UNIT 4: MONEY, BANKING, AND
FINANCE
Ch. 10: Money and Banking
Ch. 11: Financial Markets
CHAPTER 10.1

Bell Work: Grab workbook sheets
Complete: Unit 1 Warm-up (88 A-C) (105-6 A-E)
 Complete Ch. 10 Warm-up (89 A-C)

“How does money serve the needs of our society?”
 Objectives

3 Uses of Money
 6 Characteristics of Money
 Sources of money’s values


Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13369833-5/Flash/Ch10/Econ_OnlineLectureNotes_ch10_s1.swf
CH. 10 INTRODUCTION

How does money serve
the needs of our
society?
Provides means for
comparing values of
goods/services
 Serves as a store of
value
 W/out wouldn’t be able
to get wants/needs

3 USES OF MONEY

Money is anything that can serve as……
Medium of Exchange
 Unit of Account
 Store of Value

BARTERING
W/out money, we would acquire goods/services
through barter
 Still used in many parts of world

Only in more traditional economies
 Too difficult to est. value of bartered goods in a
specialized economy


Money makes exchange EASIER
Provides means for comparing value of goods/services
 Usually Money can serve as good store of value
except in times of inflation

CURRENCY
Coins and paper money
 Past forms of currency

Cattle, salt, precious stones, fur, dried fish
 Would not work well today b/c they lack at least one
of six characteristics of Money


6 Characteristics of Money






Durability
Portability
Divisibility
Uniformity
Limited Supply
Acceptability
DURABILITY/PORTABILITY

Durability


Money must be able to
withstand physical
wear/tear
Portability


Needs to be easily
carried
Paper/coins are
small/light
DIVISIBILITY/UNIFORMITY

Divisibility


Must be easily divided
into small
denominations
Uniformity

Must be able to be
counted/measured
correctly
LIMITED SUPPLY/ACCEPTABILITY

Limited Supply
Would lose value if
unlimited
 Fed. Reserve
regulated supply of
money in circulation


Acceptability

Must be accepted by
everyone as exchange
for goods/services
SOURCES OF VALUE
Commodity Money: Objects of value to society
 Representative Money: Rep. ownership of value
 Fiat Money: Govt. says it is acceptable
 Identify this source


http://www.youtube.com/watch?v=7GSXbgfKFWg
LESSON CLOSING

Frontline Video: The Warning


Complete Workbook


http://www.pbs.org/wgbh/pages/frontline/warning/vie
w/?utm_campaign=viewpage&utm_medium=grid&ut
m_source=grid
Pgs. 90,15
HW/Bell Work for tomorrow

Complete S.1 Quiz
10.2 BELL WORK
Books/Folders
Complete S.1 Quiz
10.2
“How has the American banking system changed
to meet new challenges?”
 Objectives

Shifts bt. Centralized/decentralized banking before
Civil War
 How govt. reforms stabilized banking system in
1800s
 Developments in early 1900s banking
 Causes of 2 recent banking crises


Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/products/013-3698335/Flash/Ch10/Econ_OnlineLectureNotes_ch10_s2.swf
INTRODUCTION

How has the American banking system changed
to meet new challenges?
Early people distrusted banks
 Banks have worked a lot to increase American Trust
 American Banking has developed to meet needs of
growing and changing population

BANKING BEFORE CIVIL WAR
Early banks were informal businesses that
merchants managed in addition to their regular
trade
 Post Revolution, nations leaders had idea


Est. a safe, stable banking system


Led to tireless disagreement on how to organize nat’l
banking system
2 Views
Federalists: Wanted centralized banking system
 National bank
 Anti-federalists: Opposed plan
 Decentralized banking; owned/regulated by each state

1ST BANK OF US

Federalists won the 1st debate in 1791
Est. Bank of U.S. w/20 year charter for operations
 Anti-federalists argued bank unconstitutional and
was set up only for wealthy


Bank functioned well until 1811 when charter
ran out
State banks then took over
 Led to chaos/confusion

Banks issued notes w/out specie to back it up
 Banks issued different currencies

2ND BANK OF U.S.
To eliminate chaos,
2nd bank chartered in
1816
 Stability greatly
restored


Many still feared
Banks powers
1832, Congress tried to
renew charter
 Andrew Jackson vetoed
renewal
 Led to Free Banking
Era

FREE BANKING ERA
State chartered banks expanded from 1837-63
 Large number led to many problems


Bank runs/panics
Often not enough gold/silver to back notes issued
 Led to bank runs: people trying to collect all at same time


Wildcat banks (poorly financed/high rate of failure)


Fraud


Located in remote places where only “wildcats” lived
New banks would issue notes for gold/silver then run off
Different currencies

Differing currencies from states/cities led to confusion and
more fraudulent imitations
STABILITY OF LATER 1800S

Banking Acts of 1863 and 1864

Gave federal govt. power to:
Charter Banks
 Require banks to hold adequate amount of gold/silver
reserves
 Issue a national currency


