CHAPTER
11
MONEY
AND BANKING
WHAT IS MONEY?
-
MONEY IS A SOCIAL
INSTITUTION THAT INCREASES WEALTH BY LOWERING THE COSTS
OF EXCHANGE
-
THE EVOLUTION OF MONEY
-
INITIALLY TRADE WAS CARRIED ON VIA BARTER
-
DISADVANTAGE OF BARTER
o
DOUBLE
COINCIDENCE OF WANTS
§
THE DIFFICULTY OF FINDING 2 TRADING PARTNERS WHO
WANTED WHAT THE OTHER GUY HAD TO OFFER
o
A MONEYED ECONOMY REPLACED BARTER BECAUSE IT WAS
MORE CONVENIENT
§
LOWERS THE COSTS OF EXCHANGE
-
GENERAL CHARACTERISTICS OF MONEY
o
CONSIDERED VALUABLE
o
GENERALLY ACCEPTED
o
LIMITED AVAILABILITY
-
THE MOST DISTINGUISHING CHARACTERISTIC OF MONEY IS LIQUIDITY
def - THE COST OF
EXCHANGING IT FOR OTHER ASSETS
o
THE MORE LIQUID AN ASSET, THE MORE MONEYLIKE IT IS
§
A $20 BILL IS MORE LIQUID THAN $20 WORTH OF PENNIES
OR A CHECK FOR $20
§
FIVE $20 BILLS WOULD BE MORE LIQUID THAN A $100 BILL
OF A CHECK FOR $100 OR A $100 BOND
o
LIQUIDITY INCREASES CHOICES AND OPPORTUNITIES
-
CHARACTERISTICS OF MODERN MONEY
o
PORTABLE
o
DIVISIBLE
o
DURABLE
o
STABLE
-
FUNCTIONS OF MONEY
o
MEDIUM OF EXCHANGE
o
MEASURE OF VALUE
o
STORE OF VALUE
§
THE DEMAND FOR MONEY IS A
DEMAND TO HOLD MONEY NOT TO CONSUME
IT.
§
WHY DO PEOPLE CHOOSE TO HOLD MONEY INSTEAD OF
SPENDING IT?
·
MONEY AS AN ASSET, INCREASES ONES FLEXIBILITY OF
TAKING ADVANTAGE OF OPPORTUNITIES WHEN THEY ARISE
o
UNIT OF ACCOUNT
o
BASIS FOR CREDIT
§
IT CAN BE USED AS COLLATERAL
·
Def ANYTHING PLEDGED AS SECURITY TO GUARANTEE
REPAYMENT OF A LOAN
-
TYPES OF MONEY
yap-money.htm
o
COMMODITY MONEY
§
Def MONEY WHICH IS INTRINSICALLY VALUABLE
§
MONEY WHICH HAS AN ALTERNATE USE
o
REPRESENTATIVE MONEY
§
MONEY WHICH IS NOT INTRINSICALLY VALUABLE BUT WHICH
IS BACKED BY SOMETHING OF VALUE
§
THE U.S. WAS ON THE GOLD STANDARD FROM 1900 1934
·
OUR PAPER MONEY WAS BACKED BY GOLD
· ADVANTAGES OF THE GOLD
STANDARD
o
PEOPLE FELT SECURE BECAUSE THEY COULD ALWAYS CONVERT
THEIR PAPER MONEY
o
IT PREVENTS THE GOVERNMENT FROM PRINTING TOO MUCH
MONEY WHICH MIGHT CAUSE INFLATION
· DISADVANTAGES OF THE GOLD
STANDARD
o
A GROWING ECONOMY NEEDS A GROWING MONEY SUPPLY
§
IF THE GOLD SUPPLY DOES NOT GROW COMMENSURATE WITH
BUSINESS, THE ECONOMY WILL NOT BE ALLOWED TO GROW
o
IF TOO MANY PEOPLE CHOOSE TO REDEEM THEIR PAPER FOR
GOLD, THEY COULD DEPLETE GOVERNMENTAL RESERVES
o
FIAT MONEY (FAITH MONEY)The $10,000 Bill and Other
Large Denominations
§
WHAT GIVES FIAT MONEY VALUE?
