and Evolution
  • Decade of Deregulation
    • After depression until late 1970’s tremendous amount of regulation’s on banks
    • 1980 deregulation started
    • Savings banks and savings and loans allowed to pay more interest than commercial banks. Commercial banks felt cheated.
crisis reform and evolution1
Crisis, Reform and Evolution
  • Commercial banks could issue checking accounts but savings banks could not. The felt cheated.
  • 1980- DIDMCA Act Passed
    • Regulation Q- max interest rates were phased out.
    • Now accts could be offered anywhere
    • All institutions could borrow from Feds not just commercial bansk
crisis reform and evolution2
Crisis, Reform, and Evolution
  • 1982- Garn-St. Germain Act
    • S and L and savings could issue credit cards, real estate loans and commercial loans.
savings and loan crisis
Savings and Loan Crisis
  • 1980- 4600 Savings and loan
    • By 1988 only 3000 – caused by bankrupcy and mergers
4 causes of failures
4 Causes of Failures
  • Deregulation- s & L not prepared to compete in these new markets
  • High interest rates- has made loans at 10% in the ‘70s, by the ‘80s rates had gone up to 15% - lost money
  • Inadequate capital- bad loans hit them hard- not enough in reserve
  • Fraud- reduced member of inspectors therefore a few companies committed huge fraud
evolution in the 1990 s
Evolution in the 1990’s
  • - 1980s turbulent
  • -1990s caution watchword
  • Banks merged
    • Larger accounts
    • More services
    • Less differences between commercial banks, savings banks and savings and loans.
class homework3
  • Describe the four factors contributing to the S&L crisis.
  • The FDIC insures deposits up to 250,000 what would you do if you had 2M dollars?