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Economics - Chapter 10 - Money and Banking

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Kevin Krizan

on 3 April 2018

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Transcript of Economics - Chapter 10 - Money and Banking

Federal Reserve System
Federal Reserve Act of 1913
The Federal Reserve Act of 1913 established the Federal Reserve System as the central banking authority of the United States.
Early American Banking
Each bank issued its own individual, "banknotes."
With America’s population growing is size, mobility, and economic activity, this multiplicity of banks and kinds of money soon grew chaotic.
The First Bank (1791-1811) and Second Bank (1816-1836) of the United States were the official representatives of the U.S. Treasury,which served as the only sources that issued and backed official U.S. money. All other banks were operated under state charter, or by private parties.
The Act setup operational standards for the banks, established minimum amounts of capital to be held by the banks, and defined how the banks were to make and administer loans.
In addition, the Act imposed a 10 percent tax on state banknotes, thus effectively eliminating non-federal currency from circulation.
Conducts America’s monetary policy.
Supervises and regulates banks and protects consumers’ credit rights.
Maintains the stability of America’s financial system.
Provides financial services to the U.S. Government, the public, financial institutions, and foreign financial institutions.
Small, medium, and large banks operated in a sort of pyramid system, whereby smaller banks removed deposits from larger ones when heavy withdrawals depleted their reserves.
When many depositors withdrew funds simultaneously at many levels, the system could break down.
Banks had to cut back sharply on lending, which reduced the money supply and decreased business activity throughout the economy.
The passing of the Federal Reserve Act was largely a response to prior financial panics and bank runs, the most severe of which being the Panic of 1907.
central banking system of the United States
In early 1781, the Articles of Confederation & Perpetual Union were ratified so that Congress had the power to issue bills of credit. It passed an ordinance later that year to incorporate a privately subscribed national bank following in the footsteps of the Bank of England.
Money and Banking
Money is anything that is freely accepted in exchange for goods and services.
medium of exchange
Money supply is all money in circulation in an economy.
Fractional Reserve Banking
A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Most countries operate under this type of system.
How do banks expand the supply of money?
Three functions of money
Means through which goods and
services can be exchanged.
Canadian Money?
The Money Supply
The M's
Properties of Money
Physical Properties
Economic Properties
Stability of Value
A little info on coins
Must be uniform (features that make it recognizable - such as size and look)
Must be scarce (Shells of the clam
would not work very well)
Types of Money
Commodity Money:
An item that has value on its own (gold, silver, salt in ancient Rome, Tobacco in colonial times)
Representative Money:
Paper money that can be exchanged for something else of value. Money has no value itself, but can be redeemed for gold or silver.
Fiat Money:
Only has value because the government says it does. People have faith that the money is worth value
US dollar is fiat money since 1971 (stopped linking to gold)
Money in the United States
: paper money and coins
Demand deposits
: checking accounts
Near money
: savings accounts, short-term CDs, money market accounts
Origins of Banking
Italian merchants were the first to use banking practices. The word bank comes
from banco (benches).
Alexander Hamilton
Was instrumental in forming the First Bank of the United States - chartered in 1791
First Treasury Secretary; War hero; Developed our banking and credit system; created Customs Department, Coast Guard, West Point, Saturday Evening Post (oldest newspaper); Wrote most of the Federalist papers which was a guide for the Constitution; Killed in a duel with the Vice President
Many banking struggles continued throughout the our history until the US created the Federal Reserve
Many states created their own banks and currency until the National Banking Act (1863)
In 1900 the government adopted the gold standard ($1 equal to a set amount of gold)
20th Century Developments
Franklin Roosevelt's New Deal
regulated interest rates
Federal Deposit Insurance Corporation (FDIC) - insurance against bank failure
Financial Institutions
Third type of financial institution
- Savings and Loan Associations (S & Ls)
Charter by states for people to pool their money and have a source for financing homes
Modern Banking
Banking has changed dramatically in the last two decades and will continue to change with new technologies
Super large banks (Bank mergers)
Automatic Teller Machines (ATMs)-electronic devices that provide many banking services
Debit cards - money comes directly from checking accounts
Stored value cards - prepaid cards (gift cards, transit fare cards)
Online banking
Why Bank?
Store money (safe)
Earn money (interest)
Borrow money (home, automobile, personal loans
Wider range of loans and savings accounts
Can be used by businesses
Old National
Fifth Third
United Fidelity Bank
Full transcript