CHAPTER 11 MONEY and BANKING

1. CHAPTER 11MONEY and BANKING “Money is our servant, not our master. Those who treat money as the master rather than the servant do not really understand money.” - Anonymous

2. SECTION 1THE EVOLUTION OF MONEY

3. THE HISTORY OF MONEYBARTERING • bartering – trading of items people have for the items they need or want. • barter economy – moneyless economy that relies on trade. • mutual coincidence of want – two people want exactly what the other has and are willing to trade what they have for it.

4. THE RENDEZVOUS GAME • Mountain Men must acquire all items on their Supply List. • Merchants must acquire at least 10 of each type of pelt. • Do not interrupt a barter in progress. • Do not barter with more than one person at a time. • Merchants can ONLY trade SUPPLIES for the exact PELTS.

5. HOW WAS IT? • Was it EASY or DIFFICULT to acquire the items on your supply list? • Name 1 ADVANTAGE and 1 DISADVANTAGE for the Mountain Men. • Name 1 ADVANTAGE and 1 DISADVANTAGE for the Merchants. • What would have made the Rendezvous Game easier? • Do you believe a barter economy is good or bad? • Should we use a barter economy today?

6. THE HISTORY OF MONEYFROM BARTERING TO CURRENCY • As civilizations grew, bartering became in increasingly more difficult system to use. • When trade and travel expanded beyond the local community, people sought a commodity – a commonly accepted item as payment. • Precious metals such as gold and silver eventually became a standard unit of exchange. • The Chinese were there first civilization to use paper money.

7. THE HISTORY OF MONEYCURRENCY IN THE NEW WORLD • The first settlers brought little money with them, and England forbid the Colonies from producing any currency. • Settlers used corn, tobacco, and other goods for money. • In 1690, Massachusetts became the first colony to make its own currency.

8. THE HISTORY OF MONEYMONEY IN THE COLONIES • During the American Revolution, the Continental Congress issued paper money called continentals to finance the war. • Eventually the money became worthless because there wasn’t enough gold or silver to back the money.

9. THE HISTORY OF MONEYGREENBACKS and the CIVIL WAR • The US issued paper money called greenbacks during the Civil War to pay for its debts. • However, there was not enough gold or silver to back the new money. • Another problem was banks were also issuing paper money.

10. THE HISTORY OF MONEYFEDERAL RESERVE ACT OF 1913 • In order to better control the supply of money in circulation, Congress passed the Federal Reserve Act in 1913 and established the Federal Reserve System – also known as The Fed. • The Treasury Department bought up all the paper money in circulation. • The Fed consists of 12 regional banks. • Now only Federal Reserve Banks are authorized to issue paper money, and can control the amount of money that is in circulation.

11. FEDERAL RESERVE SYSTEMREGIONAL BANKS A – Boston B – New York C – Philadelphia D – Cleveland E – Richmond F – Atlanta G – Chicago H – St. Louis I – Minneapolis J – Kansas City K – Dallas L – San Francisco

12. THE DEPARTMENT of the TREASURY • Congress has the sole power to produce money and control its value. • Congress established the Department of the Treasury in 1789, and Alexander Hamilton served as the first secretary. • 2 agencies are responsible for the manufacturing of coins (US Mint) and paper currency notes (US Bureau of Engraving and Printing).

13. THE UNITED STATES MINT • The Coinage Act of 1792 created the US Mint. • The first Mint was in Philadelphia, then the capital of the United States. • There are currently 4 branches in the US: Denver, Philadelphia, San Francisco, and West Point. (Mint Mark) • Fort Knox, although no coins are produced at this facility, is considered part of the US Mint because it houses the US’s gold and silver reserves. • Currently coins are minted in 6 different amounts.

14. THE BUREAU OF ENGRAVING & PRINTING • In 1862, Congress authorized the creation of the Bureau of Engraving and Printing. • There are currently 2 facilities that print federal reserve notes, our current paper money. • Federal reserve notes are legal tender, official money used for payment, of all debts in the US. • Currently notes are issued in 7 different amounts.

