Money Basics

Money Basics

http://www.youtube.com/watch?v=GXE_n2q08Yw

Microeconomics/Macroeconomics

• These are the two basic divisions of the study of economics.

• Micro studies the individual parts of the economy – one product, one industry, individual demand, etc.

• Macro studies the entire economy at one time – unemployment rates, inflation and prices, economic growth and international topics.

Money and Banking

•Money and Banking studies are included in Macroeconomics.

Before there was money…

• People traded goods and services to get what they needed or wanted.

Money replaced the ancient system of…

•Barter

• Barter is the system where people trade one thing for another without the use of money.

Barter still works fine, but had limitations:

• Problems:

• For one thing, you can’t always find the person who wants what you have and has what you want. “Coincidence of Wants”

Problems of Barter…

• For another, you can’t know what “things”, or commodities are worth in exchange. “Valuation problem”

Problems of Barter…

• And, Commodities are often perishable, so saving is an issue. “Savings problem”

Problems of Barter…

• Also, Credit can be difficult or impossible.

Money solves those problems

Money’s USES are:

• Medium of Exchange : It works as a go-between to make trades possible.

• Measure of Value- Money allows items to be evaluated in terms of money.

• Store of Value: It allows saving for the future.

• Basis for Credit: It allows a payments and credit system to be established in money units.

Commodity Money

• Often a particular item or items evolves into being used as “money”…

Commodity Money

• Wheat, cattle, certain metals, shells…• All these have been “money” in the past.

Commodity Money

• Today, Commodity Money springs up whenever there is a problem with the basic money supply.

• Cigarettes, alcoholic beverages, precious metals might become “money”.

• Elementary school cafeterias have commodity money spring up…pudding, cookies, candy, salt?

To be a “money”

• Something must be• Divisible• Portable• Acceptable

Gold

• U.S. Money is NOT backed by Gold.• It is “backed” by the credit of the U.S.

Government.

• Gold “backed” our money until 1971 when Nixon took us off the gold standard for international trade because we were losing gold to other countries through import payments.

It once was backed by gold

Assorted gold coins.

• Americans have not had gold currency since before 1933 when Franklin Roosevelt “called in” the gold and changed the international value of the dollar.)

• So why does the U.S. own gold still?

• It is officially part of the “treasure” of the U.S.

FORMS of MONEY

• Coins,• Currency, and • Checkbook Money (Demand Deposits). • http://www.bankofcanada.ca/banknotes/b

ank-note-series/polymer/

Forms of Money

• Of these three, Checkbook money is by far most important. – about 70% of the money supply, but the number of checks used is dwindling fast. Instead, demand deposit accounts are accessed electronically.

• Debit cards, electronic payments, smart cards, “plastic” money, etc are based mainly on bank deposits.

Plastic?

• No- “Plastic” is technically not money, as it either postpones payment in one of the 3 forms (credit card), or accesses your checkbook money (debit card)

• Even use of cash has declined since electronic payment methods have expanded.

Payments by smart phones…• http://www.google.com/wallet/

• https://www.youtube.com/watch?v=jke7c1B5QEM

• Are these “forms” of money? Not really because the money comes out of your bank or online account.

Smartphone payments…• http://www.hongkiat.com/blog/smartphones-into-creditcard-r

eaders/

Bitcoin – a decentralized currency

• Bitcoin iBitcoin is a peer-to-peer payment system and digital currency introduced as open source software. It is a cryptocurrency, so-called because it uses cryptography to control the creation and transfer of money.[5] http://en.wikipedia.org/wiki/Bitcoin

• http://vimeo.com/63502573

• http://www.bostonmagazine.com/news/blog/2014/02/20/liberty-teller-bitcoin-atm-boston/

So…How does a bank “work”?• Banks are profit-making businesses that take in depositors

money and give out loans based on the same deposits. • When a banks give a loan, they “create” money because the

depositor can withdraw their deposits at most any time, and the loan recipient can also withdraw the loan, thus creating money.

How a bank works…

Fractional Reserve Banking• So…the bank holds back a “fraction” of their deposits on

reserve to handle day to day needs of the business.• The Federal Reserve sets the “reserve requirement”

percentage to help control the size of the money supply.

Two events can threaten a bank• 1. A Bank “Run”- depositors ask to have their account turned

to cash or close their accounts too quickly, often in response to rumors or “panics”. This is happening in Greece and possibly Spain as we speak (2012)

• 2. The loans can “go bad” and not be repaid. This is more disastrous for a bank, as the basis for the loans is lost. This is where the FDIC will step in.

It’s a Wonderful Life• The film, It’s a Wonderful Life, from 1946, showed a bank run

in it. • http://www.youtube.com/watch?v=lbwjS9iJ2Sw• How did George get the run stopped?

Loans going “bad”…• Hard times are the worst- borrowers lose jobs or cannot raise

payment money. The bank must foreclose on any asset given as collateral.