Economics 10/24/11
http://mrmilewski.com
• OBJECTIVE: Demonstration of Chapter#9 and begin
examination of money. MCSS E-2.2.4
• I. Administrative Stuff
-attendance
-distribution of test
• II. Chapter#9 Test
• III. Journal #26 pt.A
-Read “Cybernomics Spotlight” p.286-287
1.) What does the future of money look like?
2.) What is a Smart Card?
• IV. Journal #26 pt.B
-notes on money
In the beginning…
• People traded stuff for other stuff. It was
good, but it was inconvenient to carry
around a bunch of heavy stuff hoping that
the person you wanted to trade with would
trade with you.
• This was the barter economy.
A new medium of exchange
• Something accepted by all parties as
payment for goods and services
• It included: Gold, Silver, and even Salt
(these are commodities)
• For something to serve as money it MUST
have value.
Now we use…
• Fiat money – money by government
decree. It is money because the government
says it is.
Brief History of Fiat Money
• In the U.S. from Revolutionary times until
the Civil War paper currency (Fiat) was
issued by private banks.
• At first banks were honest and only printed
enough notes they could reasonably back
with gold and silver.
• Then, problems arose.
The Bank of Milewski
Printed in Wyandotte, MI
$5.00
In Butter & Guns We Trust
Problems
1.) Too many currencies in circulation
2.) Banks could print more money when ever
they wanted. Temptation was there.
3.) Counterfeiting
By the time of the Civil War
• Congress needed money to fight the war, so
the idea of greenbacks emerged.
• At first they had no backing of gold or
silver, but they were declared legal tender.
• In 1862, the Legal Tender Act was passed
and $150 million was printed.
National Banks
• Private banks that got their charter to
operate from the Federal Government, not
the state governments.
• They issued a standard national currency
backed by war bonds.
• In 1865 Congress forced the state banks to
join the federal system by placing a 10% tax
on all privately printed bank notes.
Gold and Silver Certificates
• Gold certificates – backed by gold in the
U.S. Treasury were originally designed to
settle accounts between banks and were
printed in large denominations.
• Silver certificates – paper currency backed
by silver dollars in the U.S. Treasury.
Silver Certificates - 1886
http://images.amazon.com/images/P/B00000JS61.01.LZZZZZZZ.jpg
• “(they) modeled off the
popular gold certificates.”
• In reality, they were issued to
prop up falling silver prices,
because like all commodities,
the price of silver fluctuated.
• They were popular because
people were not happy to carry
around the bulky silver dollars
being produced by the
government.
• For example: Imaging that
there were only pennies.
Imaging how inconvenient it
would be to go shopping.
Economics 10/25/11
http://mrmilewski.com
• OBJECTIVE: Examine the gold standard. MCSS E2.2.4
• I. Journal#27pt.A
-Read “Issues in Free Enterprise” p.282-283
-Answer questions (1-3) p.283
• II. Return of Chapter#9 Test
• III. Quiz#15
• IV. Journal#27pt.B
-notes on the gold standard
• V. Journal#27pt.C
-notes Econ U.S.A. episode#8 “The Banking System”
Silver Certificates - 1886
http://images.amazon.com/images/P/B00000JS61.01.LZZZZZZZ.jpg
• “(they) modeled off the
popular gold certificates.”
• In reality, they were issued to
prop up falling silver prices,
because like all commodities,
the price of silver fluctuated.
• They were popular because
people were not happy to carry
around the bulky silver dollars
being produced by the
government.
• For example: Imaging that
there were only pennies.
Imaging how inconvenient it
would be to go shopping.
The Gold Standard
http://www.stanleymeltzoff.com/History7.html
• In 1900, Congress passed the
Gold Standard Act which
fixed the price of gold at
$20.67 per ounce.
• 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 still used the same
types of currency (greenbacks,
silver certificates, etc) as they
did before, but now they could
exchange them for gold at the
Treasury.
Advantages of the Gold Standard
• People feel secure about their fiat money if
they know they can trade it in for gold.
• It is supposed to prevent the government
from printing too much paper money.
• In reality, since the chances of everyone
trading in their fiat money for gold on the
same day is slim, governments just maintain
the appearance of it.
Disadvantages of the Gold Standard
• 1.) If the amount of gold in the treasury does not
grow as fast as the economy, the money supply
can not expand and economic growth will be
restricted.
• 2.) If everybody trades their money in for gold, the
nations gold reserve will disappear.
• 3.) Since the price of gold changes dramatically
over time, any government that tries to fix the
price of gold has huge market pressures working
against it.
• 4.) Risk of Political Failure
Political Failure
http://www.cia.gov/cia/publications/factbook/flags/sz-flag.html
• Case Study: Switzerland
• In 1999, when the Swiss
abandon the gold standard,
the price they had fixed gold
at was about $95 per ounce.
• Since, gold was in reality
$280 per ounce in early
1999, nobody was willing to
sell the Swiss gold for $185
less than they could sell it to
anybody else.
• Additionally, the Swiss
were also not willing to sell
their gold for $95 per ounce
either.