16. FUNCTIONS OF MONEY TEST QUESTION Money is any substance that serves as a medium of exchange, a measure of value, and a store of value. If it satisfies these three functions, it will be accepted and used by everyone in a society. • Medium of Exchange – Something accepted by all parties as payment for goods or services. • Measure of Value – A common denominator that can be used to express worth in terms most individuals will understand. In the US, this is expressed in dollars and cents on a price tag. • Store of Value – Allows purchasing power to be saved until needed.

17. CHARACTERISTICS OF MONEY TEST QUESTION • PORTABILITY – $ must be easily transferred from one person to another. • DURABILITY – $ must be reasonably durable so that it lasts when handled and does not deteriorate when being held as a store of value. • DIVISIBILITY – $ should be easily divisible into smaller units so that people can use only as much as needed for any transaction. • LIMITED AVAILABILITY - $ must be available, but only in limited supply.

18. SECTION 2EARLY BANKING andMONETARY STANDARDS

19. MAIN IDEAS • monetary standard – mechanism designed to keep the money supply portable, durable, divisible, and in limited supply. • According to the Constitution Congress had the power… • Coin money and regulate the value thereof, • Provide for the punishment of counterfeiting, • Make all laws necessary and proper for carrying out these powers.

20. PROBLEMS WITH PAPER • The Federal Government did not print paper money until the Civil War. Instead, private banks produced the supply of paper money. • Banks issued their own currency in different sizes, colors, and denominations. • Banks could print more money whenever they wanted. • Counterfeiting became a major problem. With so many different bank notes in circulation, counterfeiters did not even bother to copy real notes; they just made up new ones. • Each bank was supposed to have backing in the form of gold or silver for every paper note, but with so many in circulation, this was seldom the case. Thus paper money lost its value.

21. GREENBACK STANDARD • When the Civil War began, the Union needed money to finance the war. • For the first time since the Constitution was adopted, Congress decided to print paper money. • Although these notes had no gold or silver backing, they were declared legal tender – fiat currency that must be accepted in payment for debts.

22. GOLD STANDARD • In 1900, Congress passed the Gold Standard Act fixing the price of gold at $20.67/ounce. • The US was now on the gold standard – a monetary standard under which the basic currency unit is equal to and can be exchanged for a specific amount of gold. • People continued to use greenbacks, national bank notes, and gold and silver certificates. However, now these notes could be exchanged for gold at the Treasury at any time.

23. THE GOOD & BAD OF GOLD ADVANTAGES • Some people feel more secure about their money if they know it can be converted into gold. • It is supposed to prevent the government from printing too much paper currency. DISADVANTAGES • The gold stock may not grow fast enough to support a growing economy. • People may suddenly deiced to convert their currency into gold thereby draining the government’s gold reserves. • The price of gold is not fixed and can change.

24. ABANDONING THE GOLD STANDARD • The gold standard remained in force until the Depression of the 1930s when banks began to fail. • Because of uncertain times people felt safer holding gold rather than paper currency and began cashing in their dollars for gold. • The US went off the gold standard in 1934 when the government confiscated gold from private citizens.

25. INCONVERTIBLE FIAT MONEY STANDARD • Since 1934, the US has been on the Inconvertible Fiat Money Standard – where fiat money supply cannot be converted into gold or silver. • The government controls the quantity, composition, and the quality of the money supply. • Today, the Federal Reserve System has replaced all the various types of currency, and is the only agency that can issue money. • Tangible Modern Money – coins and Federal Reserve notes. • Intangible Modern Money – traveler’s checks, checking, and savings accounts.

26. SECTION 3THE DEVELOPMENT OFMODERN BANKING

27. BANKING & THE GREAT DEPRESSION • At the beginning of the Depression, no banks had insurance. • run on the bank – A rush by depositors to withdraw their funds from a bank before if failed. This made the situation even worse and caused more banks to fail. • On March 5, 1933, President Roosevelt declared a bank holiday – a brief period during which every bank in the country was required to close. • When banks failed during the Depression, depositors lost almost all of their savings. • The Glass Steagall Act created the Federal Deposit Insurance Corporation (FDIC) to insure customer deposits in the event of a bank failure. Today , FDIC insures $250,000 for one person at one bank.

28. WHY BANKS? • CHECKING A place to keep your money until you need it. • CLASSIC SAVINGS, MONEY MARKETS, & CDs A place to save your money and make money. • LOANS A place to borrow money. • CREDIT CARDS A place to use the banks’ money.