Chapter 12: The Financial System and the International Economy Summary This chapter traces the key developments of the U.S. financial system and U.S. participation in international transactions during the antebellum period. Rapid growth occurred even though the period is characterized by tremendous changes in banking and financial intermediation. Key Terms and Concepts Balance of payments Banks Bimettalism Business cycle Currency Double liability Fiat money Forstall System Fractional reserve banking Free banking Free rider problem Gold standard Inflation Interdependence Intermediation Leverage Money Paper Money Safety Fund Suffolk System Reserve ratio Unit banking Teaching Tips 1. Refresh students’ memories on the four key roles of money as defined by the text (medium of exchange, store of value, unit of account, acceptable method of deferred payment). Explain that a stable money system supports operation on the basis of comparative advantage, and thus generates wealth. 2. Define financial intermediation. Explain to students why it is key in impersonally bringing savers and borrowers together in order to support investment, trade and economic progress. 3. Layout the history behind the First and Second Banks of the U.S. Explain that both failed to get re-chartered a) out of concern that the competition between these centralized federal banks and private and state banks and b) over fear that national banks would advance special interests of a select group at the expense of the majority. Ask students to investigate the controversies. If time permits, take the students to the Federal Reserve System’s website and ask them to determine what the current functions of the Fed are and how they address some of the key concerns over the First and Second Banks of the U.S. 4. Explain the concept of fractional banking and discuss how adjustments in the reserve ratio can be used to expand and contract the money supply. Use the equation of exchange (M*V = P*Q) to discuss how changes in the money supply (M) can lead to changes in prices (P) and output (Q). 5. Discuss how the gold standard imposes fiscal discipline on a central bank and its government. 6. Define balance of payments. Explain that the U.S. gives other countries U.S. dollars when it imports to other countries. It also helps other countries acquire income and gain wealth. All these activities boost the demand for U.S. exports. Websites and Additional Resources Federal Reserve Bank of Kansas City. FED101: The Federal Reserve Today. 2009. Retrieved December 10, 2009 from: http://www.federalreserveeducation.org/fed101/index.htm The FED101 website provides a range of teaching tools that may be of interest to instructors of American economic history courses that draw students with a minimal background in economics. Federal Reserve Board. “Board of Governors.” The Structure of the Federal Reserve System. 2003. Federal Reserve System of the U.S. Retrieved December 10, 2009 from: http://www.federalreserve.gov/pubs/frseries/frseri.htm. o This website provides general information on the structure of the Fed, includes information on credit, and discusses important developments in the mortgage industry.