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50 Cards in this Set
- Front
- Back
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Functions of Money |
1) Medium of exchange- accepted by all parties as payment for goods and services 2) Measure of Value- a common expression that each person can understand 3) Store of Value- a property that allows purchasing power to be saved until needed |
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Commodity Money |
money that has an alternative use as a commodity. Ex: tobacco, salt, beads, cotton |
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Fiat Money |
money by government decree |
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Wage Stagnation/Price Inflation |
1947-1970: family incomes rising rapidly, savings increasing 1970-1978: family income stops rising, no growth 1978-2009: family incomes stagnate, despite women entering work force |
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Money in Colonial America |
Some money was commodity money (tobacco was common commodity money- value three english shillings per pound) Some colonies established fiat money |
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Tax Anticipation Notes |
maybe, fiat money that could be redeemed for gold/silver after tax revenue was collected by the government |
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Continental Dollars |
issued to help pay for the American Revolution, not backed by gold or silver By the end of the war, one quarter of a billion Continental Dollars were in circulation, making them worthless |
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Specie |
many made from gold or silver- valuable for their mineral content 1776- 12 million dollars in specie circulated while 500 million dollars in paper money circulated |
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Triangular Trade |
Molasses shipped to the American colonies was made into rum, which was traded in Africa for enslaved Africans, the African slaves were then sold in the West Indies for pesos and molasses |
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Origin of American Dollar |
During Washington's Presidency, most common circulating coin was the Spanish peso (Pirates raided the Spanish gold shipments and spent their treasure in the Southern colonies). Franklin and Hamilton decide to make the dollar the new basic unit of monetary exchange- divided into tenths, unlike the peso which was divided into eighths |
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Characteristics of Money |
1) Portability- easily transferred from one person to another making the exchange of money for products easier 2) Durability- it must not deteriorate easily as it is handled by one person or another 3) Divisibility- money should be easily broken down into smaller units so that only as much as is needed to complete a transaction 4) Limited Availability- money to be valuable has to be limited in supply |
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Monetary Standard |
a means of keeping the money supply portable, durable, divisible, and limited in supply |
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Article I, Section 8 & Article 1, Section 10 |
Gives Congress the power to coin money/regulate the value and prohibits states from coining money |
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State Banking |
1811- there were 100 state banks chartered by their respective states- the state chartered banks assured that the paper money they issued could be redeemed for gold or silver whenever the public wanted (not always true) |
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Wildcat Banks |
printed large amounts of paper money often in remote places making redemption difficult |
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Problems with Paper Currency |
1) Each bank issues their own version of paper money- different sizes, colors, and denominations 2) The temptation to issue more paper money than the banks had gold to back it up for redemption 3) Counterfeiting- some counterfeiters simply issued their own notes since there were so many types in circulation |
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Greenbacks |
1861- Congress authorized the printing of $60m in demand notes which had no backing- fiat money that must be accepted for legal debts paper money printed in green to distinguish them from state bank notes |
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Public Issuing of a National Paper Currency |
Public distrust of greenbacks --> National Banking system National Banks were privately owned but chartered by fed gov't --> issued National Banks notes, a uniform national currency backed by gov't bonds |
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Gold and Silver Certificates |
1863- government issues Gold certificates printed in large denominations for use in banks 1882- government printed gold certificates in smaller denominations for general use by the public 1886- government introduced silver certificates backed by silver dollars, which were inconveniet and bulky 1890- the government introduced Treasury Coin Notes redeemable in either gold or silver 1893- repealed the act of 1890 after the US treasury gold drain brought on by the panic of 1893 |
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Pros/Cons of Gold Standard |
Pros: 1) public trusted it -knew they could convert their paper money into gold when desired -prevented the government from printing more paper money than the backing would allow Cons 1)The government never had enough gold to back all the paper money in generation. The government printed money with the belief that it was unlikely that everyone would want to redeem their paper money at the same time 2) the price of gold fluctuates over time- buying and selling gold at a "fixed prices" would face the government significant problems |
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Abandoning of Gold Standard |
1) FDR declared national emergency 2) anyone with gold holdings of more than $100 had to file a disclosure with the US Treasury 3)1934 Gold Reserve Act- required citizens to turn in their private holdings in gold and gold certificates- paper money was issued by the Treasury which was not redeemable for gold (inconvertible fiat money) 4) National Currency & Treasury Coin Notes were withdrawn from circulation in 1930s - Gold Certificates withdrawn in 1934 -Silver Certificates withdrawn in 1968 5)Federal Reserve Notes |
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Characteristics of Portable Money |
1) portable- currency is lightweight and convertible 2)durable- metallic coins last about 20 years, paper money about 18 months 3)divisible- easily broken down into smaller denominations; checks can be written for exact amounts 4) limited availability and stability- money supply grew at 10%-20% in the 1970s contributing to inflation; relative price stability in the 1990s |
