Money and BankingMoney and Banking

Chapter 11Chapter 11

Goals & ObjectivesGoals & Objectives

1.1. 3 functions of money.3 functions of money.

2.2. 4 major types of money in early societies.4 major types of money in early societies.

3.3. 4 characteristics of money.4 characteristics of money.

4.4. Privately issued bank notes.Privately issued bank notes.

5.5. Inconvertible monetary standard.Inconvertible monetary standard.

6.6. Great Depression causes & effects.Great Depression causes & effects.

7.7. 3 major forms of depository institutions.3 major forms of depository institutions.

8.8. S&L crisis of 1980’s & Housing crisis of 2007.S&L crisis of 1980’s & Housing crisis of 2007.

The Evolution of MoneyThe Evolution of Money

• Barter EconomyBarter Economy: moneyless : moneyless economy that relies on trade.economy that relies on trade.

• Value, Utility & WealthValue, Utility & Wealth: paper : paper money alone may NOT have value money alone may NOT have value nor create individual wealth.nor create individual wealth.– Real WealthReal Wealth: Goods & Services sold or : Goods & Services sold or

traded in a free market.traded in a free market.

Bartering is a Crime?Bartering is a Crime?

Functions of MoneyFunctions of Money

1.1. Medium of exchangeMedium of exchange: something of value : something of value accepted by all parties.accepted by all parties.

1.1. Paper currency, gold, food, oil, salt, etc…Paper currency, gold, food, oil, salt, etc…

2.2. Measure of ValueMeasure of Value: common denominator used : common denominator used to express worth/value.to express worth/value.

1.1. Store of Value: Store of Value: property that allows property that allows purchasing power to be saved until needed.purchasing power to be saved until needed.

Value Collapse of Fiat MoneyValue Collapse of Fiat Money

Early Societies & MoneyEarly Societies & Money

1.1. Commodity moneyCommodity money: alternative use : alternative use as an economic good. (Weapons, as an economic good. (Weapons, food).food).

2.2. Fiat moneyFiat money: money by government : money by government decree.decree.

1.1. Continental dollarsContinental dollars: 1775: 1775

3.3. Paper moneyPaper money: individually printed : individually printed currency backed by gold & silver.currency backed by gold & silver.

1.1. 1998-2009: Liberty Dollar1998-2009: Liberty Dollar

Commodity Resources as Commodity Resources as MoneyMoney

Early Societies & MoneyEarly Societies & Money

4.4. SpecieSpecie: silver or gold coins. (1700-: silver or gold coins. (1700-1800’s)1800’s)

Emerging MoneyEmerging Money: :

1. 1. BitcoinBitcoin: 2009; crypto-currency. : 2009; crypto-currency. Electronic currency involving no Electronic currency involving no banks nor government. banks nor government.

Bitcoin: Value, Utility & WealthBitcoin: Value, Utility & Wealth

Characteristics of MoneyCharacteristics of Money

1.1. PortablePortable: easily transferred: easily transferred

2.2. Durable: Durable:

3.3. Divisible:Divisible:

4.4. Limited Availability:Limited Availability: too much in too much in circulation devalues currency. circulation devalues currency.

Trillion Dollar Coin: Trillion Dollar Coin: 2011-2012 threat by 2011-2012 threat by Democratic party to bypass Congressional Democratic party to bypass Congressional negotiation over the debt-ceiling. negotiation over the debt-ceiling.

Origins of the DollarOrigins of the Dollar

1.1. Spanish pesoSpanish peso: 1789; silver bullion-: 1789; silver bullion-ingots or bars, and coins.ingots or bars, and coins.

2.2. Rum:Rum: for slaves & molasses. for slaves & molasses.

3.3. Pesos or “pieces of eightPesos or “pieces of eight”: instead of ”: instead of divisions of 8, Ben Franklin & Hamilton divisions of 8, Ben Franklin & Hamilton used divisions of 10 for American used divisions of 10 for American Dollars.Dollars.

