Money and BankingChevalier

Spring 2015

Money

The Evolution of Money

• What is money?• It is not just a Dollar Bill, or a Euro, or a

Pound.

• It is any substance that serves as a MEDIUM OF EXCHANGE, MEASURE OF VALUE, OR STORE OF VALUE

What is the function of money?

Medium of Exchange

• Accepted by all parties as payment for goods and services

• Gold, silver, salt (salarium)

Measure of Value

• A common denominator can be used to express worth in terms that most individuals can understand.

• Purpose of price tags• A basis for comparison

Store of Value

• The property that allows purchasing power to be saved until needed.

• Shouldn’t have to be paid and then turn around and suddenly spend; money should hold its value

Early Money-Why use money?

• Commodity money• Barter economies• Fiat money (serves everybody’s self

interests)

Money in America

• 1789- George Washington created the dollar from the ‘peso’

• 8ths and 10ths

Characteristics of Money

• Portable- easily transferred• Durable- won’t deteriorate as a store of

value• Divisible- can be transferred into

smaller units (change)• Limited in supply-money will lose value

if there is too much of it

Privately Issued Bank Notes

• Americans distrusted paper currency• Counterfeiting, inflation, 100’s of different

types of notes in circulation• By the Civil War, 1,600 banks had

issued >10K types of notes.• US Gov’t only minted silver and gold

coins.

Money During the Civil War

• Civil War and the rise of the greenback

• Called legal tender• United States notes

• Both fiat currencies

Money During the Civil War

• Civil War and the National Banking System

• The move to one common currency• 10% tax on state issued currencies

• Gold Certificates and silver certificates

The Gold Standard

• Added security• Was supposed to prevent government

from printing too much money

• Could also restrict economic growth• People could convert whenever• Price of gold will change if not fixed

Today

• Inconvertible fiat money standard• M1, M2, and M3• Money today is:

• Portable• Durable• Divisible• Limited availability

The Federal Reserve System

• 1913- first central bank- a bank that can lend to other banks in times of need.

• Privately owned, publically controlled

• Federal reserve notes came into existence

Banking in the Depression

• 10K of 25K banks across the country failed• Runs on the banks• Insecurity• No depositor’s insurance

Glass-Steagall Act

• FDIC- 250,000 for one person at one bank

• Protects consumers against fraudulent banks

Types of Depository Institutions

• Commercial Banks• Demand Accounts

• Thrift Institutions (DA’a after 1970’s)

Savings Banks

• NOW accounts- demand accounts that earn interest (Negotiable Order of Withdrawal)

• Owned by Depositors (mutual savings banks)

Savings and Loan Associations S&L

• Invests a majority of its funds in home mortgages

• Cooperative clubs for homebuilders

• Association members would deposit a regular sum and take turns building homes

Credit Unions

• Non-profit (tax incentives)

• Share-draft accounts (lure for Credit unions)• Act as NOW accounts

The S&L crisis

• Deregulation by Reagan

• Interest rates, what services they could offer, borrowing from the FED

• Bad loans and interest rates led to failures on a grand scale, not prepared for this

• Changed names to avoid scandal (WAMU)