Unit 6: Chapters 1-4

Money

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

Three Usages of Money

A medium of exchange, a unit of account; a store of value

Medium of Exchange

is anything that is used to determine value during the exchange of goods and services

Unit of Account

a means for comparing the values of goods and services

Store of Valueq

money keeps its value if you decide to hold on to—or store—it instead of spending it

Money serves as a good store of value with one important exception. What is it?

Sometimes economies experience a period of rapid inflation, or a general increase in prices. The $100 you received at the beginning of the year would no longer be enough to buy the bike if the price increased due to inflation.

Barter

the direct exchange of one set of goods or services for another

Where is bartering still used?

Barter is still used in many parts of the world, especially in traditional economies in Asia, Africa, and Latin America. It is also sometimes used informally in the United States.

What is needed for barter to work?

Coincidence of Wants

What is Coincidence of Wants?

a person has to want what the baterer has to offer and vice-versa

Characteristics of Money

durability, portability, divisibility, uniformity, limited supply, acceptability

Three types of Money

commodity, representative, fiat

Commodity Money

money that has value in and of itself. Ex: Gold

Representative Money

something that has value because it can be exchanged for something of value

Fiat Money

money that has value because the government has ordered that it is an acceptable means to pay debts; by order or decree

Specie

coins made of gold or silver that could be given in exxhange for paper money

Why is Alexander Hamilton signficant in the context of the text?

was a staunch supporter of a strong federal government and, therefore, of a strong central bank. He was a Federalist.

US Treasury

a part of the National Bank seperate from the government

When was a centralized banking system considered Constitutional?

1819

What is a national bank?

a bank chartered or licensed by the federal government.

Powers of a national bank?

The bank would have the power to issue a national currency, manage the federal government's funds, and monitor other banks throughout the country.

Refresher: What is the job of a bank?

To Receive, Keep, and Lend/Loan

How do banks make money?

Through Interest on loans

What is the name of US currency?

Federal Reserve Notes

What are Federal Reserve Notes made up of?

70% Cotton and 30% Linen

What did AntiFederalist believe in?

Feared that the wealthy would gain control of the bank and use its resources to increase their power. They supported a decentralized banking system. In this system, the states would establish and regulate all banks within their borders.

Which president did not believe in the chartering of centralized banking sysem?

President Andrew Jackson. Did not sign charter resulting in its fail. 1836-160s

How long is a charter?

20 years

When was the First Bank of the US chartered?

1791

What happened to Alexander Hamilton in his final moments?

When Alexander Hamilton died in a famous duel with Vice President Aaron Burr in 1804, the Bank lost its main backer. The Bank functioned only until 1811, when its charter ran out.

How many banks had circulating currency, worsening caous?

By 1860, an estimated 8,000 different banks were circulating currency. To add to the confusion, the federal government played no role in providing paper currency or regulating reserves of gold or silver. The Civil War, which erupted in 1861, made existing problems worse.

What currency was made to fund military efforts?

Union and Confederacy needed to raise money to finance their military efforts. In 1861, the United States Treasury issued its first paper currency since the Continental. The official name of the currency was “demand notes,” but people called them greenbacks because they were printed with green ink.

What ia a gold standard?

a monetary system in which paper money and coins had the value of certain amounts of gold. The gold standard set a definite value for the dollar, so that one ounce of gold equaled about $20.

What did the Federal Reserve Act of 1913 do?

The Federal Reserve Act of 1913 established the Federal Reserve System. The Federal Reserve System, or Fed, served as the nation’s first true central bank, or bank that can lend to other banks in times of need.

What is the difference between a national and a central bank?

Central banks are banks that can lend to other banks in times of need. Known as the Bank of Banks. National Banks cannot lend to other banks.

ow many regional Federal Reserve Banks are there?

The system created as many as 12 regional Federal Reserve Banks throughout the country. All banks chartered by the national government were required to become members of the Fed. The Federal Reserve Banks are the central banks for their districts.

What are member banks?

Member banks—banks that belong to the Fed—store some of their cash reserves at the Federal Reserve Bank in their district.

What is the Federal Reserve Board?

Federal Reserve Board All of the Federal Reserve Banks were supervised by a Federal Reserve Board appointed by the President of the United States

What are short-term loans?

Short-Term Loans Each of the regional Federal Reserve Banks allowed member banks to borrow money to meet short-term demands. This helped prevent bank failures that occurred when large numbers of depositors withdrew funds during a panic.

What does Federal Reserve Notes allow?

