World War I & World War II

BANKING and MONEY

Hey P2G Here is a review from our History class concerning the week of 3/14/2016.

Our objectives included:

• To explain how has the concept of money evolved
• Describe how do banks operate

How Has Money Evolved

Originally Barter was used for the exchange of resources or services for mutual advantage, and the practice likely dates back tens of thousands of years, perhaps even to the dawn of modern humans. Some would even argue that it's not purely a human activity; plants and animals have been bartering—in symbiotic relationships—for millions of years. In any case, barter among humans certainly pre-dates the use of money. Today individuals, organizations, and governments still use, and often prefer, barter as a form of exchange of goods and services.

Outside of China, the first coins developed out of lumps of silver. They soon took the familiar round form of today, and were stamped with various gods and emperors to mark their authenticity. These early coins first appeared in Lydia, which is part of present-day Turkey, but the techniques were quickly copied and further refined by the Greek, Persian, Macedonian, and later the Roman empires. Unlike Chinese coins which depended on base metals, these new coins were made from precious metals such as silver, bronze, and gold, which had more inherent value.

The first known paper banknotes appeared in China. In all, China experienced over 500 years of early paper money, spanning from the ninth through the fifteenth century. Over this period, paper notes grew in production to the point that their value rapidly depreciated and inflation soared. Then beginning in 1455, the use of paper money in China disappeared for several hundred years. This was still many years before paper currency would reappear in Europe, and three centuries before it was considered common.

Gold was officially made the standard of value in England in 1816. At this time, guidelines were made to allow for a non-inflationary production of standard banknotes which represented a certain amount of gold. Banknotes had been used in England and Europe for several hundred years before this time, but their worth had never been tied directly to gold. In the United States, the Gold Standard Act was officially enacted in 1900, which helped lead to the establishment of a central bank.

The massive Depression of the 1930s, felt worldwide, marked the beginning of the end of the gold standard. In the United States, the gold standard was revised and the price of gold was devalued. This was the first step in ending the relationship altogether. The British and international gold standards soon ended as well, and the complexities of international monetary regulation began. Today, currency continues to change and develop. In our digital age, economic transactions regularly take place electronically, without the exchange of any physical currency. Digital cash in the form of bits and bytes will most likely continue to be the currency of the future.

What are Banks?

A Bank is a financial institution which is involved in borrowing and lending money. Banks take customer deposits in return for paying customers an annual interest payment. The bank then use the majority of these deposits to lend to other customers for a variety of loans. Banks primarily function by accepting deposits and then loaning those deposits to creditworthy individuals. There are two parts to any loan: principal and interest. The principal is the actual amount borrowed. The interest is the money a customer pays above the principal for the opportunity to borrow money. Most people require loans to purchase real estate, this type of loan is called a mortgage. By banks lending people money they earn interest and they share that earning with depositors.  When a person fails to pay back a loan, they have defaulted on the loan. Defaulting on a loan leads to bad credit and higher interest rates in the future for the individual. By defaulting, a person ruins their reputation for repaying a loan. Banks suffer because they must still provide the depositor with access to their money. If too many people default on their loans a bank can become insolvent or go “bankrupt”

What is FDIC Insured mean?

The Federal Deposit Insurance Corporation(FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000* per depositor per bank.

What is the Federal Reserve?

The Federal Reserve System, often referred to as the Federal Reserve or simply "the Fed," is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. Today, the Federal Reserve's responsibilities fall into four general areas.

• Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
• Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
• Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
• Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.

How do Banks View Money

The money supply is all the money available in the United States. In economics this is referred to as M1+M2.  M1 is money that is liquid, people can easily use M1 to pay for goods and services. M1 is good to have in the short run but offers no long term growth or return.

M2 is a measure of the money supply that includes cash and checking deposits (M1) as well as near money. “Near money" in M2 includes savings deposits, money market mutual funds and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits and may have long term growth or return attached to it. Banks often operate with little M1, but have access to large reserves of M2.

Some T.A.S.C. Questions or ideas that you may want to consider are below:

Describe what is interest and principal.

How do banks earn money or make a profit?

What is the major difference between M1 and M2?

Which currency (M1 or M2) would a bank most likely seek to maintain in order to make the most profit?

What is the Federal Reserve?

If you want more information on banks here is a history channel documentary on the subject: