CHAPTER - MONEY AND THE BANKING SYSTEM

• Characteristics of Money • Money and Banking in History • Deregulation QuickTime™ and a H.264 decompressor are needed to see this picture.

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Money

• FUNCTIONS •- medium of exchange •- standard of value •- store of value Click to play

Money

• New Necessary Characteristics of Money Security Anonymous Portable Infinite duration Two-way Off line capable Divisible Wide acceptability User friendly

Money

• Commodity money QuickTime™ and a decompressor are needed to see this picture.

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Money

• Representative money CHECKS BONDS EARLY BILL OF CREDIT

• Fiat money

MONEY

• Currency

Money

Counterfeit Cash

• By the end of the Civil War, between one-third and one-half of all U.S. paper currency in circulation was counterfeit. On July 5, 1865, the Secret Service was created under the U.S. Treasury Department. In less than a decade, counterfeiting was sharply reduced. In the past ten years the breakdown of denominations counterfeited has changed dramatically. The total of known $50 and $100 notes counterfeited has increased by sixty percent.

Money and the Banking System Section 2

• US vs. States Rights Federalists Alexander Hamilton Anti-Federalists Thomas Jefferson

History of Banking

• First Bank of the United States 1791-1811 - 20 year charter - Regulation of state banks - - Dollar as official US unit of currency Lost charter in 1811 = (+) state banks (x3) - chaos b/c insufficient reserves (McCulloch v. Maryland, 17 U.S. 316 (1819) (USSC+) IMPLIED CONGRESSIONAL POWERS The US Supreme Court would be the umpire in the federal system, and states couldn't tax the national government and Congress has implied powers.)

History of Banking

• Second Bank of the United States • Restored order but distrusted and not popular w/ state banks 1816-1836 - 20 year charter

First Historical Period of Banking 1780-1860

• First Bank of the United States - 1791 - 1811 (1811-1816 - x3 increase in state banks) • Second Bank of the United States 1816-1836 - 20 year charter (By 1837 - x2 increase in state banks) • Banking Crisis of 1837 economic recession

History of Banking

• Andrew Jackson vetoed the bill extending the National Bank - one year later Banking Crisis of 1837 (due to the absence of federal regulation provided by Bank of US)

Second Historical Period of Banking 1860-1913 Banking Acts of 1863 and 1864

and stability back to the banking system - to bring uniformity • Dual banking system State Banks by states chartered National Banks chartered by Federal government • Supreme national currency eliminated 1600 state bank currencies

Gold Standard Act of 1900 -

by gold - (repealed in 1934) paper money backed

Third Historical Period of Banking 1913 - Present

• To establish reform and regulation • The Federal Reserve System - 1913 - to act as the nations central bank • All national banks required to join • 12 Fed Reserve banks across the country • Independent of President - exercise monetary policy - Prime lending rate

Modern Banking Reforms

• New Deal - during Great Depression, FDR ordered nations banks closed and audited to discourage runs • Banking Act of 1933 est. Federal Deposit Insurance Corp (FDIC) insures deposits up to $100,000 (also FSLIC for Savings and Loans) Bank Run FDR Click to play

• Types of Banks

Modern Banking

Mutual Savings - small farmers and seamen’s banks in rural areas Commercial the most number of financial services and accounts Savings and Loan - mostly home mortgages but many financial services Credit Union large businesses and labor unions, owned by depositors

Deregulation Section 3

• • • • • Depository Institutions Deregulation and Monetary Control Act 1980 - regional and national banks - flexibility in interest rates (+ competition) - SandLs get checking accounts - ATMs, Achs, POS terminals, debit cards, electronic home banking, digital cash Occurs when the government lifts some of its restrictions on an industry

Deregulation Section 3

Depository Institutions Deregulation and Monetary Control Act (1980) Varied interest rates Open checking accounts, CD’s, card services, etc… by all institutions Allowed Internet Banking Increased reserves by all No reserves are required on the first $6.6 million. Between $6.6 million and $45.4 million, deposits are subject to a 3% reserve. Above $45.4 million they are subject to a 10% reserve.

Fun Fact

• The largest note ever printed by the Bureau of Engraving and Printing was the $100,000 Gold Certificate, Series 1934. These notes were printed from December 18, 1934 through January 9, 1935 and were issued by the Treasurer of the United States to Federal Reserve Banks general public.

only

notes were used for against an equal amount of gold bullion held by the Treasury. These transactions between FRBs and were not circulated among the