Government and the Economy

Commodity, representative and fiat moneyCommodity, representative and fiat money

Commodity: an item that has a value of Commodity: an item that has a value of its own—precious metals (gold and its own—precious metals (gold and silver) and gems; tobacco in the early VA silver) and gems; tobacco in the early VA colony colony

Jamestown, VirginiaJamestown, Virginia

100 Englishwomen: bought for 120 lbs of tobacco 100 Englishwomen: bought for 120 lbs of tobacco

=

Students will explain the functions that money serves; students will Students will explain the functions that money serves; students will identify identify the sources of money’s value; the sources of money’s value;

Commodity, representative and fiat moneyCommodity, representative and fiat money

Representative: paper money; specie Representative: paper money; specie (gold or silver)(gold or silver)

Fiat: a government fiat or decree says Fiat: a government fiat or decree says that it has valuethat it has value


In this film I played a In this film I played a secret service agent secret service agent

focused on anti-counterfeit focused on anti-counterfeit operations. So, operations. So, what what steps has the U. S. steps has the U. S.

government taken to government taken to combat the rise of illegally combat the rise of illegally

created currencycreated currency??


In In 1996 1996 the Treasury Department introducedthe Treasury Department introduced a a new $100 billnew $100 bill—the—the first major redesign since first major redesign since 19291929. The design incorporated several . The design incorporated several security features that make it difficult to forge security features that make it difficult to forge the new bill. the new bill. These features include an almost-These features include an almost-invisibleinvisible watermark, watermark, or design in the paper, of or design in the paper, of Benjamin Franklin whose enlarged portrait also Benjamin Franklin whose enlarged portrait also appears on the bill; a multicolored shade of ink appears on the bill; a multicolored shade of ink for the numeral in the lower front right-hand for the numeral in the lower front right-hand corner;corner; a synthetic security thread embedded a synthetic security thread embedded in the paper; in the paper; and microprintingand microprinting


Pilgrims, I often played Pilgrims, I often played historical characters, historical characters,

like Davy Crocket like Davy Crocket ininThe AlamoThe Alamo. So, . So,

nippers, pay attention nippers, pay attention now as we discuss the now as we discuss the

history of U. S. history of U. S. bankingbanking. First off, let’s . First off, let’s

do a little do a little brainstorming. In brainstorming. In

groups of 2-3, groups of 2-3, list what list what you remember about you remember about U. S. banking historyU. S. banking history..

Students will discuss key events in U. S. banking history, identifying Students will discuss key events in U. S. banking history, identifying the most common types of U. S. financial institutions; the most common types of U. S. financial institutions;

Prior to the Civil WarPrior to the Civil War

Hamilton’s Economic PlanHamilton’s Economic Plan

1790: U.S. huge national debt.1790: U.S. huge national debt.

• Government take responsibility for Government take responsibility for for existing public debtfor existing public debt• Federal government assume states’ Federal government assume states’ debtsdebts• Create a large and permanent nationalCreate a large and permanent national debtdebt• Create a national bank Create a national bank • Excise taxes Excise taxes on distillers on distillers & tariffs & tariffs



Jefferson Jefferson opposed paying off states’ opposed paying off states’ debtsdebts Only pay off national debt; many Only pay off national debt; many southern southern states had already states had already paid off state debtspaid off state debts..

Would accept national Would accept national bank if capital moved bank if capital moved to new city on banks to new city on banks of Potomac River.of Potomac River.



For: influential segments of population,For: influential segments of population, speculators plus manufacturers and speculators plus manufacturers and merchantsmerchants Anti: small farmers (majority)Anti: small farmers (majority) Disproportionate tax burdenDisproportionate tax burden Property taxes to statesProperty taxes to states Bore brunt of excise taxesBore brunt of excise taxes


Second Bank of the United States Second Bank of the United States

Most powerful financial Most powerful financial institution institution

Only place the federal Only place the federal government could deposit government could deposit funds funds

Federal government owned 20% of stock and did Federal government owned 20% of stock and did tremendous business in general banking. tremendous business in general banking. It provided It provided credit to growing enterprises and issued bank notescredit to growing enterprises and issued bank notes


