Economics 11804 www.msu.edumilewsk6

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Economics 11/8/04www.msu.edu/milewsk6

• OBJECTIVE Examine where money comes from.
• I. Journal 37 pt. A
• -Read Profiles in Economics p.291
• -Answer question 1 p.291
• II. Journal 37 pt. B
• -notes on money
• III. Homework due Friday 11/12/04
• 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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In the beginning

• People traded stuff for other stuff. It was
  good, but it was inconvenient to carry around a
  bunch of heavy stuff hoping that the person you
  wanted to trade with would trade with you.
• This was the barter economy.

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A new medium of exchange

• Something accepted by all parties as payment for
  goods and services
• It included Gold, Silver, and even Salt (these
  are commodities)
• For something to serve as money it MUST have value

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Now we use

• Fiat money money by government decree. It is
  money because the government says it is.

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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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Economics 11/9/04www.msu.edu/milewsk6

• OBJECTIVE Examine the U.S. Mint and the future
  of money.
• I. Journal 38
• -Read Cybernomics Spotlight p.286-287
• 1.) What are the characteristics of money?
• 2.) What is a smart card and what functions does
  it perform?
• 3.) Do you think that smart cards will catch on
  in the U.S.?
• II. Modern Marvels The U.S. Mint
• -worksheet on the film
• III. Homework due Friday 11/12/04
• 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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Some facts on Smart Cards

• Developed in the late 1970s and have been in use
  for over 10 years
• Smart cards have an embedded microchip that can
  carry up to 100 times more information than a
  magnetic-stripe card.
• Smart cards are popular in Europe where they are
  commonly accepted in stores, vending machines,
  payphones.
• 962 million smart cards were sold worldwide in
  1997. Less than 1 were sold in the U.S.
• Why less than 1, the U.S. doesnt have the
  standardized technology to read smartcards.

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Economics 11/10/04www.msu.edu/milewsk6

• OBJECTIVE Examine the U.S. Mint and the future
  of money.
• I. Finish watching Modern Marvels The U.S. Mint
• II. Return of Chapter 7 Test
• III. Journal 39 pt. A
• -Read The Global Economy p.297
• -Answer questions (1-2) p.297
• IV. Journal 39 pt. B
• -notes on the gold standard

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The U.S. Dollar v. foreign currencies

• Some current exchange rates
• 1USD .77 Euros
• 1USD 1.20 Canadian Dollars
• 1USD 105.74 Japanese Yen
• 1USD .53 U.K. Pounds
• 1USD 11.44 Mexican Pesos

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Silver Certificates - 1886

• (they) modeled off the popular gold
  certificates. where we left off Monday
• 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 11/11/04www.msu.edu/milewsk6

• OBJECTIVE Examine the short comings of the gold
  standard.
• I. Journal 40 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 40 pt. B
• -notes on the gold standard

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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 11/12/04www.msu.edu/milewsk6

• OBJECTIVE Examine the development of modern
  banking.
• I. Journal 41 pt. A
• -Read the Business Week Newsclip p.306
• -Answer questions (1-2) p.306
• II. Journal 41 pt. B
• -notes on the Federal Reserve
• NOTICE No School Monday November 15th

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The Federal Reserve - 1913

• The United States 1st true central bank
• All federal banks were required to join and all
  state banks were eligible to be members.
• All members own shares of stock in the system
  making the Fed privately owned, but it is
  publicly controlled.
• The President appoints the Feds Board of
  Governors and the Chairman. All appointments are
  approved by Congress (checks balances)

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The Great Depression ?

• Despite reforms like the Federal Reserve, many
  banks were not sound.
• Deposits were not insured and runs were common.
  Millions of people lost all of their money.
  (Including my Great-Grandfather)
• March 5, 1933 Bank Holiday. FDR ordered all
  banks to close until legislation could be passed
  to make banks stronger.

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FDIC

• The Banking Act of 1933 (The Glass-Steagall
  Act)
• Main point of the Act was the FDIC Federal
  Deposit Insurance Corporation.
• The FDIC insured depositors up to 2500. It is
  now 100,000.
• Today the FDIC aggressively pursues ways to
  protect consumers from fraudulent banks.
• Both symbols from
• http//www.fdic.gov/regulations/resources/signage/
  index.html

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Other Depository Institutions

• Commercial Banks for businesses and had the
  power to issue checking accounts
• Thrift Institutions accepted deposits of small
  investors but didnt have the power to issue
  checking accounts until the mid-1970s
• Mutual Savings Bank owned and operated only for
  the benefit of their depositors.

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SL and Credit Unions

• Savings and Loans a depository institution that
  invests a majority of their funds in mortgages.
  They were regulated by the Federal Home Loan Bank
  Board
• Credit Unions non-profit service that is owned
  and operated for the benefit of its members.