Homework Support For the report due on Monday the following excerpt of the class lecture is presented.

Homework Support

For the report due on Monday the following excerpt of the class

lecture is presented

Chapter 10Terms

commodity money currency demand deposit barter fiat money Liquidity money supply

Gold Standard Federal Reserve Note Bank of US Three Uses of Money Bank-run/panic Mortgages Interest rate Principal

OBJECTIVES

OBJECTIVE 1: Using the History of American Banking, including debates over a national bank, balance the desire for unregulated banking and the advantages of economic freedom against the need for protection of investors and individuals using regulation.

OBJECTIVE 2: Present your argument in a team of two to the class in an oral report with a written paper for submission including your major points and summary of your argument.

History of American Banking.

Banking debate over national bank. 1st Bank of US 1791-1811 2nd Bank of US 1816-1836

Free Banking Era, 1837-1863 Each Bank issued its own currency by 1860 over 8,000 banks with different currency

Chaos or Control Free Era Bank Run or Panic Wildcat banks Fraud Many Currencies Paper money

Continentals (Rev War Greenbacks (Civ War) Federal Reserve Notes

(1913)

National Banking Acts 1863, 1864 Acts gave Federal

Government power to Charter Banks

Require gold and silver reserves

Issues national currency.

Bank Safeguards and Reforms

FDIC Insurance for bank failures, 1933. Savings and Loan crisis in 1980’s caused

many failures FSLIC dissolved all S&L’s had to join FDIC in 1989

Banking Today

Fractional Reserve,

p. 260. Federal Reserve Notes

serve like gold or silver reserves banks must keep 20%

cash on hand

Mortgages Credit/Debit cards Interest-principal Commercial Banks S&L’s Fed Savings Banks Credit Unions Finance Companies

The Reagan Deregulation Program Federal requirements that set maximum interest

rates on savings accounts were phased out. This eliminated the advantage previously held by savings banks.

Checking accounts could now be offered by any type of bank.

All depository institution could now borrow from the fed in time of need, a privilege that had been reserved for commercial banks. In return all banks had to place a certain % of their deposits in the fed. This gave the FED more control and stabilized state banks.

Bank Deregulation Garn - St. Germain Act of 1982 allowed savings banks to now

issue credit cards, make non residential real estate loans and commercial loans; actions previously only allowed to commercial banks.

In 1980 the US had 4,600 thrifts, by 1988 mergers and bankruptcies left 3000. By the mid 1990's less than 2000 survived.

The S&L crisis cost about 600 Billion dollars in "bailouts." This is 1500 dollars from every man woman and child in the US.

In summary, the S&L crisis was caused by deregulation which led to high interest rates that then collapsed. Other causes included inadequate capital and defrauding shorthanded government regulatory agencies (less regulators and inspectors).

Steps Taken to Solve the S&L Crisis Passed the Financial Reform, Recovery and Enforcement Act

(FIRREA) Abolished the independence of the S&L industry. Abolished the Federal Home Loan Bank Board which had been in

charge of supervising S&L's New agency Office of Thrift Supervision (OTS) created as part of

the executive branch. Changed Federal Insurance. FSLIC eliminated and responsibilities transferred to FDIC. Two separate funds were created within the FDIC:

SAIF - Savings and Loan Insurance Fund - for all savings type banks.

BIF - Bank Insurance Fund - for commercial banks. Resolution Trust Company (RTF) created to dispose of failed thrifts.

Electronic Banking

ATM Debt Cards Stored Value Cards The Float

check kiting now limited by the Automated Clearing Houses (ACH)

checks are processed more quickly

Major components of Money Supply

M1: Currency Demand deposits checkable deposits traveler’s checks

M2: M1+ Money market

accounts savings accounts money market mutual

funds Other easily liquidated

savingsSee p. 259 fig. 10.5.

Major components of Money Supply

M1 Money

M2 Money

M3: M2+ large

denomination certificates of deposit

Major components of Money Supply

L: M3+ most securities

within 18 months of maturity

US Savings bonds 1yr to18 month

T-bills, other govt. bonds

“L” stands for Liquidity or overall ability to spend.

Major components of Money Supply

Origin of the Dollar

Use of specie

Coins, and Paper Money

The Gold Standard

The Story of US Money

In the late 1700's the Spanish had instituted the use of specie known as pesos.

The Spanish had long mined the silver in Mexico, melting and creating bullion or ingots.

The treasure ships stopped in the West Indies and often fell prey to pirates who spent their stolen treasure in the Southern Colonies.

How was the use of the dollar originated?

How was the use of the dollar originated?