Hard Money vs. Soft MoneyHard Money vs. Soft Money

Soft Money: more currency in Soft Money: more currency in circulationcirculationIssuing banknotes unsupported by Issuing banknotes unsupported by gold or gold or silver silver was the best way to circulate was the best way to circulate more more currencycurrencyObjected to Bank of the United States Objected to Bank of the United States because it restrained state banks because it restrained state banks from from issuing notes freelyissuing notes freelyWanted rapid expansionWanted rapid expansion


Hard Money vs. Soft MoneyHard Money vs. Soft Money

Hard Money: Gold & silver only currency basisHard Money: Gold & silver only currency basisCondemned all banks that issued bank notesCondemned all banks that issued bank notesConservative approach to expansion Conservative approach to expansion

I was a hard money advocateI was a hard money advocatebecause a business I owned because a business I owned failed as a result of the Panic failed as a result of the Panic of 1797. I was therefore of 1797. I was therefore suspicious of banks and suspicious of banks and paper currency.paper currency.


Nicholas Biddle Nicholas Biddle President of the Bank of President of the Bank of the the United StatesUnited StatesPut bank on a sound and Put bank on a sound and prosperous basisprosperous basisGranted financial favors to Granted financial favors to influential men (Webster influential men (Webster and and Clay)Clay)1832: asked Congress to 1832: asked Congress to renew bank’s charter 4 renew bank’s charter 4 years years early (campaign issue)early (campaign issue)


Civil War to World War ICivil War to World War I

Patchwork banking systemPatchwork banking systemCivil War—Congress issued greenbacks as Civil War—Congress issued greenbacks as currency not backed by specie; currency not backed by specie; rather it was rather it was fiat money backed only by the federal fiat money backed only by the federal government’s promise to repay government’s promise to repay the note’s face the note’s face value at some future datevalue at some future dateNational Banking Acts of 1863 and 1864—National Banking Acts of 1863 and 1864—gave the federal government the power to gave the federal government the power to charter banks and require banks to hold gold charter banks and require banks to hold gold and silver reservesand silver reserves


Bimetallism: most of its existence, U. S. had Bimetallism: most of its existence, U. S. had recognized both gold and silver as backing recognized both gold and silver as backing for currency for currency

Crime of 1873:Crime of 1873:•1870s: 16 oz of silver = 1 oz of gold 1870s: 16 oz of silver = 1 oz of gold •Silver used more for jewelry than for coins;Silver used more for jewelry than for coins;•Mints stopped coining silverMints stopped coining silver•1873: Congress—officially discontinued silver 1873: Congress—officially discontinued silver coinscoins•Value of silver fell below 16:1; many felt a Value of silver fell below 16:1; many felt a conspiracy of big bankers; demanded a conspiracy of big bankers; demanded a return, at once, to free silver and unlimited return, at once, to free silver and unlimited coinage of silver at 16:1coinage of silver at 16:1


1896 Democratic National Convention1896 Democratic National Convention Western & Southern delegates Western & Southern delegates determined to seize control determined to seize control Wanted a pro-silver candidate Wanted a pro-silver candidate

William Jennings BryanWilliam Jennings BryanBryan, the Great Commoner,Bryan, the Great Commoner, The Cross of Gold SpeechThe Cross of Gold Speech


World War I to present World War I to present

Federal Reserve Act of 1913Federal Reserve Act of 1913Several acts during the New Deal—Several acts during the New Deal—bank bank holiday; holiday; Banking Act of 1933—Banking Act of 1933—Fed’s Fed’s member banks could not sell stocks and member banks could not sell stocks and bonds and bonds and established the FDICestablished the FDICThe Gold Reserve Act of 1934—The Gold Reserve Act of 1934—eliminated the gold standard in the US—eliminated the gold standard in the US—done to regulate the amount of money in done to regulate the amount of money in the economy, control credit, restore the economy, control credit, restore confidence in the economy, and stabilize confidence in the economy, and stabilize exchange ratesexchange rates


In this film I In this film I deregulated some deregulated some

Japanese naval vessels Japanese naval vessels during World War II. during World War II.

