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The American Banking System The American Banking System

The American Banking System - PowerPoint Presentation

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The American Banking System - PPT Presentation

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

bank money banks banking money bank banking banks gold investment market federal reserve system dollar dow amp est services

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Slide1

The American Banking System

Slide2

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 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

Slide3

2

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

Slide4

Bank 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

Slide5

Great 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Glass-Steagall was repealed in 1999

Slide6

Banking 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.

Slide7

Modern Day Services

ATM

24 hour banking

Debit Cards

On-line Banking

Cell phone apps

Slide8

Money$$$$$$$$$$$$$$

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

Slide9

Characteristics of Money

Durable

Portable

Divisible

Uniform

Limited Supply

Acceptable

Slide10

Sources 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

Slide11

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

Slide12

Define 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.

Slide13

Coca-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

Slide14

Savings 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

Slide15

Financial Institutions

Banks and Credit Unions

Finance Companies

Mutual Funds

Brokerage Houses

Life Insurance Companies

Pension Funds

Slide16

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

Slide17

Saving 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.

Slide18

Risk 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

Slide19

N.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

Slide20

Events 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

Slide21

The 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

Slide22

1987, 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.

Slide23

2008, 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.

Slide24

Federal 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

Slide25

Organizational 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

Slide26

What 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