Topic 6: Money, Banking, and Financial Markets

Topic 6: Money, Banking, and Financial Markets

By Deneva Contreras

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Cash or Barter?

Suppose you saw a sign on the street that said “For Sale or Barter—Six Adorable Kittens. Make Your Best Offer!”

1. How much cash would you be willing to pay for a pet of your choice (cat, dog etc)?

2. What goods or services would you be willing to trade for one?

3. Would you rather pay cash or barter? Why?​

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The Role of Money

Money is anything that serves as a medium of exchange, a unit of account and a store of value.

• A medium of exchange is anything used to measure value during the exchange of goods and services.

• As a unit of account money is a way to compare the value of goods and services.

Money can also be used as a store of value: this means money keeps its value if you hold on to it

Subject | Subject

The coins and paper bills used as money in a society are called currency.

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Currency must have six characteristics:

1. durability: be able to withstand a lot of use

2. portability: be easily carried and transferred

3. divisibility: easily divided into smaller units

4. uniformity: people must be able to count and measure money accurately

5. scarcity: it must have a controlled supply

6. acceptability: the ability to be accepted by all people in society

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Different types of money are valuable for different reasons

Commodity money is made up of objects of value, such as precious stones, that are used as money.

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Representative money represents an object of value for which it can be exchanged.

• For example, paper receipts for gold or silver were an early form of representative money.

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The United States today uses fiat money.

• This type of money has value because the government states that it is an acceptable means to pay debts.

Open Ended

Compare and Contrast What is one advantage of using currency instead of bartering?

What is the Gold Standard?

At one point, all of the paper money and coins in circulation in the United States had the value of certain amounts of gold.

• ​Because this value was set, people could redeem their money for gold, which the government held in large quantities.

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This was known as the gold standard​.

• In the late twentieth century, the United States government took the country off the gold standard.

• Now our money is not backed by gold, but only by the government’s statement of its value.

Open Ended

Why do you think the government might go off the gold standard?

Changes in American Banking

A bank is an institution for receiving, keeping, and lending money.

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In 1791, Congress set up the Bank of the United States.

• It lent money to the federal government and issued bank notes, a form of representative money backed by gold and silver.

• The Bank brought stability to American banking.

• However, many people opposed it.

• They worried that a centralized bank would respond only to the needs of wealthy individuals and large businesses.

• It ceased to exist in 1811, when its charter, or license, expired.

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A second central bank had the same fate, expiring in 1836.

Free Banking Era

The period between 1837 and 1863= 26 years.

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This period was dominated by state-chartered banks (legal document that authorizes the bank to conduct business.

• Many of these banks did not have enough gold and silver to back their paper money.

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During the Civil War, Congress enacted important bank reforms.

• These laws gave the federal government the power to charter banks.

• Banks were now required to hold adequate gold and silver reserves.

• The government also established a uniform national currency.

Open Ended

Why do you think the decision was made that money would only be issued by the federal government?

Federal Reserve System & FDIC​

In 1913, Congress established the Federal Reserve System: "The Fed"

• ​It served as the nation's first true central bank, or bank that can lend to other banks in times of need.

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In the 1930s, the failure of banks was one reason for the severe economic decline called the Great Depression

• ​ banks loaned large sums of money to many high-risk businesses. Many of these businesses were unable to pay back their loans.

• 1935: ​Led to new laws regulating banks.

  • ​One established the Federal Deposit Insurance Corporation (FDIC), which insures customer deposits if a bank fails.

Take a look at the top center of this dollar bill.

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It says “Federal Reserve Note” because this bill, like all other United States paper money, is issued by one of the twelve Federal Reserve Banks that are part of the Federal Reserve System.

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The U.S. Treasury issues coins. In the past, state governments and other banks were allowed to issue their own currency.

Examining a Dollar Bill

2008 Banking Crisis

In 2008, after banks had made too many high risk loans to people who wanted to buy homes, banks faced a crisis.

• ​Many people could not repay these loans, which led to a large number of foreclosures.

  • ​A foreclosure is when a bank takes a home away from its owner.

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The United States economy suffered as banks began lending less money, the economy slowed down, and many people lost their jobs.

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"This bonus is performance based. You lost lots of money which resulted in a big payout. Way to go"

This cartoonist expresses the idea that the bailout rewarded people who had made bad business decisions.

Analyze Political Cartoons Why might the policy make people angry?

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Bank Services

Think about the banks in your community. They provide many services to individuals and businesses.

Make a list of bank services that you might use. What are some benefits of those services?

The Functions of Modern Banks

The money supply is all the money available in the United States economy.

• Divided into categories called Ml and M2.

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​Ml is money that people can easily use to pay for goods and services, such as currency and deposits in checking accounts.

• These are assets that have liquidity, which means they can be used as cash or easily turned into cash.

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M2 consists of all the assets in Ml plus several other assets which have less liquidity, such as savings accounts and money market mutual funds.

• These are funds that pool money from small investors to purchase government or corporate bonds.

The basic service banks provide is a safe way for people to store and save money.

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Banks offer savings accounts, checking accounts, money market accounts and certificates of deposit.

• ​Most of these accounts pay interest, the price paid for the use of borrowed money.

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Banks also provide loans, mortgages, and credit cards.

• ​Many of the loans that banks offer have positive aspects, such as convenience, but also have negative aspects, such as the fact that the interest on loans and credit cards can become costly over time.

• A mortgage is a loan used for real estate.

  • When banks lend money, they make a profit by charging interest.

  • The borrower also has to repay the principal, the amount borrowed.

• Credit cards allow consumers to buy goods and services based on a promise to pay for them at a later date.

A lot of this is computerized now:

atms, online banking services, direct deposit etc​

Open Ended

Summarize Why do people use banks?