How about you tell the How about you tell the Colonel about Colonel about bank bank

deregulationderegulation..

Students will identify and discuss the results of banking deregulation Students will identify and discuss the results of banking deregulation

Deregulation is the reduction of Deregulation is the reduction of government restrictions resulted in more government restrictions resulted in more competition and the rise of regional competition and the rise of regional bankingbankingBanks can offer loan rates comparable to Banks can offer loan rates comparable to Savings and Loans and credit unionsSavings and Loans and credit unionsBanks can also merge with other banks Banks can also merge with other banks to build branch offices in other states to build branch offices in other states

Students will identify and discuss the results of banking deregulation Students will identify and discuss the results of banking deregulation

Hmmm. That check on the wall Hmmm. That check on the wall makes me think of banking, which makes me think of banking, which makes me further think about the makes me further think about the topic of this chapter,topic of this chapter, the Federal the Federal

Reserve.Reserve.

Students will explain the characteristics and purposes of the Federal Reserve System Students will explain the characteristics and purposes of the Federal Reserve System

Back in 1907, people Back in 1907, people dressed liked this, dressed liked this,

and unlike Danny, no and unlike Danny, no one had weird one had weird

haircuts. So which haircuts. So which one of you little one of you little

nippers can tell me nippers can tell me about the causes of about the causes of the the Panic of 1907.Panic of 1907.


Duke, I was born in 1907 Duke, I was born in 1907 and I’m a real man like and I’m a real man like

you. So, I’ll answer. The you. So, I’ll answer. The nationnation’’s monetary system s monetary system

at the time had no at the time had no mechanism for expanding mechanism for expanding the amount of money in the amount of money in

circulation circulation and, second, the and, second, the system of pyramided system of pyramided

reserves in which smaller reserves in which smaller banks deposit some of their banks deposit some of their reserves into larger banks reserves into larger banks and larger banks deposit and larger banks deposit

some of their reserves into some of their reserves into the largest banksthe largest banks.. Students will explain the characteristics and purposes of the Federal Reserve System Students will explain the characteristics and purposes of the Federal Reserve System

That’s pretty good, That’s pretty good, pilgrim. Now which pilgrim. Now which

one of you little one of you little nippers can tell me nippers can tell me

the the role of the role of the Federal Reserve Federal Reserve

System?System?


We can, Mr. Wayne.We can, Mr. Wayne. First the Fed First the Fed supervises member supervises member banks. Second, it banks. Second, it holds cash reserves, holds cash reserves, which represent which represent funds available for funds available for short-term borrowing short-term borrowing by commercial banks by commercial banks or by the or by the government. government. Third, Third, the Fed moves the Fed moves money into or out of money into or out of circulation circulation in order to in order to stabilize the national stabilize the national monetary and monetary and banking systems.banking systems.


Good job, Emanual. Good job, Emanual. Say those are two Say those are two pretty handsome pretty handsome

fillies you are with. fillies you are with. Let’s go ahead and Let’s go ahead and discuss the discuss the way the way the Federal Reserve is Federal Reserve is

organized.organized.


And one of the most And one of the most important aspects of important aspects of the the Federal Reserve Federal Reserve

system system is its ability to is its ability to remain remain free of free of

political pressurepolitical pressure. . The The long, staggered long, staggered

terms of the terms of the members of the members of the

Board of Governors Board of Governors prevent any one U. S. prevent any one U. S.

president from president from “stacking” the board. “stacking” the board. The The Fed also funds Fed also funds

itself and receives no itself and receives no budget budget

appropriations from appropriations from Congress.Congress.


October, 2022October, 2022Your check Your check bounced! It bounced! It messed up messed up our account our account big time. big time.

You’re gonna You’re gonna get it for that. get it for that.

Maybe that Maybe that will teach ya will teach ya how the how the Fed Fed oversees the oversees the flow of money flow of money

by clearing by clearing checks.checks.