Pesos were known as pieces of eight because The Triangle Trade brought Pesos to America as well, Molasses to Rum To Slaves

They were divided up into parts of eight called bits. The pesos resembled Australian currency called

Talers, which the colonists had seen because Australia was also a colony of England, the term became so popular that Franklin and Hamilton decided to name the new currency Dollars.

The new Dollar was divided by units of 10, not 8, because it was easier.

Pieces of Eight, Spanish Coin

How was money first issued in the colonies?

The Constitution in Article 1, section 8 gives Congress the power to deal with money.

Article 1 section 10 further states that no state shall have these powers but it was basically understood at that time that the government could not print paper money.

If the Federal Government could not print paper money, who could?

State Banks - Banks chartered by states. These banks printed paper currency , mostly backed by gold or silver.

Some banks abused this and printed large amounts of currency to be spent in far away cities.

These wildcat banks presented a problem.

State Bank Notes

State Bank Notes

State Bank Notes

What did the federal government do at that time to regulate money?

The Bank of the United States, created by Alexander Hamilton and then destroyed by Jackson, acted as a department of the treasury.

It had a federal charter and collected fees, taxes and made payments on behalf of the federal government.

What problems arose as result of this lack of supervision?

By the civil war there were 1,600 different banks issuing over 10,000 different types of currency.

Each bank was supposed to base their currency on existing gold or silver reserves but this was often no the case.

As a result lists of "bad notes" were circulated and often a person went to buy something and found they had bad currency.

This meant that the money they had was now essentially worthless.

When did the Federal government start printing currency?

When the Civil War began in 1861 the north needed currency so Congress passed a law authorizing the printing of $60 million of demand notes.

These were declare legal tender even though they had no gold or silver backing. In 1862 they printed another $150 million.

These United States Notes were known commonly as Greenbacks because they were printed green on the front and back.

What did the government do to support the Greenback?

Created a National Banking System. Rigorously inspected banks were chartered by the federal government.

Each bank would issue national currency or the US Notes.

They were uniform in appearance and backed by US Government Bonds.

State banks still existed and few could afford to buy the bonds and get a charter.

Greenbacks

What did the government do to support the Greenback?

In 1865 Congress passed a 10% tax on all privately issued currency.

This killed the state banks and left only greenbacks and national currency in circulation.

What did the government do to calm fears that US Notes weren't good?

It issued Gold Certificates (1863) printed in yellow.

These became known as Yellow backs. They were backed by gold reserves. They were originally used by banks to settle

differences but in 1882 the government printed $20 bills for general use.

Gold Certificate

Gold Certificate

Gold Certificate

What did the government do to calm fears that US Notes weren't good?

It issued Silver Certificates (1886) in part to support prices for silver miners in the west. In 1878 the government began buying huge silver reserves and mint them into dollars.

Later they kept the silver in reserve and printed silver certificates (1886).

Treasury Coin Notes were printed from 1890 to 1913 and were redeemable for gold and silver coin.

Silver Certificate

Treasury Coin Note

When did Congress start to back dollars with gold?

(1900) - This is known as the "Gold Standard" The government didn't actually have all the gold for all the money in circulation but it was acknowledged that all wouldn't redeem at one time.

Why did Congress start to back dollars with gold?

Support the currency and provide it with inherent value.

How much was a dollar worth in gold?1/20.67 of an ounce

Gold Coin

What are the advantages of being on the gold standard?

People feel more secure about their money. Prevents the government from printing too

much money and therefore value remains high, this can also be a disadvantage.

What are the disadvantages if the gold standard?

Growing economy needs a growing money supply which requires growing gold stocks.

If these cannot be found then economic growth is stunted.

In event of financial crisis many may convert their certificates to gold, therefore depleting national reserves.

Why did the US go off the Gold Standard?

During the depression many began hoarding gold, banks began to fail and people began to cash in their dollars for gold.

In 1933, fearing the government could not back the money supply a national emergency was decreed and we officially went off the gold standard.

What happened to those that had gold? Anyone with more than $100 of gold had to file a

treasury form.

Why did the US go off the Gold Standard?

Citizens, Banks and businesses were required to hand over their gold and gold certificates in exchange for Federal Reserve Notes as the national currency.

Those who did not hand it in had their gold and certificates confiscated.

What did it mean that we were no longer on the Gold Standard?

It meant we were on a inconvertible fiat money standard. The money supply cannot be converted to gold or silver.

It is fiat, decreed, money. Since 1975 Americans have again been able to own

gold. The government now manages the value of money

by regulating the economy and the money supply.