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The Federal Reserve System's jobs |
1) Provide financial services to the government 2) regulate financial institutions 3) maintains the payment systems 4) enforces consumer protection laws 5) conducts monetary policy |
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Basics of the Fed |
-privately owned by the member banks who own stock in the fed -banks can choose to be a member of the fed; nationally chartered banks must be a member of the fed -member banks are required to purchase shares in the fed |
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How many Federal Reserve Banks? |
12: 1)Boston 2)New York 3)Philly 4)Cleveland 5)Richmond 6)Atlanta 7)Chicago 8)St. Louis 9)Minneapolis 10)Kansas City 11)Dallas 12) SanFran |
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FED Board of Governors |
seven member Board of Governments appointed by the President and confirmed by the Senate for a 14 year term -appointments are staggered so vaccines occur every two years -the board is regulatory and supervisory- it sets general policies for the fed and member banks -reports each year to congress |
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FED District Banks |
In 1913, FED operated as a system of twelve independent and equally powerful banks. Today, the Fed is no longer limited solely to its regional responsibilities The regional reserve banks act as bank for the member banks, doing for them what local banks do for their depositors |
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Federal Open Market Committee (FOMC) |
-makes decisions about interest rates and money supply -twelve members: seven members of the FED Board of Governors, the Pres of the NY District FED, and four district Federal Reserve bank presidents who serve one year rotating terms -FOMC meets eight times a year in DC- reviews the country's economy and makes decisions about the cost and availability of credit -the monetary policy making body of the FED |
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Federal Advisory Council |
representatives of each of the twelve FED reserves- gives advice on the overall health of the economy |
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Consumer Advisory Council |
council of 30 members who meet with the Board three times a year on consumer credit laws |
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Thrift Institutions Advisory Council |
the council is made up of representative from savings banks, credit unions, and saving and loan institutions. Gives advice on the state of thrift institutions |
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Fed regulatory responsibilites |
-all depository institutions must maintain monetary reserves against depositors deposits -the fed monitors the reserve deposits of member state baks while other federal agencies monitor the reserves of non-member banks the FED has authority over holding companies- corporations that own one or more banks |
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Additional FED responsibilities |
1) clearing checks 2) enforcing consumer legislation 3) maintaining currency and coins 4) providing financial services to the government |
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Fractional Reserve System |
banks must keep a fraction of their deposits on hand to meet the Reserve Requirement |
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Reserve Requirement |
an amount of money on hand at any time to meet the requirements of depositors on a day to day basis |
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Excess Reserves |
-the amount of deposits left after meeting the Reserve Requirement that can be used to make loans -2006: the reserve requirement is 10% on ordinary deposits --> 90% is the excess reserves then |
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Banking Balance Sheets |
-Bank loans show up as liabilities, obligations to others -Bank assets are properties, possessions, and claims on others -a banks net worth is its assets minus its liabilities |
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Certificate of Deposit |
an interest bearing loan to a bank. -prior notice needs to be given for a withdrawal; banks try to maintain a 2%-3% spread between the interest give on the deposits and the interest charges on a loan |
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Demand Deposit Account |
-requires that 20% be set aside in a Member Bank Reserve to satisfy the FED's reserve requirement -each loan of the excess reserves must meet a new reserve requirement that member banks must meet |
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Easy Money Policy |
money supply grows as interest rates fall- this normal stimulates the economy |
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Tight Money Policy |
the FED restricts the money supply by higher interest rates -consumers and businesses borrow less and spend less and the economy grows more slowly |
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Change the Reserve Requirement |
Within limits, Congress allows the Fed to change the reserve requirement for checking, time, and savings accounts -raising or lowering the reserve requirement would make more or less money available to be loaned |
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Open Market Operations |
the FED can buy and sell government securities -buying securities increases the money supply --> lower interest rates -selling securities decreases the money supply --> higher interest rates |
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Discount Rate |
the rate of interest the FED charges to member banks -as rates go up, fewer banks will want to borrow money from the FED --> reduces the amount of money available to bank customers --> interest rates up -reverse when rates go down |
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Moral Suasion |
Testimony before Congress by the FED chair might have an influence on interest rates if his comments indicate that the economy is sluggish or overheated |
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Selective Credit Controls |
minimum down payments on cars or consumer goods during WWII to free factories to produce war materials |
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Short Run Results |
when the FED expands the money supply, the cost of credit (interest rates) go down. Similarly, the cost of interest rates go up if the FED contracts the money supply |
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Long Run Results |
-when the FED increases the money supply, inflation occurs |
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Monetizing the Debt |
creating extra money to off set the deficit spending to keep interest rates from changing --> eventually results in inflation |
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Quantity of Money Theory |
-decrease the money supply, increase the interest rates -increase money supply, decrease the interest rate |