After learnin’ that After learnin’ that lesson, maybe she’ll lesson, maybe she’ll

be more careful be more careful when she writes when she writes

checks. But, checks. But, pilgrims, the Fed pilgrims, the Fed

also makes also makes loans to loans to commercial bankscommercial banks. . What kind of loans What kind of loans

are they?are they?


Mr. Wayne, sir, I know!!! Mr. Wayne, sir, I know!!! Many are Many are short term loans short term loans

to replenish their to replenish their reserves, or supplies of reserves, or supplies of cash. Federal Reserve cash. Federal Reserve banks loan reserves, banks loan reserves,

usually for periods of one usually for periods of one day to several weeks. day to several weeks.

Most are sought for Most are sought for seasonal factors, natural seasonal factors, natural disasters, and financial disasters, and financial

emergencies. emergencies. I hope you I hope you like my answer, because I like my answer, because I think you were mega-HOT, think you were mega-HOT,

Mr. Wayne!Mr. Wayne!Students will explain the characteristics and purposes of the Federal Reserve System Students will explain the characteristics and purposes of the Federal Reserve System

Don’t be such a kiss-Don’t be such a kiss-up, Janki. After all, up, Janki. After all, his real name was his real name was Marion Morrison! Marion Morrison! And you forgot to And you forgot to

say that the say that the Fed also Fed also serves as a lender of serves as a lender of

last resort by last resort by making emergency making emergency loans to commercial loans to commercial

banks in times of banks in times of emergency.emergency.


Watch your mouth, Watch your mouth, little lady. little lady.

Remember, never Remember, never mess with a mess with a

paratrooper. All paratrooper. All right, back to right, back to

business. business. How does How does the Fed work with the Fed work with the U. S. Treasury?the U. S. Treasury?


Duke, the Fed Duke, the Fed serves as serves as the government’s bank.the government’s bank.It also serves as the It also serves as the depository for federal depository for federal revenues and holds a revenues and holds a Treasury checking Treasury checking account on which the account on which the Treasury writes checks Treasury writes checks to to cover tax refunds, Social cover tax refunds, Social Security payments and Security payments and all other government all other government payments, like my payments, like my monthly pension.monthly pension.


Thanks, Colonel Thanks, Colonel Pete. You were the Pete. You were the

same rank that I same rank that I was in this picture, was in this picture, The Longest DayThe Longest Day. .

Any way, one of you Any way, one of you little nippers needs little nippers needs to tell me to tell me how the how the Fed regulates the Fed regulates the

money supplymoney supply..


Mr. Wayne, you are my Mr. Wayne, you are my kind of guy—my favorite kind of guy—my favorite actor and a GREAT actor and a GREAT AMERICAN! The answer is: AMERICAN! The answer is: It It regulates the amount of regulates the amount of money in circulation.money in circulation.New currency is put into New currency is put into circulation for two major circulation for two major reasons:reasons:

a. To replace old and a. To replace old and worn-out notesworn-out notes, which , which eventually are destroyed; eventually are destroyed; and and b. To increase the b. To increase the amount of money in amount of money in circulation circulation by expanding by expanding the pool of cash that the the pool of cash that the Federal Reserve banks can Federal Reserve banks can loan.loan.Students will explain the characteristics and purposes of the Federal Reserve System Students will explain the characteristics and purposes of the Federal Reserve System

MoreoverMoreover, on behalf of the , on behalf of the entire system, the Federal entire system, the Federal Reserve Bank of New York Reserve Bank of New York buys and sells U. S. buys and sells U. S. government securities on the government securities on the open market. open market. Trading in Trading in securities allows the Fed securities allows the Fed both to increase or decrease both to increase or decrease the money supply and to the money supply and to provide the government with provide the government with the cash it needs to finance the cash it needs to finance public goods and services.public goods and services.


Pilgrim, you’re Pilgrim, you’re pretty squared pretty squared

away. Great job—away. Great job—you can be in MY you can be in MY unit any day. All unit any day. All right, on the next right, on the next slide I’m gonna slide I’m gonna show ya the show ya the 3 3

different different measurements of measurements of the U. S. money the U. S. money

supply.supply.


