Unit 6 – Finance

I. Currency

A. Money

1. Three Uses of Money

a) Medium of exchange (Barter) - Exchanging goods & services without use of set values.

b) Unit of Account.

c) Store of Value.

2. Currency.

B. Six Characteristics of Money

1. Durability – withstands wear & tear.2. Portability – Easily transported from place to

place.3. Divisibility – Easily divided into smaller

denominations. 4. Uniformity – Every unit must be the same for

counting & measuring. 5. Limited Supply – The lower amount available,

the value is more. 6. Acceptability – Everyone must be willing to

accept the goods.

C. Sources of Money’s Value

1. Commodity Money.

2. Representative Money.

3. Fiat Money.

D. Bank

1. Early Republic 2. Federalists: Alexander Hamilton

supported a centralized gov’t & national bank.

a) Issues a single currency for the entire nationb) Manages government’s fundsc) Monitors other banks.

3. Anti-federalists: Thomas Jefferson wanted a decentralized system.

E. First Bank of the United States

1. 1791 – Bank given 20 year charter

2. Great success in bringing order to banking

3. Anti-federalists argued it was unconstitutional & let charter run out in 1811.

F. Chaos Ensues

G. Jacksonian Era

1. Second Bank of the United States

2. 1816 – 20 year charter

3. Jackson opposed re-chartering of bank.

H. Free Banking1. Bank runs2. Wildcat Banks – established on the

frontier & were unreliable.3. Fraud – Banks issued notes, collected

gold & silver, then vanished.4. Currency – Different states, cities,

banks, businesses, & other organizations issued currency-creating chaos.

I. Civil War & Reconstruction 1. North attempted stability.

a. Greenbacks – national currency

b. Nation Banking Acts of 1864 & 1865

c. Power to charter banks.

d. Power to require banks to hold gold & silver to back notes

2. South issued its own currency based on cotton, but became worthless.

J. Gold Standard .

1. Definite value for the dollar.

2. Government issued currency only if it had gold to back it.

K. Progressive Era

1. Bank chaos

2. Centralized system for currency, but not banking.

3. Panic of 1907 – Banks did not have enough reserves to back up $, banks failed, businesses stopped expanding.

L. Federal Reserve System

1. Central Bank.2. Member Banks.3. Federal Reserve Board – Appointed by

President of the USA to supervise banks.

4. Loans – Fed banks loaned money for short term needs to prevent bank failures.

5. Federal Reserve Notes.

6. The Federal Open Market Committee

a. Regulates banks to ensure they follow federal laws

b. Banker’s bank

c. Conducts monetary policy = controlling supply of money.

M. Great Depression

1. Economic decline starts 1929. 2. Banks loaned large sums of $ in the 20’s that

businesses could not pay back.3. Crop failures & dropping prices mean farmers

unable to pay debts. 4. Stock market crash -1929 created panics in

market & banks across nation.5. FDR established bank holiday so banks would

close & give time for people to calm down & the industry to regain footing.

6. FDIC established.

N. Deregulation and the Reagan Era

1. Deregulation was sought by banks & was given by Republicans and Democrats.

2. Several industries were deregulated.

3. Savings & Loans also deregulated.

O. Conflicting Progress

1. S& L’s failed after risky loans.

2. Congress passed legislation to restrict S&L’s.

3. Glass-Steagall Act passed that allows banks to sell stocks and bonds.

4. Bank mergers became extremely popular.

II. Modern Banking

A. Money Supply – all $ USA.

1. M1- Liquidity - money that people can gain access to easily and immediately

2. M2 = assets that cannot be used as cash within a short period of time. (Deposits in savings accounts).

B. Managing Money

1. Storing – fireproof vaults and protected by the FDIC

2. Saving accounts3. Checking accounts4. Money market accounts- Save, write a

limited number of checks. Interest high, but variable.

5. Certificates of Deposit – Guaranteed of interest over time, withdrawal = fee.

C. Loans

1. Banks let borrowers take money, as longs as they pay it back with interest.

2. Mortgages. 3. Credit Cards. 4. Simple interest – $ made off of original

borrowed sum.5. Compound interest – $ made of original sum

and previous interest. 6. Profit- banks make more $ off interest from $

they loaned out than the interest they pay to accounts.

D. Financial Institutions

1. Credit Unions- Organized for specific groups of people, with low interest rates

2. Finance Companies – People are more likely to fail paying these back and so interest rates are high.

III. Investments

A. Financial System1. Flow of Savings – from savers to financial

institutions to investors.

2. Intermediariesa. Bank

b. Life Insurance Companies –Company collects premiums and lends to investors.

c. Pension Funds – receives income after working a certain number of years or age.

B. Financial Assets

1. Bonds a. Coupon Rate.

b. Maturity.

c. Par Value (face value or principal).

d. Yield.

e. Discounts – occur when bonds are sold at less than par value.

f. Ratings – Similar to academic grading, rates go from AAA/Aaa to D.

2. Stock Market

a. Stock or equities are shares of ownership in a corporation.

b. Dividends – pay stockholders from profits of corporation. Usually paid quarterly.

C. Stock Exchange – Markets for buying and selling stock.

1. NYSE – New York Stock Exchange (1792)a. represents largest/most respected companies in nation.

b. Big companies are blue chips which profit over the long run.

2. NASDAQ –Mostly trading technology, energy stocks, exchange deals with smaller, riskier companies

D. History

1. Investors panicked,16.4 million shares sold on 10/29/29 (Black Tuesday) compared to normal 4 to 8 million.

2. Fed limited money supply to discourage lending.

3. Americans cautious about stock until 1990’s.

4. Half of households now own mutual funds.