Chapter 10 Money and Banking Money Money is anything that serves 3 purposes: Money is anything that serves 3 purposes: –Medium of Exchange – used when

Chapter 10Chapter 10

Money and BankingMoney and Banking

MoneyMoney

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

MoneyMoney

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

MoneyMoney

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

6 Characteristics of 6 Characteristics of CurrencyCurrency

•Currency – coins and paper Currency – coins and paper bills society uses for moneybills society uses for money–More useful than bartering More useful than bartering because of 6 characteristicsbecause of 6 characteristics

What are the 6 What are the 6 Characteristics?Characteristics?

The 6 Characteristics of The 6 Characteristics of CurrencyCurrency•Durability – lasts for a long Durability – lasts for a long

timetime•Portability – easy to carryPortability – easy to carry•Divisibility – can be divided Divisibility – can be divided

into smaller denominationsinto smaller denominations•Uniformity – looks universally Uniformity – looks universally

the same, difficult to the same, difficult to counterfeitcounterfeit

The 6 Characteristics of The 6 Characteristics of CurrencyCurrency•Limited SupplyLimited Supply

•Acceptability – everyone in Acceptability – everyone in the economy must accept its the economy must accept its valuevalue

I’ve been thinking really deep and

philosophical like lately.

How did the value of paper currency

evolve to its present state?

History of the Value of History of the Value of MoneyMoney

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


•Representative Money – Representative Money – starting in 1600’s, people starting in 1600’s, people traded paper receipts that traded paper receipts that represented gold or silver kept represented gold or silver kept in a town safein a town safe–Gold and silver were difficult Gold and silver were difficult to carry aroundto carry around


•Fiat Money – Started in Fiat Money – Started in 1930’s, government issued 1930’s, government issued currency and passed laws currency and passed laws saying that all people must saying that all people must accept it as payment for accept it as payment for debtsdebts

On the Back of a Dollar…On the Back of a Dollar…

On the Back of a Dollar…On the Back of a Dollar…

From Saturday Night LiveFrom Saturday Night Live

What is a Bank?What is a Bank?

•Bank – institution for Bank – institution for receiving, keeping, and receiving, keeping, and lending moneylending money

Brief HistoryBrief History

•Start of U.S. History (1780’s – Start of U.S. History (1780’s – 1800’s)1800’s)–Federalists vs. Anti-FederalistsFederalists vs. Anti-Federalists

•Federalists favored a Federalists favored a national banknational bank

•Anti-Federalists believed Anti-Federalists believed states should controlstates should control


•National Banks were created, National Banks were created, and accomplished a number and accomplished a number of purposesof purposes–Held government tax Held government tax revenuerevenue

–Lend and borrow money for Lend and borrow money for government purposesgovernment purposes


•National Banks were created, National Banks were created, and accomplished a number and accomplished a number of purposesof purposes–Issue representative money Issue representative money backed by gold or silverbacked by gold or silver

–Watch over states use of Watch over states use of representative moneyrepresentative money


•Later, Later, because of because of politics, the politics, the national bank national bank is killedis killed

Banking With No National Banking With No National BankBank

•ProblemsProblems–Bank runs, panicsBank runs, panics–High rates of bank failureHigh rates of bank failure–FraudFraud–Many different currenciesMany different currencies

The New National Banking The New National Banking SystemSystem

•Federal Reserve Bank – Established Federal Reserve Bank – Established in 1913in 1913– Gives short term loans to private Gives short term loans to private

banks to prevent failuresbanks to prevent failures– Created a national currency – Created a national currency –

today’s dollarstoday’s dollars

•Federal Reserve controls Federal Reserve controls number of dollars in circulationnumber of dollars in circulation


• Federal Reserve Bank – Established in 1913Federal Reserve Bank – Established in 1913– Monetary Policy Tools of the Federal ReserveMonetary Policy Tools of the Federal Reserve

•Open Market Operations – buying/selling Open Market Operations – buying/selling government bonds to expand/contract the government bonds to expand/contract the money supplymoney supply

•Controls the discount rate (primarily the Controls the discount rate (primarily the decision of the Chairman of the Federal decision of the Chairman of the Federal Reserve Board)Reserve Board)

•Reserve Requirement Ratio (RRR) – Reserve Requirement Ratio (RRR) – amount of deposits banks must keep in amount of deposits banks must keep in reserve (rarely ever used)reserve (rarely ever used)


• Federal Reserve Bank – Established in 1913Federal Reserve Bank – Established in 1913– Monetary Policy Goals of the Federal ReserveMonetary Policy Goals of the Federal Reserve

•Expansionary Policy – Grows the economy, Expansionary Policy – Grows the economy, but may cause inflation to go upbut may cause inflation to go up

– Lower the discount rate, encourage borrowingLower the discount rate, encourage borrowing– Buy bonds from investors, injects cash into the Buy bonds from investors, injects cash into the

economyeconomy

•Contractionary Policy – Controls inflation, Contractionary Policy – Controls inflation, but may cause economic growth to slowbut may cause economic growth to slow

– Raise the discount rate, discourage borrowingRaise the discount rate, discourage borrowing– Sell bonds to investors, takes cash out of the Sell bonds to investors, takes cash out of the

economyeconomy

Hello, I am Ben Bernanke.

