MONEY AND BANKING

1
MONEY AND BANKING

• CURRENCY EVOLUTION

2
THE EVOLUTION OF MONEY

• BARTER SYSTEM-
• DOUBLE COINCIDENCE OF WANTS
• FIRST TO COIN MONEY WERE THE LYDIANS
• FIRST TO PRINT MONEYCHINESE
• FUNCTIONS OF MONEY
• MEDIUM OF EXCHANGE
• MEASURE OF VALUE
• STORE OF VALUE
• CHARACTERISTICS OF MONEY
• 1. PORTABILITY
• A. EASILY TRANSPORTED
• 2. DURABILITY
• A. DURABLE ENOUGH TO BE CIRCULATED AND HANDLED
• 3. DIVISIBILITY
• A. CAN BE DIVIDED INTO SMALLER UNITS
• 4. LIMITED AVAILABILITY
• A. IT HAS TO HAVE A LIMITED SUPPLY TO KEEP ITS
  VALUE.
• B. NEED TO AVOID INFLATION

3
ORIGINS OF THE US DOLLAR

• MONEY IN EARLY SOCIETIES
• COMMODITY MONEY
• FIAT MONEY
• MONEY IN COLONIAL AMERICA
• COMMODITY
• WAMPUM
• PAPER CURRENCY
• SPECIE
• DURING COLONIAL DAYS
• SPANISH PESO -- PIECES OF 8
• TRIANGULAR TRADE, PIRACY
• US CURRENCY ASSIGNED TO FRANKLIN AND HAMILTON
• NAME DOLLAR WAS A NICKNAME FOR TALERS OR
  DOLARS
• BECAUSE OF JEFFERSON THE US CURRENCY WAS DIVIDED
  INTO TENTHS.
• EVEN TODAY SOME PEOPLE REFER TO 25 CENTS AS 2
  BITS (1/4th of a Spanish piece of 8)

4
DEVELOPMENT OF US MONETARY STANDARDAND HISTORY
OF BANKING

• HISTORY OF US MONETARY STANDARD
• CONTINENTAL DOLLARSFiat money, no value after
  the Revolution.
• CONSTITUTION STATED Exclusive power to COIN
  money-CONGRESS NO PAPER MONEY UNTIL CIVIL WAR
  DAYS.
• ALL PAPER CURRENCY ISSUED BY PRIVATE BANKS
• 1790s-1860s All Us Paper currencyBank Notes
• CONSTITUTION DID NOT FORBID BANKS FROM ISSUING
  PAPER CURRENCY.
• BACKED BY SPECIE ON DEPOSIT IN THE ISSUING BANK.
• Convertible Currency
• GROWTH OF STATE BANK--BANKING
• BY 1811100 STATE BANKS PRINTING BANK NOTES
• ABUSES IN BANKING
• WILDCAT BANKSFRAUDULENT BANK NOTES (RECKLESS
  BANKING)
• PANIC OF 1819ANDREW JACKSON AND NICHOLAS BIDDLE
• 2ND BANK OF UNITED STATES CRISIS
• MAJOR PROBLEMS WITH PRINTED CURRENCY IN EARLY
  1800S
• TOO MANY BANK NOTES CIRCULATED
• PRINTED MORE NOTES THAN WHAT COULD BE BACKED.
• COUNTERFEITING
• BY 1860 THERE WERE 1,600 BANKS ISSUING gt 10,000
  KINDS OF PAPER CURRENCY.

5
GREENBACKS AND OTHER US PAPER CURRENCY

• BY 1850S US CURRENCY WAS IN TURMOIL BUT POWERFUL
  BANKERS RESISTED CHANGE.
• CHANGE IN CURRENCY CAME AS A RESULT OF THE CIVIL
  WAR.
• TO FINANCE THE WAR BOTH UNION AND CONFEDERACY
• SOLD WAR BONDS
• 1861 US CONGRESS AUTHORIZED THE PRINTING 60
  MILLION DEMAND NOTES.NO SPECIE BACKING BUT
  WERE LEGAL TENDER. Fiat Money
• 1862 LEGAL TENDER ACTAUTHORIZED AN ADDITIONAL
  150 MILLION US NOTES
• BY 1863 50 OF US MONEY SUPPLY GREENBACKS.
• NATIONAL CURRENCY
• DURING THE WAR PEOPLE FEARED THE GREENBACKS
  WERE LOSING THEIR VALUE.
• CONGRESS CREATED NATIONAL BANKING SYSTEM.
• FED. GOVT. ISSUED CHARTERS TO PRIVATE BANKS.
• THESE BANKS WOULD PRINT GOVT. BACKED NATIONAL
  BANK NOTES.
• THE BANKS WOULD BE GOVT. REGULATED AND INSPECTED.
• BANKS WHO JOINED HAD TO PURCHASE WAR BONDS.
• BY 1865, THE FEDERAL GOVT. FORCED STATE BANKS TO
  JOIN BY PLACING A 10 TAX ON ALL BANK NOTES.
  Many state banks had to recall their bank notes.
• CURRENCY BY THIS TIME WAS PUBLICALLY ISSUED.

