EconomicsMs. HarrisChapters 10 and 16 Money, History of American Banking, Banking Today, The Federal Reserve System & Functions, and Monetary Policy
Chapter 10 - Key Terms/Questions, Section 1 – Money – pp 243 - 248 • Money – anything that serves as • A medium of exchange, • A unit of account, and • A store of value • Medium of exchange – anything that is used to determine value during the exchange of goods/services for another
Unit of Account • A means for comparing the values of goods/services 2009 Cadillac Escalade 2009 Kia Rio Hybrid - $73,135 $11,495
Store of Value • Something that keeps its value, even if it is stored, rather than used
Currency • Paper bills and coins used as money
Commodity Money • Objects that have value in themselves and that are also used as money
Representative Money • Objects that have value because the holder can exchange them for something else of value
Fiat Money • A fiat is an order or decree • Fiat money is money that has value because a government has decreed it is an acceptable means to pay debts.
Why does the United States’ currency have value? • The face value of US currency is decreed by the federal government
What are the disadvantages of commodity money? • Disadvantages vary depending on the commodity, but often include lack of portability, durability, or divisibility
What is a Continental and why did Continentals become worthless? • Representative money (bills) issued by Congress to finance the war against England. • The federal government could not tax the people and the reserve held very little gold or silver. People came to believe that they could not exchange their Continentals for gold and silver coins
The History of American Banking - pp 250 – 256 • Key Terms/Questions, Ch 10,Sec. 2
Bank • An institution for receiving, keeping, and lending money
National Bank • A bank that is chartered, or licensed, by the national government
Bank Run • Widespread panic in which great numbers of people try to redeem their paper money
greenback • Paper currency issued during the Civil War
Gold Standard • A monetary system of which paper money and coins are equal to the value of a certain amount of gold
Gold Standard - notes • The gold standard was replaced by fiat currency, whereby the government or central bank is ultimately responsible for the value of the money. • Until 1971, the U.S. dollar was fixed to the price of gold. Many economists feel that reverting to the gold standard would quell inflation because of the fixed value feature.
Federal Reserve System • The nation’s central banking system
Central Bank • A bank that can lend to other banks in times of need
Member Bank • A bank that belongs to the Federal Reserve System
Federal Reserve Note • The national currency used in the United States today
Great Depression • The severe economic decline that marked 1929 as its beginning and lasted more than ten years.
Federal Deposit Insurance Corporation <http://www.fdic.gov/> • The FDIC insures bank deposits in order to ease the danger of depositors’ losing money, as happened after the stock market collapse in 1929 • Deposits at FDIC-insured institutions are now insured up to at least $250,000 per depositor through December 31, 2013.
What benefits came from adoption of the gold standard in the 1870s? • It set a definite value for the dollar -- one ounce of gold = $20 • Government was limited to printing notes only up to the value of the limited supply of gold • The public gained confidence in the banking system
Analyze the different views of Alexander Hamilton and Thomas Jefferson concerning the creation of a national bank • Hamilton (Federalist) believed the country needed a strong central government to establish economic and social order • Thomas Jefferson (Antifederalist) supported a decentralized banking system. The States would establish and regulate all banks within their borders
List the three powers endowed upon the federal government by the National Banking acts of 1863 and 1864. • Power to charter banks • Power to require banks to hold adequate gold and silver reserves to cover their bank notes • Power to issue a single national currency
Bank Runs and Panics • State-chartered banks often did not keep enough gold and silver to back the paper money that they issued
Wildcat Banks • Banks located on the edges of settled areas. • Wildcat banks had a high rate of failure
Fraud • A few banks engaged in out-and-out fraud (or cheating). They issued bank notes, collected gold and silver money from customers who bought the notes, and then disappeared. • Anyone who had bought the notes lost their money.
Many different currencies • State-chartered banks – as well as cities, private banks, railroads, stores, churches, and individuals – were allowed to issue currency. • A dollar issued by the “City of Atlanta” may not be worth the same as a dollar issued by “City of New York.” Many notes were counterfeit or worthless imitations of real notes.
Ch 10, Section 3 – Banking Today – pp 258 – 264 • money supply • All of the money available in the United States economy • Liquidity • The ability to be used as, or directly converted to cash
Demand Deposit • The money in checking accounts
Money Market Mutual fund • A fund that pools money from small savers to purchase short-term government and corporate securities .
Fractional Reserve Banking • A banking system that keeps only a fraction of funds on hand and lends out the remainder
default • Failure to pay back a loan
mortgage • A specific type of loan that is used to buy real estate
Credit card • A card entitling its holder to buy goods/services based on the holder’s promise to pay for these goods and services
interest • The price paid for the use of borrowed money
Principal • The amount of money borrowed
Debit Card • A card used to withdraw money from an account
creditor • Person or institution to whom money is owed
What is the difference between M1 and M2 money? Give an example of each. • M1 includes all money that is immediately accessible for people to use. Examples: cash, money in checking accounts, and traveler’s checks
What is the difference between M1 and M2 money? Give an example of each. - continued • M2 includes all of M1 plus all assets that are easily transferred into M1. Examples: savings account deposits, certificates of deposit, and money market mutual funds.
How is a debit card different from a credit card? • A debit card withdraws money directly from a checking or savings account • When a credit card is used for a purchase, it functions as a loan that needs to be paid
Describe the three of the services that banks provide. • Storing money safely • Lending money • Offering mortgages • Issuing credit cards