Political Failure
• Case Study: The United States
• When banks began to fail in the early 1930’s,
people began to cash in their U.S. paper currency
for gold. So did foreign countries that had U.S.
currency.
• Step#1: With the reality of the U.S. having no
gold, the government quit redeeming paper
currency for gold.
• Step#2: On August 28, 1933, FDR declared a
national emergency which required all citizens
with more than $100 of gold or gold certificates to
file a disclosure form with the government.
The U.S. & Gold
• Step#3: In 1934, the U.S. government fixed the
price of gold at $35 per ounce.
• Step#4: The U.S. then confiscated all the privately
owned gold and the U.S. quit exchanging fiat
currency for gold.
• This in effect took the U.S. off the gold standard.
• The U.S. continued to fix the price of gold at $35
per ounce until 1971.
Inconvertible Fiat Money Standard
• Inconvertible Fiat Money Standard – a
monetary standard under which the fiat money
cannot be converted to gold or silver.
• Now, the government manages the money supply
under the Federal Reserve System.
Economics 10/26/11
http://mrmilewski.com
• OBJECTIVE: Examine the U.S. Mint. MCSS E-2.2.4
• I. Journal#28pt.A
-Read “Profiles in Economics” p.291
-Answer question #1 p.291
• II. Journal#28pt.B
-notes on Gresham’s Law
• III. Modern Marvels: The U.S. Mint
-Answer questions while watching the film
Gresham’s Law
• Thomas Gresham, was a financial advisor to
England’s Queen Elizabeth I.
• He said that bad money tends to drive good money
out of circulation.
• Good money – currency where the metallic value
of the coin is higher than the face value
• Bad money - currency where the metallic value
of the coin is lower than the face value
• This occurred in 1965, when the U.S. took the
silver out of the coins it minted. Those with
copper and nickel bases stayed in circulation.
Those with silver were hoarded.
Economics 10/27/11
http://mrmilewski.com
• OBJECTIVE: Examine the Federal Reserve Bank.
MCSS E-2.2.4
• I. Journal#29pt.A
-Read “The Global Economy” p.297
-Answer questions (1-2) p.297
• II. Journal#29pt.B
-notes on the Fed
• III. Journal#29 pt.C
-notes Econ U.S.A. episode#8 “The Banking System”
• NOTICE: Journals 21-30 Due Tomorrow!
The Federal Reserve - 1913
• The United States’ 1st true central bank
• All federal banks were required to join and all
state banks were eligible to be members.
• All members own shares of stock in the system
making the Fed privately owned, but it is publicly
controlled.
• The President appoints the Fed’s Board of
Governors and the Chairman. All appointments
are approved by Congress (checks & balances)
The Great Depression 
• Despite reforms like the Federal Reserve,
many banks were not sound.
• Deposits were not insured and runs were
common. Millions of people lost all of their
money. (Including my Great-Grandfather)
• March 5, 1933 – Bank Holiday. FDR
ordered all banks to close until legislation
could be passed to make banks stronger.
FDIC
• The Banking Act of 1933 – (The Glass-Steagall
Act)
• Main point of the Act was the FDIC – Federal
Deposit Insurance Corporation.
• The FDIC insured depositors up to $2500. It is
now $100,000 ($250,000 October 2008).
• Today the FDIC aggressively pursues ways to
protect consumers from fraudulent banks.
Both symbols from:
http://www.fdic.gov/regulations/resources/signage/index.html
Other Depository Institutions
• Commercial Banks – for businesses and had the
power to issue checking accounts
• Thrift Institutions – accepted deposits of small
investors but didn’t have the power to issue
checking accounts until the mid-1970s
• Mutual Savings Bank – owned and operated only
for the benefit of their depositors.
• Page 303
S&L and Credit Unions
• Savings and Loans – a depository
institution that invests a majority of their
funds in mortgages. They were regulated
by the Federal Home Loan Bank Board
• Credit Unions – non-profit service that is
owned and operated for the benefit of it’s
members.
Economics 10/28/11
http://mrmilewski.com
• OBJECTIVE: Examine the Role of the Fed. MCSS E2.2.4
• I. Journal#30pt.A
-Film: Federal Reserve: The Eye of the Storm
-Answer questions (1-8) on the film
• II. Quiz#16
• III. Journal#30pt.B
-notes on non-bank financial institutions
• NOTICE: Journals 21-30 Due!
The Federal Reserve: The Eye of the Storm
• 1.) What do people want most in a bank?
• 2.) What do banks do with the money people
deposit in them?
• 3.) What happens when a bank has more money
than it needs?
• 4.) What emergency economic action did the Fed
take in 1992?
• 5.) What is Fed-Wire?
• 6.) What was a run on a bank?
• 7.) How do banks fail today?
• 8.) In what ways does the Fed ensure that banks
don’t fail today?
Nonbank financial institutions
• Another important group of financial
intermediaries includes:
• nonbank financial institutions–
nondepository institutions that channel
savings to borrowers.
• Finance companies, life insurance
companies, pension funds, and real estate
investment trusts are examples of nonbank
financial institutions.