Economics 2209 http:students.resa.netmilewski

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Economics 2/2/09 http//students.resa.net/milewsk
i

• OBJECTIVE Demonstration of Chapter9 and begin
  examination of money.
  
• I. Administrative Stuff
• -attendance
• -distribution of test
• II. Chapter9 Test
• III. Journal 25 pt.A
• -Read Cybernomics Spotlight p.286-287
• 1.) What does the future of money look like?
• 2.) What is a Smart Card?
• II. Journal 25 pt.B
• -notes on money

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In the beginning

• People traded stuff for other stuff. It was
  good, but it was inconvenient to carry around a
  bunch of heavy stuff hoping that the person you
  wanted to trade with would trade with you.
• This was the barter economy.

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A new medium of exchange

• Something accepted by all parties as payment for
  goods and services
  
• It included Gold, Silver, and even Salt (these
  are commodities)
  
• For something to serve as money it MUST have
  value.

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Now we use

• Fiat money money by government decree. It is
  money because the government says it is.

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Brief History of Fiat Money

• In the U.S. from Revolutionary times until the
  Civil War paper currency (Fiat) was issued by
  private banks.
  
• At first banks were honest and only printed
  enough notes they could reasonably back with gold
  and silver.
  
• Then, problems arose.

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• The Bank of Milewski
• Printed in Wyandotte, MI
• 5.00
• In Butter Guns We Trust

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Problems

• 1.) Too many currencies in circulation
• 2.) Banks could print more money when ever they
  wanted. Temptation was there.
  
• 3.) Counterfeiting

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By the time of the Civil War

• Congress needed money to fight the war, so the
  idea of greenbacks emerged.
  
• At first they had no backing of gold or silver,
  but they were declared legal tender.
  
• In 1862, the Legal Tender Act was passed and 150
  million was printed.

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National Banks

• Private banks that got their charter to operate
  from the Federal Government, not the state
  governments.
  
• They issued a standard national currency backed
  by war bonds.
  
• In 1865 Congress forced the state banks to join
  the federal system by placing a 10 tax on all
  privately printed bank notes.

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Gold and Silver Certificates

• Gold certificates backed by gold in the U.S.
  Treasury were originally designed to settle
  accounts between banks and were printed in large
  denominations.
• Silver certificates paper currency backed by
  silver dollars in the U.S. Treasury.

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Silver Certificates - 1886

• (they) modeled off the popular gold
  certificates.
  
• In reality, they were issued to prop up falling
  silver prices, because like all commodities, the
  price of silver fluctuated.
  
• They were popular because people were not happy
  to carry around the bulky silver dollars being
  produced by the government.
  
• For example Imaging that there were only
  pennies. Imaging how inconvenient it would be to
  go shopping.

http//images.amazon.com/images/P/B00000JS61.01.LZ
ZZZZZZ.jpg
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Economics 2/3/09 http//students.resa.net/milewsk
i

• OBJECTIVE Examine the gold standard.
• I. Journal26pt.A
• -Read Issues in Free Enterprise p.282-283
• -Answer questions (1-3) p.283
• II. Return of Chapter9 Test
• III. Journal26pt.B
• -notes on the gold standard
• IV. Journal26pt.C
• -notes Econ U.S.A. episode8 The Banking System

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Silver Certificates - 1886

• (they) modeled off the popular gold
  certificates.
  
• In reality, they were issued to prop up falling
  silver prices, because like all commodities, the
  price of silver fluctuated.
  
• They were popular because people were not happy
  to carry around the bulky silver dollars being
  produced by the government.
  
• For example Imaging that there were only
  pennies. Imaging how inconvenient it would be to
  go shopping.

http//images.amazon.com/images/P/B00000JS61.01.LZ
ZZZZZZ.jpg
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The Gold Standard

• In 1900, Congress passed the Gold Standard Act
  which fixed the price of gold at 20.67 per
  ounce.
  
• Gold standard a monetary standard under which
  the basic currency unit is equal to, and can be
  exchanged for, a specific amount of gold.
  
• People still used the same types of currency
  (greenbacks, silver certificates, etc) as they
  did before, but now they could exchange them for
  gold at the Treasury.

http//www.stanleymeltzoff.com/History7.html
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Advantages of the Gold Standard

• People feel secure about their fiat money if they
  know they can trade it in for gold.
  
• It is supposed to prevent the government from
  printing too much paper money.
  
• In reality, since the chances of everyone trading
  in their fiat money for gold on the same day is
  slim, governments just maintain the appearance of
  it.

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Disadvantages of the Gold Standard

• 1.) If the amount of gold in the treasury does
  not grow as fast as the economy, the money supply
  can not expand and economic growth will be
  restricted.
• 2.) If everybody trades their money in for gold,
  the nations gold reserve will disappear.
  
• 3.) Since the price of gold changes dramatically
  over time, any government that tries to fix the
  price of gold has huge market pressures working
  against it.
• 4.) Risk of Political Failure

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Political Failure

• Case Study Switzerland
• In 1999, when the Swiss abandon the gold
  standard, the price they had fixed gold at was
  about 95 per ounce.
  
• Since, gold was in reality 280 per ounce in
  early 1999, nobody was willing to sell the Swiss
  gold for 185 less than they could sell it to
  anybody else.
• Additionally, the Swiss were also not willing to
  sell their gold for 95 per ounce either.

http//www.cia.gov/cia/publications/factbook/flags
/sz-flag.html
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Political Failure

• Case Study The United States
• When banks began to fail in the early 1930s,
  people began to cash in their U.S. paper currency
  for gold. So did foreign countries that had U.S.
  currency.
• Step1 With the reality of the U.S. having no
  gold, the government quit redeeming paper
  currency for gold.
  