Early Banking and Monetary Early Banking and Monetary StandardsStandards

Monetary StandardMonetary Standard: the role of : the role of the Federal Reserve….the Federal Reserve….

Article I, Section 10 Article I, Section 10 ““No State No State shall coin money: emit bills of credit; shall coin money: emit bills of credit; make anything but gold and silver make anything but gold and silver coin a tender in payment of debtscoin a tender in payment of debts””

The Greenback StandardThe Greenback Standard

GreenbacksGreenbacks: Legal tender; Gov’t printed : Legal tender; Gov’t printed money for the 1money for the 1stst time with no gold or silver time with no gold or silver backing: backing: fiat currencyfiat currency.. Legal tenderLegal tender: Government required : Government required

acceptance of currency.acceptance of currency. U.S. NotesU.S. Notes: 1862 $150 million. ½ money in : 1862 $150 million. ½ money in

circulation. circulation. Confederate States of America: Confederate States of America: Fiat moneyFiat money..

Greenbacks lose ValueGreenbacks lose Value

National Banking SystemNational Banking System: Privately : Privately owned banks received operating charters owned banks received operating charters from federal government.from federal government. Backed by Backed by U.S. bondsU.S. bonds: IOU’s + interest: IOU’s + interest 18651865: End of the War Between the States: End of the War Between the States

State Banks State Banks forcedforced into the national banking into the national banking system. 10% tax on all privately issued system. 10% tax on all privately issued banknotes.banknotes.

Private banking system abolished.Private banking system abolished.

Gold & Silver CertificatesGold & Silver Certificates

18631863: paper currency backed by gold : paper currency backed by gold placed into the U.S. Treasury. placed into the U.S. Treasury. Reduction of supply in 1882Reduction of supply in 1882

18781878: paper currency backed by silver on : paper currency backed by silver on reserve with the U.S. Treasury.reserve with the U.S. Treasury. 18861886: Silver Dollars in circulation: Silver Dollars in circulation

The Gold Standard

1900 Congress passes Gold Standard Act: price set at $20.67 per ounce Currency can be exchanged for gold for

the 1st time.

ADVANTAGES: 1. Money is more secure2. Restricts the government and politics3. Helps maintain value

The Gold Standard

DISADVANTAGES: 1. Restricts rapid economic growth2. Drains governments gold reserves.3. Political risk of failure if gold prices

drop.

Abandoning the Gold Standard

1933: FDR declared a national emergency

1934: Gold Reserve Act: Banks, citizens forced to turn over their gold certificates.

Government literally “CONFISCATES” gold by force. People move to: Numismatic Coins

Monetary/Financial Coup d’etat

The Inconvertible Fiat Money The Inconvertible Fiat Money StandardStandard

19341934: Government money can NOT : Government money can NOT be converted into gold.be converted into gold.

Gold CertificatesGold Certificates: $10,000 fine and : $10,000 fine and imprisonment for refusal to obey: F.D. imprisonment for refusal to obey: F.D. Roosevelt’s Executive Order 6102 Roosevelt’s Executive Order 6102

19681968: Silver certificates become : Silver certificates become worthless. worthless.

The Development of Modern The Development of Modern BankingBanking

►1. The 1. The Federal Reserve SystemFederal Reserve System: 1913: 1913► FRNFRN’’s were backed by gold from s were backed by gold from

1914- 1914- 1934. 1934. Nations Nations Central BankCentral Bank: Created by : Created by

America’s wealthy elite: Rockefeller, America’s wealthy elite: Rockefeller, Morgan, DuPont, Mellon, Woodrow WilsonMorgan, DuPont, Mellon, Woodrow Wilson

Modeled on Germany’s Modeled on Germany’s MonarchicalMonarchical Central Banking Central Banking SystemSystem

Jefferson & Jackson vetoed 1Jefferson & Jackson vetoed 1stst & 2 & 2ndnd National National Banks Banks

Jefferson’s Anti-National BankJefferson’s Anti-National Bank

Jackson’s Anti-National BankJackson’s Anti-National Bank

Bank HolidayBank Holiday

►19131913: Government creates Central : Government creates Central Banking System: Banking System: Federal Reserve ActFederal Reserve Act 19301930: 25,500 Banks existed.: 25,500 Banks existed.