6
GOLD AND SILVER CERTIFICATES

• GOLD CERTIFICATES
• 1863--PAPER MONEY BACKED BY GOLD ON DEPOSIT WITH
  THE US TREASURY.
• PRINTED IN LARGE DENOMINATIONS USED MOSTLY BY
  BANKS TO SETTLE FINANCIAL PROBLEMS.
• 1882SMALLER DENOMINATION GOLD CERTIFICATES WERE
  CIRCULATED.
• CONVERTIBLE CURRENCY
• SILVER CERTIFICATES
• 1878PAPER MONEY BACKED BY SILVER ON DEPOSIT WITH
  THE US TREASURY
• TREASURY COIN NOTES
• 1890PAPER MONEY THAT WAS REDEEMABLE IN GOLD OR
  SILVER.
• Convertible currency
• PRACTICE ENDED IN 1893.
• THE GOLD STANDARD
• 1900 GOLD STANDARD ACTPRICE OF GOLD FIXED AT
  20.67 AN OUNCE. ALL NOTES WERE REDEEMABLE IN
  GOLD. SILVER TO GOLD RATIO 161.

7
ADVANTAGES AND DISADVANTAGES OF THE GOLD STANDARD.

• ADVANTAGES
• 1. PEOPLE FELT IT MADE THE MONEY MORE SECURE.
• 2. IT KEPT INFLATION IN CHECK, BECAUSE THE GOVT.
  COULD ONLY PRINT MONEY BASED ON THE AMOUNT OF
  GOLD ON DEPOSIT.
• DISADVANTAGES
• 1. THE GOLD STOCK DOES NOT INCREASE ENOUGH TO
  STAY UP WITH THE GROWTH OF THE ECONOMY.
• 2. PEOPLE MIGHT SUDDENLY CONVERT THEIR MONEY IN
  FOR GOLD AND DRAIN THE GOLD SUPPLY.
• 3. PRICE OF GOLD CONSTANTLY FLUCTUATES AND IF
  THE GOVT. FIXES THE GOLD PRICE THEN IT MUST
  MANIPULATE THE MARKET.
• 4. IT CAN MAKE A GOVT. LOOK BAD IF IT CANNOT
  HOLD THE PRICE OF GOLD.
• 5. INDIVIDUALS OR GROUPS COULD CORNER THE GOLD
  SUPPLY AND MANIPULATE ITS VALUE.
• ABANDONING THE GOLD STANDARD
• FDR GOT THE US OFF THE GOLD STANDARD DURING THE
  GREAT DEPRESSION
• 1934 GOLD RESERVE ACT REQUIRED ALL CITIZENS,
  BANKS AND BUSINESSES TO TURN IN THEIR GOLD COIN
  AND GOLD CERTIFICATES FOR FEDERAL RESERVE NOTES.

8
INCONVERTIBLE FIAT MONEY STANDARD

• 1934PAPER MONEY THAT COULD NOT BE CONVERTED INTO
  GOLD OR SILVER.
• THE FEDERAL RESERVE SYSTEM ISSUED THE ONLY
  CURRENCY.
• NATIONAL CURRENCY AND TREASURY COIN NOTES WERE
  WITHDRAWN FROM CIRCULATION IN THE 1930s.
• GOLD CERTIFICATES CONFISCATED IN 1934.
• SILVER CERTIFICATES RETIRED IN 1968.
• TODAY US CURRENCY IS FEDERAL RESERVE NOTES AND
  COINS.
• INTANGIBLE SOURCES OF MONEY ARE TRAVELERS
  CHECKS, CHECKING ACCOUNTS, AND SAVINGS ACCOUNTS.
• HISTORY OF BANKING
• 2 primary Economic Functions of Banks
• 13th century trade fairsbancs- Usury
• 1694 Bank of England
• 1792 1st Bank of the US
• MODERN BANKING REGULATION
• 1913 FEDERAL RESERVE SYSTEMReserve Requirement,
  Discount rate, Buying/selling bonds
• FDIC
• FINANCIAL INSTITUTIONS
• (STATE AND NATIONAL) COMMERCIAL BANKS
• CREDIT UNIONS
• FINANCE COMPANIES (PAY-DAY LENDERS)--USERY