• Step2 On August 28, 1933, FDR declared a
  national emergency which required all citizens
  with more than 100 of gold or gold certificates
  to file a disclosure form with the government.

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The U.S. Gold

• Step3 In 1934, the U.S. government fixed the
  price of gold at 35 per ounce.
  
• Step4 The U.S. then confiscated all the
  privately owned gold and the U.S. quit exchanging
  fiat currency for gold.
  
• This in effect took the U.S. off the gold
  standard.
  
• The U.S. continued to fix the price of gold at
  35 per ounce until 1971.

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Inconvertible Fiat Money Standard

• Inconvertible Fiat Money Standard a monetary
  standard under which the fiat money cannot be
  converted to gold or silver.
  
• Now, the government manages the money supply
  under the Federal Reserve system.

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Economics 2/4/09 http//students.resa.net/milewsk
i

• OBJECTIVE Examine the U.S. Mint.
• I. Journal27pt.A
• -Read Profiles in Economics p.291
• -Answer question 1 p.291
• II. Journal27pt.B
• -notes on Greshams Law
• III. Modern Marvels The U.S. Mint
• -Answer questions while watching the film

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Greshams Law

• Thomas Gresham, was a financial advisor to
  Englands Queen Elizabeth I.
  
• He said that bad money tends to drive good money
  out of circulation.
  
• Good money currency where the metallic value of
  the coin is higher than the face value
  
• Bad money - currency where the metallic value of
  the coin is lower than the face value
  
• This occurred in 1965, when the U.S. took the
  silver out of the coins it minted. Those with
  copper and nickel bases stayed in circulation.
  Those with silver were hoarded.

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Economics 2/5/09 http//students.resa.net/milewsk
i

• OBJECTIVE Examine the Federal Reserve Bank.
• I. Administrative Stuff
• -attendance
• -calendar
• II. Journal28pt.A
• -Read The Global Economy p.297
• -Answer questions (1-2) p.297
• III. Journal28pt.B
• -notes on the Fed

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Calendar

• Next week No School Friday February 13th
• No School Monday February 16th
• ACT Practice Test Tuesday 2/17 Wednesday 2/18
• If you take the ACT practice test on Wednesday
  2/18 you will take the Ch12 Test on Tuesday
  2/17
  
• If you take the ACT practice test on Tuesday 2/17
  you will take the Ch12 Test on Wednesday 2/18.

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The Federal Reserve - 1913

• The United States 1st true central bank
• All federal banks were required to join and all
  state banks were eligible to be members.
  
• All members own shares of stock in the system
  making the Fed privately owned, but it is
  publicly controlled.
  
• The President appoints the Feds Board of
  Governors and the Chairman. All appointments are
  approved by Congress (checks balances)

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The Great Depression ?

• Despite reforms like the Federal Reserve, many
  banks were not sound.
  
• Deposits were not insured and runs were common.
  Millions of people lost all of their money.
  (Including my Great-Grandfather)
  
• March 5, 1933 Bank Holiday. FDR ordered all
  banks to close until legislation could be passed
  to make banks stronger.

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FDIC

• The Banking Act of 1933 (The Glass-Steagall
  Act)
  
• Main point of the Act was the FDIC Federal
  Deposit Insurance Corporation.
  
• The FDIC insured depositors up to 2500. It is
  now 100,000 (250,000 October 2008).
  
• Today the FDIC aggressively pursues ways to
  protect consumers from fraudulent banks.
  
• Both symbols from
• http//www.fdic.gov/regulations/resources/signage/
  index.html

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Other Depository Institutions

• Commercial Banks for businesses and had the
  power to issue checking accounts
  
• Thrift Institutions accepted deposits of small
  investors but didnt have the power to issue
  checking accounts until the mid-1970s
  
• Mutual Savings Bank owned and operated only for
  the benefit of their depositors.
  
• Page 303

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SL and Credit Unions

• Savings and Loans a depository institution that
  invests a majority of their funds in mortgages.
  They were regulated by the Federal Home Loan Bank
  Board
• Credit Unions non-profit service that is owned
  and operated for the benefit of its members.

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Economics 2/6/09 http//students.resa.net/milewsk
i

• OBJECTIVE Examine the Role of the Fed.
• I. Journal29pt.A
• -Film Federal Reserve The Eye of the Storm
• -Answer questions (1-8) on the film
• II. Journal29pt.B
• -notes on non-bank financial institutions
• III. Mindjogger
• -video quiz on Chapter11

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The Federal Reserve The Eye of the Storm

• 1.) What do people want most in a bank?
• 2.) What do banks do with the money people
  deposit in them?
  
• 3.) What happens when a bank has more money than
  it needs?
  
• 4.) What emergency economic action did the Fed
  take in 1992?
  
• 5.) What is Fed-Wire?
• 6.) What was a run on a bank?
• 7.) How do banks fail today?
• 8.) In what ways does the Fed ensure that banks
  dont fail today?

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Nonbank financial institutions

• Another important group of financial
  intermediaries includes
  
• nonbank financial institutionsnondepository
  institutions that channel savings to borrowers.
  
• Finance companies, life insurance companies,
  pension funds, and real estate investment trusts
  are examples of nonbank financial institutions.