Banking Banking

Standards

• Standard 10 – Students will understand that: institutions evolve in market economies to help individuals and groups accomplish their goals. Banks, labor unions, corporations, legal systems, and not-for-profit organizations are examples of important institutions. A different kind of institution, clearly defined and well enforced property rights, is essential to a market economy

Standards

• Standard 11 – Students will understand that: money makes it easier to trade, borrow, save, invest, and compare the value of goods and services

The Federal Reserve Act of 1913The Federal Reserve Act of

1913• The Federal Reserve

System, often referred to as “the Fed,” is a group of 12 regional, independent banks.

• Initially the Federal Reserve System did not work well because the actions of one regional bank would counteract the actions of another.

A Stronger Fed• In 1935, Congress

adjusted the Federal Reserve structure so that the system could respond more effectively to crises.

• Today’s Fed has more centralized powers so that regional banks can work together while still representing their own concerns.

• Glass-Steagall Act (1933) regulated the banks (2 Dems)

• Repealed by the Depository and Monetary Control Act (1980)Gramm-Leach-Bliley Act (1999) allowed banks to own other financial companies (3 Reps)

• Proprietary TradingWhen a bank uses their money to make trades – they get to keep the profit - very risky

What’s It Like Living in a Barter Economy?

– A barter economy is an economy in which people trade goods and services instead of money.

– Living in a barter economy is difficult because many of the people you want to trade with don’t want to trade with you.

– Transaction costs are any costs associated with the time and effort needed to search out, negotiate, and complete an exchange.

– Reducing transaction costs would make trading easier.

Entrepreneur has ideas

BanksPeople make money

Money

• Money has to have 6 characteristics:1. Durability – must last a long time2. Portability – must be able to easily carry it3. Divisibility – can be divided into smaller denominations4. Uniformity – the must be a standard value5. Limited supply – the amount must be regulated6. Acceptability – everyone must be able to exchange the money at any time

Money

• Commodity money – objects that have value that are used as money ie. salt or cattle

• Representative money – has value because it can be exchanged for something of value ie. an IOU

• Fiat money – has value because the government says it has value ie. dollar bill

Banks

In 2014, 7% of American families were unbankedMostly Hispanic. Why?

BanksBanksThe main function of a bank is to act as a clearing

house for checks writtenMost banks are members of the FDIC – Federal Deposit

Insurance Corporation, which guarantees deposits up to $250,000 per depositor

Deposits$10m

5% I

$9mLoans

10% I

• fractional reserve banking is a banking arrangement in which banks hold only a fraction of their deposits and lend out the remainder.

• Interest on $9M investments @ 10% = $900kInterest paid to customer is $10M @ 5% = - $500k

• -$500k + -$100k (expenses) = $600k

• Profit = $300k

Liabilities

$10M deposits

$1M equity

Assets

$9M

$1MReserves

BANK

Multiplier EffectMultiplier Effect– The multiplier effect is created through fractional banking– Still only 1,000 G but the multiplier effect has created 2,710

G

BANK

Assets Liabilities

100 G Equity

Farmers have 1,000 GFarmers1000 G

900 G

100 G

Workers have 900 GWorkers900 G

810 G90 G

810 G 810 G

The Money Supply

• The money supply is all the money available in the economy

• M1 represents money that people gain immediately (liquid) – cash, demand deposits, traveler’s cheques

• M2 represents all of M1 and other assets that are not as easily available, such as money market mutual funds and saving deposits

What Are the Three Functions of Money?Money has three major functions.

medium of exchange = something accepted as payment for goods and services. ie. When you buy clothesunit of account = a common measurement used to express values. In the United States, many goods and services are expressed in dollars.store of value = something that has the ability to hold value over time. ie. Cash in a piggy bankIf prices rise then money declinesMoney is a good that is accepted as payment(goods = anything that satisfies our wants)

Saving and Checking Guide

• Goal #1 Saving Accountsa) What is a savings account, b) How to make a deposit, c) How to make a withdrawal, d) how to manage a savings account.

• Goal #2 Checking Accountsa) How to write a check

• Goal #3 Balancing a Bank Accounta) How to balance a checking account

Making a deposit or withdrawala. To put money in your account you will need

a deposit slipb. To take money from your account you will

need a withdrawal slipc. All transactions should be recorded on a

savings account register which will be provided by the bankBank transactions can take place at a bank or by using an ATM (automated teller machine)Be careful:Keep the PIN number safeMake sure you are aloneMost ATMs dispense in $20 increments

Making a deposit - To put money in your account you will need a deposit slip

Making a depositMaking a deposit

This is what the completed form should look like

Withdrawal SlipWithdrawal SlipMaking a withdrawal - To take money from your account you will need a withdrawal slip

This is what the withdrawal form should look like

Savings RegisterSavings RegisterThis is what a blank savings register looks likeIt is very important to keep track of all your transactions

This is what the savings register should look like

A checkA check

This is a check

Writing a checkWriting a check

Check registerCheck register