The 1st Bank Conflicting viewpoints Hamilton Sec of the Treasury vs Jefferson central bank vs a decentralized banking system Congress est the First Bank of the US in 1791 and grants it a 20 year charter ID: 783528
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Slide1
The American Banking System
Slide2The 1st Bank
Conflicting viewpoints: Hamilton (Sec. of the Treasury) vs. Jefferson
central bank vs. a decentralized banking system
Congress est. the First Bank of the U.S. in 1791, and grants it a 20 year charter
What did the Bank of the US do?
Held $ collected from taxes
Issued bank notes backed by gold and silver
Ensured state-chartered banks held sufficient reserves of gold/silver
Slide32
nd
Bank of the U.S.
Est. in 1816 due to financial chaos
20 year charter
Supreme court ruled that the national bank was constitutional
McCullough v. Maryland, 1819
Free Banking Era,
1837-1863
Bank runs
Fraud
Many different currencies
Slide4Bank Unification
& the Gold Standard
National Banking Acts, 1863 and 1864
Gave the Federal Govt. power to:
charter banks
Require banks have enough gold/silver to cover bank notes
Issue a common currency
Gold Standard
:
adopted in the1870’s, monetary system in which paper $ and coins are = to the value of a certain amount of gold
Set a definite value for the dollar
Only issue currency if it had gold in reserve
Slide5Great Depression and Reforms
Bad loans, the stock market crash and massive withdrawals of $ resulted in the closing of thousands of banks
Glass-Steagall
Act, 1933:
separated banking according to the types of banking business -
commercial banking
and
investment
banking
Federal Deposit Ins. Corp. or FDIC:
insurance on customer deposits in the event of a bank failure ($250k single/500k joint account)
Banks were closely regulated through the 1970’s, but began losing market share to Wall Street investment firms
Deregulation lead to bank mergers
Glass-Steagall was repealed in 1999
Slide6Banking Today
Creation of “Super Banks”
- Bank of America
- JP Morgan/Chase
- Citigroup
- Wells Fargo
Investment firms such as Goldman-Sachs and Morgan Stanley becoming
b
ank
h
olding firms
“Too
Big To
Fail”
The idea that a business has become so large and ingrained in the economy that a government will provide assistance to prevent its failure. "Too big to fail" describes the belief that if an enormous company fails, it will have a disastrous ripple effect throughout the economy.
Slide7Modern Day Services
ATM
24 hour banking
Debit Cards
On-line Banking
Cell phone apps
Slide8Money$$$$$$$$$$$$$$
Three Uses:
Medium of exchange:
anything that is used to
determine
value during the exchange of goods & services
Unit of account:
money provides a means for
comparing
the values of goods & services (dollars and cents)
Store of value:
money keeps its value if you decide to hold on to it
Exception:
periods of rapid inflation
Slide9Characteristics of Money
Durable
Portable
Divisible
Uniform
Limited Supply
Acceptable
Slide10Sources of Money’s Value
1
.
Commodity Money:
objects that have value in and of themselves and that are also used as money (only works in simple economies)
- livestock
- precious stones
2.
Representative Money:
makes use of objects that have value because the holder can exchange them for something else of value
- IOU
- gold and silver certificates
3
.
Fiat Money:
also referred to as “legal tender”
- our current system
Money Supply
Economist divide the money supply into two main categories:
M1=
$ that is
Immediately
accessible to pay for goods and services
- Liquid =
ability to use or directly covert to cash
-
Ex:
checking accounts, debit card
M2 =
all of M1 plus additional assets
- can be converted to cash easily
or “near money”
-
Ex:
savings account, money market mutual funds
Slide12Define the following terms: gold standard, Glass-Steagall Act
Describe the conflict between Hamilton & Jefferson concerning a central banking authority.
What were the duties of the 1
st
National Bank?
The period between 1837 and 1863 is referred to as the ________________.
List three results of the National Banking Acts of 1863 and 1864.
Explain the purpose of the Federal Deposit Insurance Corporation (FDIC).
What are the three uses of money?
What is the difference between M1 and M2? Provide an example of each.
How does a debit card differ from a credit card?
List three services that today’s banks provide.
Slide13Coca-Cola (KO)
one
$40 share of the company's stock bought in 1919, with dividends reinvested,
would
be
worth today……………….