M1—all currency in circulation, the value of M1—all currency in circulation, the value of all travelers’ checks, all checking-account all travelers’ checks, all checking-account deposits, and similar accounts in financial deposits, and similar accounts in financial institutions;institutions;M2—M1 plus money-market accounts, M2—M1 plus money-market accounts, money-market mutual fund shares, and money-market mutual fund shares, and other easily accessible savings deposits;other easily accessible savings deposits;M3—M2 plus all large time deposits, M3—M2 plus all large time deposits, repurchase agreements and Eurodollarsrepurchase agreements and Eurodollars


Before we charge on into your econ Before we charge on into your econ final, I’m gonna show ya the final, I’m gonna show ya the

difference between difference between easy-money easy-money policy and tight-money policypolicy and tight-money policy. .

Learnin’ that is almost as tough as Learnin’ that is almost as tough as chargin’ the chargin’ the Sands of Iwo JimaSands of Iwo Jima..


Easy-money policy Easy-money policy isis designed to expand designed to expand the money supply, increase aggregate the money supply, increase aggregate demand, create jobs, and thus reduce demand, create jobs, and thus reduce unemployment and promote economic unemployment and promote economic growth. Usually adopted during a growth. Usually adopted during a recession.recession.By charging banks a lower interest rate to By charging banks a lower interest rate to borrow money,borrow money, the Fed makes more money the Fed makes more money available to those banks; banks, available to those banks; banks, in turn,in turn, lower interest rates lower interest rates they charge customersthey charge customers..Increased borrowing and spending Increased borrowing and spending stimulate economic growth asstimulate economic growth as businesses businesses make more products and hire more make more products and hire more workers.workers.Can lead to inflationCan lead to inflationStudents will explain the characteristics and purposes of the Federal Reserve System Students will explain the characteristics and purposes of the Federal Reserve System

Hayley is Hayley is grabbing me grabbing me too tightly. too tightly.

Hey! I Hey! I guess that’s guess that’s a nice segue a nice segue

into our into our discussion of discussion of

tight-tight-moneymoney. .

What is tight What is tight money?money?


As a person in a tight As a person in a tight spot, I’ll do that right spot, I’ll do that right now. Anow. A tight-money tight-money policy slows business policy slows business activity and helps activity and helps stabilize prices. It is stabilize prices. It is characterized by higher characterized by higher interest rates and a interest rates and a contraction of the contraction of the money supply, both of money supply, both of which are designed to which are designed to reduce aggregate reduce aggregate demand. It can lead to demand. It can lead to deflation.deflation.Students will explain the characteristics and purposes of the Federal Reserve System Students will explain the characteristics and purposes of the Federal Reserve System

Not bad, young lady. I Not bad, young lady. I hope ya got outa that hope ya got outa that mess. Any way, let’s mess. Any way, let’s finish this so we can get finish this so we can get to the officers’ club. I to the officers’ club. I know you youngsters are know you youngsters are tired, so I’ll finish this off tired, so I’ll finish this off on the next slide by on the next slide by showin’ ya showin’ ya monetary monetary policy toolspolicy tools. Pay . Pay attention or I’ll have ya attention or I’ll have ya on KP tomorrow.on KP tomorrow.


•Open-Market Securities—main tool of the Open-Market Securities—main tool of the Fed—buying and selling of government Fed—buying and selling of government securities; securities; •Discount rate—interest rate that the Fed Discount rate—interest rate that the Fed charges member banks for the use of its charges member banks for the use of its reserves—adjusted to increase or decrease reserves—adjusted to increase or decrease borrowingborrowing•Prime rate: the interest rate the Prime rate: the interest rate the commercial banks charge on loans to their commercial banks charge on loans to their most reliable business customers; most reliable business customers; •Reserve requirement—the money that Reserve requirement—the money that must be held by banks either in their own must be held by banks either in their own vaults or in their accounts at the district vaults or in their accounts at the district Federal Reserve bank.Federal Reserve bank.


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Government and the Economy