Economics 5205 www.msu.edumilewsk6

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Economics 5/2/05www.msu.edu/milewsk6

• OBJECTIVE Continue examination of where money
  comes from.
• I. Journal 38 pt. A
• -Read The Global Economy p.297
• -Answer questions (1-2) p.297
• II. Journal 38 pt. B
• -notes on money
• III. Homework due THURSDAY 5/5/05
• 1.) Read Chapter 11 section1 p.284-290
• -Answer questions (3-6) p.290
• 2.) Read Chapter 11 section2 p.292-298
• -Answer questions (3-6) p.298

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This Week

• Today- 5/2/05 Journal38
• Tomorrow- 5/3/05 Film U.S. Mint
• Wednesday- 5/4/05 Journals 24-38 Due
• Thursday- 5/5/05 Homework Due
• Friday- 5/6/05 Film Banks Progress
  Reports End

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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.

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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.

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Economics 5/3/05www.msu.edu/milewsk6

• OBJECTIVE Examine the operation and history of
  the U.S. Mint.
• I. Modern Marvels The U.S. Mint
• -Answer questions while watching the film
• II. Journals due tomorrow!!
• III. Homework due THURSDAY 5/5/05
• 1.) Read Chapter 11 section1 p.284-290
• -Answer questions (3-6) p.290
• 2.) Read Chapter 11 section2 p.292-298
• -Answer questions (3-6) p.298

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Economics 5/4/05www.msu.edu/milewsk6

• OBJECTIVE Examine the monetary system.
• I. Journals Due NOW
• II. Guided Readings
• -Complete Guided Readings on Ch11 sec12
• -Answers MUST be in complete sentences and are
  due at the end of class
• III. Administrative Stuff
• IV. Homework due TOMORROW!! 5/5/05
• 1.) Read Chapter 11 section1 p.284-290
• -Answer questions (3-6) p.290
• 2.) Read Chapter 11 section2 p.292-298
• -Answer questions (3-6) p.298

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Economics 5/5/05www.msu.edu/milewsk6

• OBJECTIVE Examine the short comings of the gold
  standard.
• I. Journal 39 pt. A
• -Read the Cover Story p.292
• 1.) How much gold does Switzerland have?
• 2.) Why did the Swiss abandon the Gold Standard?
• II. Journal 39 pt. B
• -notes on the gold standard
• III. Journal 39 pt. C
• -Modern Marvels Gold Mines
• -take notes on the film

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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.

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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.
• With the reality of the U.S. having no gold, the
  government quit redeeming paper currency for
  gold.
• 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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• In 1934, the U.S. government fixed the price of
  gold at 35 per ounce.
• 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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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 5/6/05www.msu.edu/milewsk6

• OBJECTIVE Examine the operation and history of
  the modern bank.
• I. Modern Marvels Banks
• -Answer questions while watching the film
• II. Progress Report Period Ends Today!