Answer:
$9.8 million
Latest price $ 44.80
Microsoft (MSFT)
100 shares @ $21 during the IPO, would be worth today……. Answer: north of 1.5 million
Latest price $49.87 per share
Slide14Savings and Investing
The word
Investment
is defined as the “act of redirecting resources from being consumed today, so that they may create benefits in the future”.
Investing is an
essential
part of the
free enterprise system.
How?
-
promotes economic growth
- contributes to our nations’ wealth
Financial Institutions
Banks and Credit Unions
Finance Companies
Mutual Funds
Brokerage Houses
Life Insurance Companies
Pension Funds
Functions of Financial Institutions
Store and Protect Money
Saving Money
(
savings & money market accounts, Certificates of Deposit or CD’s, Investment products)
Loans
Mortgages
Issue credit cards
Slide17Saving and Investing
Investment Terms:
Diversification:
strategy of spreading out investments to reduce risk
Principle:
amount of money originally invested
Return:
money an investor receives above and beyond the sum initially invested
Time
Value of Money:
idea that a dollar now is worth more than a dollar in the future,
because
a dollar now can earn interest
Dollar Cost Averaging (DCA
): investment strategy designed to reduce volatility in which securities are
purchased in
regular
intervals, regardless of what direction the market is moving.
Slide18Risk and Return
The riskier the investment, the higher potential return……..
Types of risk:
Time
Type of Investment product
Liquidity
Inflation
“Risk
comes from not knowing what you're doing”.
“Rule
No.1: Never lose money. Rule No.2: Never forget rule
No.1”.
Warren
Buffett
Slide19N.Y. Stock Exchange
Est. in 1792
-
Buttonwood Agreement
1896, Dow Jones Industrial Avg. first appears
- 30 of the largest corp.
- Wal
-
Mart, Home Depot, Nike, Microsoft
1972, Dow closes above 1,000
Dow closed yesterday at 17, 773
Slide20Events That Shook the Stock Market
Panic of 1907
Began w/the San Francisco earthquake in 1906
Bank failures in the fall of 1907
J. P. Morgan, along w/other bankers
pumped millions of $ into weaker banks
Est. of the Federal Reserve System
Slide21The 1970”s
Jan. 1973-Dec. 1974-”Bear Market”
Dow Jones lost 45% of its values
Two major issues that fueled the Bear Market:
Abolishment of the
Bretton-Woods Agreement by Pres. Nixon
-
terminated
convertibility of the US dollar to
gold
Arab Oil Embargo
Fall
out:inflation (above 10 percent)
• high
unemployment
Slide221987, Black Monday
1980’s had seen a Bull Market from 1982-1987
Oct. 19, 1987, Largest one-day loss in the Dow Jones, 22.6% or $500 Billion
The Causes:
U.S. trade and budget deficits
Stocks over-valued
Sell-orders
Unlike 1929, the market rebounded
the next day and posted record gains.
Slide232008, Housing Bubble Bursts
From 1996 to 2006, home prices nearly
doubled.
What caused the “bubble to burst”?
Low home interest rates
Relaxed lending standards (sub-prime mortgages)
Investors placing to much $ in real estate
Fall of Lehman-Brothers
The Dow fell
from its high of
14,164
reached
in Oct
.
2007, to
6,443
by March
2009 – a
54%
plunge in little under 18 months.
Slide24Federal Reserve System
Est.
in 1913 under the Federal Reserve Act
Commonly referred to as the
“Fed”
Serves as the nations 1
st
true
central bank, meaning it can
lend to other
banks
in times of need
Slide25Organizational Structure
Divided into 12 Districts across the U.S.
Each district has a Federal Reserve Bank, w/the main branch in Washington, D.C.
There are roughly 6,000 member banks
The Fed is run by 7 individuals referred to as the Board of Governors, each appointed by the President
Janet Yellen (1
st
woman) is the current Chairman of the Federal Reserve Board
Slide26What does the Fed do?
Serve as a clearing house for checks
Lend $ to member banks
- considered the “lender of last resort”
Main job is controlling the money supply
How does this work?
Reserve requirement:
amount of money the Fed requires a bank to hold in reserve
Discount rate:
amount of interest the Fed charges to loan money to banks