·
ITS AVAILABILITY IS
LIMITED
·
IT IS BACKED
BY GOVERNMENTAL DECREE AND BY MONETARY POLICY
o
LEGAL TENDER def GOVERNMENT SANCTIONED MONEY FOR THE
REPAYMENT OF DEBT BOTH PUBLIC AND PRIVATE
§
IF LEGAL TENDER IS NOT
ACCEPTED AS PAYMENT, INTEREST ACCUMULATION ON DEBT CEASES
·
JINGLING AND FOLDING MONEY ARE BOTH LEGAL TENDER
MONEY SUPPLY AND THE
UNITED STATES
-
JINGLING
o
ALL COINS MINTED IN THE
o
TOKEN MONEY def JINGLING MONEY WHOSE FACE VALUE EXCEEDS THE
AMOUNT OF PRECIOUS METAL CONTAINED WITHIN THE COIN
§
ALL TOKEN MONEY IS JINGLING MONEY BUT ALL JINGLING
MONEY IS NOT TOKEN MONEY
-
FOLDING
o
PRIMARILY CONSISTS OF FEDERAL RESERVE NOTES
o
PAYMENT IN KIND
-
CHECKBOOK MONEY
o
CREDIT
o
CREATED BY A BANK WHEN IT MAKES A LOAN
VOCABULARY
ASSOCIATED WITH MONEY
o
SPECIE def PRECIOUS METAL MINTED INTO COINS
o
BULLION def PRECIOUS METAL FORMED INTO INGOTS
o
STANDARD MONEY def GOLD INTERNATIONALLY ACCEPTED MONEY
DEVELOPMENT OF MODERN
BANKING
-
IN THE US WE HAVE A DUAL BANKING SYSTEM
o
NATIONAL BANKS THEY RECEIVE THEIR CHARTER FROM THE NATIONAL
GOVERNMENT
§
THEY CAN CONDUCT INTERSTATE BUSINESS
o
STATE BANKS THEY RECEIVE THEIR CHARTER FROM THE STATE
GOVERNMENT
§
RESTRICTED TO DOING BUSINESS INTRASTATE
-
THE FEDERAL RESERVE BANKING SYSTEM WAS CREATED IN
1913
-
THE F.D.I.C. WAS CREATED IN 1933
o
CREATED BY THE GLASS-STEAGLE ACT
o
INSURES DEPOSITS UP TO $100,000/ACOUNT
o
CREATED TO RESTORE CONFIDENCE IN THE BANKING SYSTEM
o
THIS HAS SUCCEEDED IN PREVENTING RUNS ON BANKS
BECAUSE OF THE SENSE OF SECURITY THE DEPOSITORS EXPERIENCE
-
OTHER FINANCIAL INSTITUTIONS
o
SAVINGS BANKS
o
SAVINGS AND LOAN ASSOCIATIONS THRIFTS
o
CREDIT UNIONS
-
BANK DEREGULATION 1980S
o
BANKS WERE DISSATISFIED BECAUSE THEY WERE LIMITED AS
TO THE AMOUNT THEY COULD PAY ON SAVINGS ACCOUNTS
§
THIS GAVE A COMPETITIVE ADVANTAGE TO THRIFTS
o
S & LS WERE DISSATISFIED BECAUSE THEY WERE NOT
ALLOWED TO OFFER CHECKING ACCOUNTS
·
THIS WAS AN ADVANTAGE FOR BANKS
§ REGULATION Q
·
THRIFTS WERE ALLOWED TO OFFER N.O.W.
ACCOUNTS
o
def A CHECKING ACCOUNT THAT PAYS INTEREST
·
BANKS WERE ALLOWED TO OFFER COMPETITIVE RATES ON
TIME DEPOSITS
o
ALL FINANCIAL INSTITUTIONS WERE ALLOWED TO BORROW
FROM THE FED
-
REFORM OF THE THRIFT INDUSTRY
o
FEDERAL INSTITUTION REFORM, RECOVERY AND ENFORCEMENT ACT 1989
§ ABOLISHED
THE INDEPENDENCE OF THE THRIFT INDUSTRY
§ THE
OFFICE OF THRIFT SUPERVISION WAS CREATED TO TAKE OVER THE SUPERVISION
PREVIOUSLY HELD BY THE FEDERAL HOME LOAN BANK BOARD
· LOCATED
IN THE DEPARTMENT OF TREASURY
· THE
EXECUTIVE BRANCH OF THE GOVERNMENT NOW REGULATED THE THRIFT INDUSTRY
o
FSLIC FUNCTIONS WERE TRANSFERRED TO FDIC
§ SAIF
SAVING ASSOCIATION INSURANCE FUND
§ BIF
BANK INSURANCE FUND
o
THE RESOLUTION TRUST CORPORATION WAS CREATED TO DISPOSE OF THE
ASSETS OF FAILED THRIFTS
§ SOME $300
TO $500 BILLION SPENT TO RESCUE FAILED THRIFTS