What is Money? Money (3) Characteristics Medium of Exchange - money is accepted as payment for goods and services Measure of Value - expresses worth in terms that most individuals understand Store of Value - can possess money for a long period of time Money in Early Societies Commodity Money - money with alternative use: commodity (i.e. tobacco, tea) Fiat Money - money by government decree (i.e. coins and currency) Money in Colonial America Commodity Money - trade for goods (i.e. gunpowder for corn or hemp) Wampum - form of Indian currency using shells with value Paper Currency - fiat money produced by each state Specie - money in coins, usually made of silver and gold Origins of the Dollar Pesos - Spanish origin, made money of silver and placed value on coins Talers - Austrian descent, sounds like dollars Monetary Unit - standard unit of currency in a country’s money system 4 Characteristics of Money (4) Portability - easily transferred from one place to the next Durability - can it be kept in circulation for a long period of time Divisibility - can people easily divide it into smaller sections or portions Stability - it must hold worth by being available, but always in limited supply Review: What are the characteristics and functions of money?
Monetary Standard - the mechanism designed to keep supply 1) portable, 2) durable, 3) divisible, and s 4) table in value Privately Issued Bank Notes Growth of State Banking - State Bank - a bank that receives its charter to operate from a state government Abuses in Banking - Wildcat Banks - banks that overprinted their currencies and were difficult to get to Problems with Currency - - each bank gave out different currency - temptation to prints notes existed due to lack of control (no backing) - forgery The Greenback Standard Greenback - legal tender - fiat currency that must be accepted in payment of debts greenbacks - name for the new currency issued during the civil war United States Notes - new currency with no gold or silver backing National Currency - National Banking System (NBS) - bureau provided inspection of private banks national banks - banks that received their charter from the national government Gold Certificates - paper currency backed by gold on deposit at the US Treasury Silver Certificates - paper currency backed by silver on deposit at the US Treasury Treasury Coin Notes - paper currency backed by silver and gold on deposit at the US Treasury Gold Standard Gold Standard - a monetary standard under which the basic unit of currency is equivalent to, and can be exchanged for, a set amount of gold Advantages - 1. people feel more secure about their money because they can always convert it 2. prevents government from printing too much paper money Disadvantages - 1. a growing economy needs more money which means more gold necessary to back it all 2. everyone might decide to convert their money to gold depleting the supply Abandoning the Gold Standard - in affect until the Depression during the 30’s when the government took all gold and issued government money in exchange for the gold The Inconvertible Fiat Money Standard inconvertible fiat money standard - money that can not be exchanged for anything but is legal tender because the government has said so Review: Why does a country use a monetary standard?
The National Banking System National Bank Requirements: 1. Must use National or N.A. in their titles 2. Pass stiff inspections by the Comptroller of the Currency 3. must purchase government bonds Dual Banking System - a system that allows banks to obtain charters from either the state of the federal government The Federal Reserve System - nation’s first central bank or first bank that could be used in times of need Other Depository Institutions 1. Mutual Savings Bank - depositor-owned operated for benefit of depositors 2. Saving and Loans Associations - institution invests funds — home mortgages 3. Credit Unions - operated solely by and for the benefit of the members 4. Saving Bank - economic institution that sold stock in order to gain more capital and are different form MSBs because they are not depositor -owned Review: Where could money be deposited after 1863?
A Decade of Deregulation - removal or relaxation of government restrictions on business Deregulation Legislation 1. Regulation Q - sets maximum interest rates on savings accounts 2. NOW (Negotiable Order of Withdrawal) can be offered by any institution 3. depository institutions borrow from the Federal Reserve System when needed The Saving and Loans Crisis Causes: 1. too much deregulation 2. high interest rates 3. inadequate capital 4. fraud Reforming the Thrift Industry Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989: 1. got rid of Savings and Loans 2. abolished the Federal Home Loan Bank Board (FHLBB) 3. Changed the Federal Deposit Insurance 4. disposed of failed thrifts 5. allowed sound institutions to continue Review: How did deregulation affect financial institutions?