I am the current Chairman of the Fed.

Enjoy the rest of your class.

Other Federal Regulations on Other Federal Regulations on BanksBanks•Federal Deposit Insurance Federal Deposit Insurance

Corporation (FDIC) – insures Corporation (FDIC) – insures customer deposits up to customer deposits up to $100,000 in the event of $100,000 in the event of bank failurebank failure

Banking TodayBanking Today

•Two types of moneyTwo types of money–M1 - types of money that M1 - types of money that people can quickly get people can quickly get access to and spendaccess to and spend•Liquidity - the ability to Liquidity - the ability to convert an asset into cashconvert an asset into cash

•M1 has high liquidityM1 has high liquidity

Banking TodayBanking Today

•Two types of moneyTwo types of money– M2 – Everything in M1 plus assets M2 – Everything in M1 plus assets

that are not immediately used for that are not immediately used for purchasespurchases•Near Money – term for assets Near Money – term for assets that cannot be used in financial that cannot be used in financial exchangesexchanges

•Includes savings accounts, Includes savings accounts, mutual fundsmutual funds

Services of the BankServices of the Bank

•Place to store your money safely Place to store your money safely – an Account– an Account

Services of the BankServices of the Bank•Types of AccountsTypes of Accounts

– Savings Account – pay a small Savings Account – pay a small interest rate, allow you to interest rate, allow you to withdraw cashwithdraw cash

– Checking Account – pay a very Checking Account – pay a very small interest rate, allow you to small interest rate, allow you to write checks, withdraw cash, or write checks, withdraw cash, or use a debit carduse a debit card

Services of the BankServices of the Bank• Types of AccountsTypes of Accounts

– Money Market Account – pay a higher Money Market Account – pay a higher interest rate according to the market interest rate according to the market value, works like a checking account, value, works like a checking account, require high minimum balancerequire high minimum balance•Not insured by the FDICNot insured by the FDIC

– Certificate of Deposit (CD) – pay a Certificate of Deposit (CD) – pay a very high guaranteed interest rate very high guaranteed interest rate over a certain time, but do not allow over a certain time, but do not allow you to take money out in that timeyou to take money out in that time

Services of the BankServices of the Bank•Loans – banks Loans – banks

lend out money lend out money and charge and charge interestinterest– Fractional Fractional

Reserve – Reserve – banks only banks only keep some of keep some of the money the money depositeddeposited


lend out money lend out money and charge and charge interestinterest– Risk of Risk of defaultdefault

– failure of – failure of lendee to make lendee to make payments to payments to the bankthe bank


lend out money lend out money and charge and charge interestinterest– Mortgage – Mortgage –

type of loan type of loan given to given to purchase real purchase real estate (houses, estate (houses, land)land)

Services of the BankServices of the Bank

•Credit Cards – bank pays for Credit Cards – bank pays for goods you purchase, then bills goods you purchase, then bills you for them later, adding you for them later, adding interest to what you oweinterest to what you owe

Interest RatesInterest Rates

•Interest – the price paid for the Interest – the price paid for the use of borrowed money (usually use of borrowed money (usually a percentage rate)a percentage rate)

•Principal – the amount Principal – the amount borrowedborrowed

•Balance – the amount still owedBalance – the amount still owed


•The interest rate can be The interest rate can be compoundedcompounded (added on) in (added on) in many different waysmany different ways

•Whaddya say we take a look Whaddya say we take a look at how it works together?at how it works together?


•Compounded Annually (Once Compounded Annually (Once a year)a year)– $100,000 principal, 5% interest $100,000 principal, 5% interest

raterate– What is the total new principal?What is the total new principal?

–$105,000.00!$105,000.00!

Interest RatesInterest Rates•Compounded Semiannually Compounded Semiannually

(Twice a year)(Twice a year)– $100,000 x 2.5% (first $100,000 x 2.5% (first

compounding)compounding)– $102,500.00$102,500.00– $102,500 x 2.5% (second $102,500 x 2.5% (second

compounding)compounding)

–$105,060.00!$105,060.00!

Interest RatesInterest Rates•Compounded Monthly (12 Compounded Monthly (12

times a year)times a year)– Anyone want to try calculating Anyone want to try calculating

this?this?– Fine then. It’s $105,116.19Fine then. It’s $105,116.19– You spend an extra $116.19 You spend an extra $116.19

just from the way the interest just from the way the interest is compoundedis compounded

More Services of the BankMore Services of the Bank

•Automated Teller Machines Automated Teller Machines (ATMs) – allow you to (ATMs) – allow you to deposit/withdraw money and see deposit/withdraw money and see account information without account information without going into the bankgoing into the bank

•Debit Cards – used to withdraw Debit Cards – used to withdraw money, or pay for goods from money, or pay for goods from your checking accountyour checking account

Documents

Chapter 10 Money and Banking Money Money is anything that serves 3 purposes: Money is anything that serves 3 purposes: –Medium of Exchange – used when