Federal Reserve Notes The system also created the national currency we use today in the United States—Federal Reserve notes. This allowed the Federal Reserve to increase or decrease the amount of money in circulation according to business needs.

What is a bank run?

When there are more customers run to withdraw their money, for fear of losing it, than what the bank has on hand.

What is a "Bank Holiday" and why did it help?

FDR Reforms After becoming President in 1933, Franklin D. Roosevelt acted to restore public confidence in the nation’s banking system. Only days after his inauguration, Roosevelt closed the nation’s banks. This “bank holiday” was a desperate last resort to restore trust in the nation’s financial system. Within a matter of days, sound banks began to reopen.

What is the FDIC?

Federal Deposit Insurance Corporation (FDIC). The FDIC insures customer deposits if a bank fails. By 2008, each depositor's basic accounts in one bank were insured up to $250,000. 1933, Congress passed the act.

What executive order did Roosevelt issue?

In an attempt to increase the money supply, Roosevelt also issued an executive order that effectively ended the nation's use of the gold standard. In 1933, the United States nationalized all gold owned by private citizens and restricted individuals' ability to redeem dollars for gold. The results of these actions were an increase in gold's value and a decrease in the value of the dollar.

What is monetary fiscal policy?

Monetary policy refers to the actions that the Fed takes to influence the level of real GDP and the rate of inflation in the economy.

What are reserves and their requirements?

Banks had to keep a certain amount of reserves on hand. Reserves are deposits that a bank keeps readily available as opposed to lending them out. Reserve requirements—the amount of reserves that banks are required to keep on hand

Banking Act Years

1831-1864

What type of bank id the Federal Reserve?

Central Bank

Who is the chairman of the Feds currently?

Jerome Powell

What is a discount rate?

the minimum interest rate set by the Federal Reserve for lending to other banks.

The nation's banking system needed to address two issues. What are they?

First, consumers and businesses needed greater access to funds to encourage business expansion. Second, banks needed a source of emergency cash to prevent depositor panics that resulted in bank runs.

The structure of the Federal Reserve System

7 Members of the Board of Governors, 12 District Reserve banks- the first two are apart of the FOMC, Federal Open Market Comitee- 2,600 member banks, and 25,000 other depositary institutions.

What does the FOMC do?

The Federal Open Market Committee (FOMC) makes key monetary policy decisions about interest rates and the growth of the money supply in the United States. The committee meets about eight times a year in private to discuss the cost and availability of credit, for businesses and consumers, across the country. Announcements of the FOMC's decisions can affect financial markets and rates for home mortgages, as well as many economic institutions around the world.

Free banking/ Wild cat Era

Crazy banking tripled on the western frontier.

National Banking Act of 1863

Created a national Banking system and uniform currency.

What is a bank holding company?

A bank holding company is a company that owns more than one bank.

What is a federal funds rate?

Under normal circumstances, banks lend each other money on a day-to-day basis, using money from their reserve balances. These funds are called federal funds. The interest rate that banks charge each other for these loans is the federal funds rate.

Discount Rate

Banks also borrow from the Federal Reserve, especially in financial emergencies such as recessions. The Fed acts as a lender of last resort, making emergency loans to commercial banks so that they can maintain required reserves. The rate the Federal Reserve charges for these loans is called the discount rate.

What is M1?

M1 is a measure of the funds that are easily accessible or in circulation. M1 consists of assets that have liquidity, or the ability to be used as, or directly converted into, cash. About 45 percent of M1 is made up of currency held by the public, that is, all currency held outside of bank vaults. Another large component of M1 is deposits in checking accounts.

What is M2?

M2 includes the funds counted in M1 as well as money market accounts and savings instruments. Additional M2 funds cannot be used as cash directly but can be converted to cash fairly easily. M2 assets are also called near money.

What are funds in checking accounts called?

Funds in checking accounts are also called demand deposits, because checks can be paid “on demand,” that is, at any time.

Define Money market mutual funds

Included as part of M2, these are funds that pool money from a large number of small savers to purchase short-term government and corporate securities. They earn interest and can be used to cover checks written over a certain minimum amount, such as $250.

What is a fractional reserve banking?

A banking system that keeps only a fraction of its funds on hand and lends out the remainder is called fractional reserve banking. The more money a bank lends out, and the higher the interest rate it charges borrowers, the more profit the bank is able to make.

What is interest?

The cost of borrowing money

What is principal?

The amount of money borrowed

Define creditor

a person or company to whom money is owed.