Economics: Money and Banking – Flashcards
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Why banks exist
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To make money
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How banks make money
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Invest money in stocks, loans and interest
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How people pay for things today
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Services/labor, credit card, Bitcoin, trading
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Barter economy
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Commodity money, goods are the money, don't have today because too bulky
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Barter economy is
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An exchanging of goods, to go back and forth
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Commodity money
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Anything that has value that you can exchange for something else, good, what you have, what you produce
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Why don't have barter economy today
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Too bulky- unreasonable, example is Walmart would have warehouse full of millions of items since it since it sells millions of items every day
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Money and value
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Money stores value, but it is a depreciating value
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Characteristics of money
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Portable- get to where exchanging is (not house), durable- won't disintegrate, divisible- can't buy basket for 1/4 cow when only have live cows, limited supply- important if everyone has it, it loses its value (or not enough)
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Functions of money
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MEDIUM OF EXCHANGE- consistent and fixed amount, immediately know value, MEASURE OF VALUE, STORE OF VALUE- non- deteriorating- next year, still worth same, subject to change, and depreciate due to prices changing, each year, money buys you less and less
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Beginning of banking
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Jews started banking
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Jews and banking
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Why Hitler attacked them, seen as shrewd and penny-pinchers
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Starting point of banks
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All private banks, a rich guy wants to make money on his money, so he loans out and charges interest
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Qualities of private banks
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Privately issued bank notes, no Federal currency until Civil War
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history of Federal currency
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None until Civil War, Lincoln did this, reasons were to unify nation under one currency, to devalue Confederate currency, and to destroy South's financial ability
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Characteristics of national banking
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Greenbacks, national currency, private bank that is chartered by national government
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Greenbacks
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No gold backing, currency printed by federal government, national currency
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Charter
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Gives authority because government approves
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Year we went to the gold standard
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1900
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What going to gold standard means
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For every dollar, dollar worth of gold in Fort Knox
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Advantages of gold standard
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People feel secure about money- have money to back up, prevents government from printing too much money
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Gold standard prevents
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Government not just endlessly printing money
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Disadvantages of gold standard
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Not realistic, need for more currency as society grows, gold value constantly changes
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Abandoning the gold standard
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When off in 1971, price of gold fluctuates now
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People's reasoning for having gold standard
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Some say have it because it controls government
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Federal Reserve System
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Created as direct response to Great Depression, bank for banks
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What about the Great Depression the Fed was created for
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Banks didn't have money to give to people, distrust of banks
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Characteristics of the Fed
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A banker's bank- for times of need, protect banks from running out of money, controlled by member banks
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Federal Deposit Insurance
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$250,000 per customer per bank- guaranteed, against robbery- even if stolen- up to $250,000
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How a bank gets its money- detailed
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Issuing stock- sell stock, people buy stock/ownership at low prices, hope value increases, deposits- people deposit money into account, use commercials to convince people to come, imposing architecture better since seems safer
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Reserve requirement
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Government requires banks to have 20% not invested, so if a person walks in and wants exact amount (all), can do
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Reserve requirement example
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If $1,000 in bank, $200 in vault and $800 invested- no access to
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Loans, Investments, and fees
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Profit for the bank- rapid, may have today and sell tomorrow
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Questions to ask when selecting a bank- evaluating your needs
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How are you paid, how are your bills paid
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Selecting a bank don't
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Don't automatically choose the one you grew up with
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Tip for choosing a bank based on how you are paid
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If direct transfer, doesn't matter where, if a check, find close- so don't have to drive a long time to find a bank
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Tip for choosing a bank based on how your bills are paid
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If have to physically pay, choose local
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Banking services
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Checking account, savings accounts, debit cards, credit cards, smart cards, electronic funds transfer
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Negative of banks
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Banks willing to destroy people's lives for profit
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How people get into credit card debt
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By paying only minimum payment each month (interest can be up to 12%-20%)- a %
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Tips for financial literacy
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Know why you should save, pay attention to details, make yourself creditworthy, know that what you do now financially affects you later
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Warnings about banks
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We learn/education is there to keep people from being naive- think worse of banks so they don't take advantage, be very careful-banks don't have best interests at heart
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Standard banks
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For-profit, profit of shareholders or owners
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Credit unions
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Lower loan interest rates, non-profit, higher interest rates, everyone votes on policy changes, don't answer to stockholders
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What non-profit means
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After operating expenses, isn't extra, if there is, money poured/goes back into company (ex. invest in facilities)
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Thrifts
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Not for main banking, very small facilities, only one category (examples are home, car, etc.)
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CD
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Certificate of deposit, put money in bank and not allowed to touch it for certain period of time
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Advantages of CDs
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Higher interest rates, not risky, longer the term, the higher the interest
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Disadvantages of CDs
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Must be left in the bank for a fixed amount of time, penalties for withdrawing money early, minimum balances required
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Savings Account
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Deposit account that earns interest and is issued by a bank or credit union, easy to access, insured
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Advantages of Savings account
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Not risky, no restrictions on withdrawals, low or no minimum balance required
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Disadvantages of savings account
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lowest interest rates, sometimes opening and maintenance fees
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Money Market Account
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Fees associated if under certain balance, type of checking and savings account issued by bank or credit union to hold person's money
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Advantages of money market account
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Higher interest rate than savings, can withdraw money (some restrictions)
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Disadvantages of money market account
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Higher minimum balance, some withdrawal restrictions, subject to fees if balance below certain amount
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Retirement account
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Helps set aside money for retirement, anything with stocks, can gain or drop quickly, is risk of losing money (is fairly secure) in stock market- no control over
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Advantages of retirement account
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tax-deferred growth, some employers will match contributions, helps create long-term savings
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Disadvantages of retirement account
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penalties for withdrawing before retirement, contribution limits
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529 savings account
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Only for education
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Advantages of 529 savings account
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low minimum starting balance, some states offer tax breaks, tax-deferred growth
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Disadvantages of 529 savings account
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Have to use money for college or 10% penalty
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mutual funds
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Type of retirements
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Advantages of mutual funds
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creates opportunity to diversify investments
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Advantages of stocks
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if market value increases, potential for great gain
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Disadvantages of mutual funds
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return not guaranteed, if portfolio professionally managed, may be subject to high fees
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Stocks
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share in the ownership of a company
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Disadvantages of stocks
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if market value decreases, potential for great loss, no guarantee for return on investment and principle could be lost, managing stock options may require professional help
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Bonds
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long term (ex. 5, 10, 15 yrs.), loan where you lender and gov. borrower
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Advantages of bonds
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Usually more security than stocks
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Disadvantages of bonds
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Historically lower return rates
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Why should you save?
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In times of trouble (ex. 3-6 months worth), big bills over time
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Minimum deposit
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Smallest amount of money person must put in to open new account
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ATM Fees
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Fees people pay to use ATMs, usually at ATMs not from their bank
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Maintenance Fees
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Fee paid to bank to keep account open
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Overdraft
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Requires a fee when a withdrawal from an individual's bank account exceeds the available balance.