►Run on the bankRun on the bank: :

19331933: FDR: : FDR: Bank HolidayBank Holiday: 10,000 banks go : 10,000 banks go bankrupt. Federal Reserve suspends Gold bankrupt. Federal Reserve suspends Gold Standard and converts dollars to Standard and converts dollars to fiat fiat currency.currency.

Government confiscates gold from individuals, Government confiscates gold from individuals, banks, business, etc…banks, business, etc…Financial Coup d'etatFinancial Coup d'etat

FDIC & 4 Banking InstitutionsFDIC & 4 Banking Institutions

► Federal Deposit Insurance CorporationFederal Deposit Insurance Corporation Glass-Steagall ActGlass-Steagall Act: 1933: : 1933:

► $250,000 per account government insurance.$250,000 per account government insurance.► Commercial BanksCommercial Banks: Power to issue checking accounts. : Power to issue checking accounts.

Demand DepositsDemand Deposits::► Savings BanksSavings Banks: For depositors only.: For depositors only.

NOW accountsNOW accounts: checking that pays interest.: checking that pays interest.► Savings & Loan AssociationsSavings & Loan Associations: Bank heavily invested into : Bank heavily invested into

mortgages. 1934: Federal Home Loan Bank Board created to mortgages. 1934: Federal Home Loan Bank Board created to regulate and supervise S&L’s. regulate and supervise S&L’s.

► Credit UnionsCredit Unions: Nonprofit service cooperative, owned by and : Nonprofit service cooperative, owned by and operated for its depositors. operated for its depositors.

Government Regulation & Government Regulation & DeregulationDeregulation

►RegulationRegulation: 1933-1979: Government : 1933-1979: Government limited interest paid on checking & limited interest paid on checking & savings accounts.savings accounts.

►DeregulationDeregulation: 1980-2007: Removed : 1980-2007: Removed interest regulations and spread interest regulations and spread NOWNOW accounts beyond accounts beyond Savings BanksSavings Banks. All . All depository institutions could borrow depository institutions could borrow from the Federal Reserve.from the Federal Reserve.

S & L Crisis: CRA; Community S & L Crisis: CRA; Community Reinvestment Act of 1977Reinvestment Act of 1977

► 19771977: Government Required Loans to : Government Required Loans to unqualified borrowers with no or poor credit unqualified borrowers with no or poor credit and limited income.and limited income. Community Reinvestment ActCommunity Reinvestment Act: :

Crisis ProblemsCrisis Problems: :

1.1. Government loan requirements: Gov’t Government loan requirements: Gov’t RegulationRegulation

2.2. High Interest Rates on low interest loans. High Interest Rates on low interest loans. Gov’t RegulationGov’t Regulation

3.3. Small capital reserves. Small capital reserves.

Financial Institutions Reform, Financial Institutions Reform, Recovery, and Enforcement Recovery, and Enforcement

ActAct►19891989: FIRREA; $300 Billion dollar FDIC : FIRREA; $300 Billion dollar FDIC

bailout to failed S&L’s cost every man, bailout to failed S&L’s cost every man, woman and child in America $1,200.00.woman and child in America $1,200.00.

►FDICFDIC: Bank takeovers: Forced sell or : Bank takeovers: Forced sell or merger done secretly to prevent merger done secretly to prevent shareholdersshareholders from having adequate from having adequate information to sell information to sell stockstock.. CreditorsCreditors: could sue in court for lost : could sue in court for lost

dividends.dividends.