1870s

Nation adopted gold standard
Set a definite value for the dollar
 1 oz. gold =$20
 Gave public a stable currency and gained public confidence

BANKING OF EARLY 1900S
Problems persisted despite stabilizing efforts
 Led to Federal Reserve Act of 1913


Est. Federal Reserve System; reorganizing bank
system
12 regional Reserve Banks
 All nat’l charted banks required to be members
 Federal reserve board
 People to supervise banks; appt. by president
 Short-Term Loans
 Each regional reserve allowed member banks to borrow to
meet short term demands; helped prevent failures in face
of panics
 Federal Reserve notes
 Created currency used today, allowed them to
increase/decrease supply as needed

BANKING AND GREAT DEPRESSION
Fed. Was unable to
prevent Great
Depression
 FDR acted to restore
system in 1930s

Est. FDIC to insure
customer deposits if
bank failed
 Changed currency to
Fiat money so Fed
could better control
the supply

TWO CRISES FOR BANKING
Savings/Loan

1970s-1980s Many
industries Deregulated
Led to crises for S/L;
wasn’t prepared for
competitions
 High interest rates and
risky loans added on
 1989 congress passed
legislation to abolish
independence of S/L
industry
Sub-Prime Mortgage





Mortgage companies and
banks lent $ to people who
couldn’t afford to pay them
off
Interest rates increased
and led to foreclosures
Ripple effect hit banks and
creditors hard and led to
recession
Led to 2008 Bailout of
banks, auto-makers, and
financial firms
LESSON CLOSING

Workbook pages

91 and 23
S2 Quiz for tomorrow
 Finish “Warning Video”

10.3 BELL WORK
•Watch
2 Online Sources
• Visual Glossary
• Action Graph
•Finish
Sect. 2 Quiz
10.3
“What banking services to financial institutions
provide?”
 Objectives

How money supply in U.S. is measured
 Functions of Financial institutions
 Different types of Financial Institutions
 Changes brought by electronic banking


Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13369833-5/Flash/Ch10/Econ_OnlineLectureNotes_ch10_s3.swf
INTRODUCTION

What banking services do financial institutions
provide?

Financial Institutions
Provide electronic services
 Issue credit cards
 Make loans to businesses
 Provide mortgages to prospective home buyers
 Manage ATM machines

MEASURING MONEY SUPPLY
To keep track of different types economists divide
money into categories
 M1 represents money that people can gain access to
easily. Have liquidity (converted to cash easily)

Currency held by public
 Deposits in checking accounts
 Traveler’s checks


M2: all assets in M1 plus several additional assets.
Cannot be converted to cash as easily

Called Near Money; Savings, mutual funds, CDs
FUNCTIONS OF FINANCIAL INSTITUTIONS
Provide wide range of services
 Storing money



Provide safe place to store money
Saving Money

Offer people ways to save money though:
Savings accounts
 Checking accounts
 Money market accounts, allow people to save and write
limited amount of checks
 CDs, offer guaranteed rate of interest but cannot be
removed for period of time

FUNCTIONS OF FINANCIAL INSTITUTIONS

Loans
Lend money to people and charge interest on loans
 Loans help consumers:



Many banks loan money to other financial
institutions/individuals


Buy homes, pay for college, start/grow businesses
Called Fractional Reserve Banking
Mortgages/Credit Cards
Specific type of loan to buy real estate
 Banks also issue credit cards


Owners can buy goods/services w/promise to repay
 Often have high interest rate
SIMPLE AND COMPOUND INTEREST
Interest is price paid for use of borrowed money
 Principal is amount borrowed
 Simple Interest



Compound interest


Amount of interest paid only on the principal
Amount paid on both principal and gained interest
Interest is how banks make money!

They take in more than they pay out
TYPES OF FINANCIAL INSTITUTIONS
Commercial
Banks
Savings/Loan
Assoc.
• Offer checking accounts, accepts deposits,
and makes loans
• Allows people to save/borrow enough for
own homes
Savings Banks
• Owned by depositors who make smaller
deposits than commercial bank would take
Credit Unions
• Cooperative lending assoc.’s est. for
particular groups
Finance
Companies
• Make installment loans to consumers
ELECTRONIC BANKING
Has Increased with the increasing importance of computers
ATMS
•ATMs allow customers to deposit/withdraw cash,
and obtain information
Debit Cards
•Debit cards can be used at an ATM or in a store to
purchase goods. Require PIN for security
Home Banking
•More people using internet to check balances,
transfer money, automatically deposit checks, and
pay bills
ACHs
•Automated clearing houses allow consumers to pay
bills w/out writing checks
Store-value
Cards
•Carry money on them to be used in that store up on
a phone (w/minutes)
LESSON CLOSING

Finish Online Videos
How the Economy Works
 Case Study

Finish Any of Open workbook
 Test Friday


Review/Work Day tomorrow