Never borrow money from friends.

 The age-old adage, "Never a borrower nor a lender be," carries profound wisdom. While borrowing money from friends may seem like a convenient solution in times of financial hardship, it can have far-reaching consequences that can strain relationships and lead to emotional distress.

Financial Implications

One of the most immediate concerns is the potential for financial strain. When money changes hands between friends, it can create a sense of obligation and expectation. If the loan is not repaid on time or in full, it can lead to tension, resentment, and damaged friendships. Moreover, borrowing money from friends can mask underlying financial problems, preventing individuals from addressing the root causes of their financial difficulties.

Social Implications

The social implications of borrowing money from friends can be even more significant. Money can be a sensitive topic, and discussing financial matters can often lead to uncomfortable conversations. When money is involved, it can be easy for emotions to run high, and misunderstandings can arise. If a loan is not repaid, it can damage trust and erode the foundation of the friendship.

Practical Advice for Avoiding Financial Pitfalls

To maintain healthy financial boundaries and avoid the pitfalls of borrowing from friends, consider the following tips:

1. Prioritize Budgeting:

   • Create a realistic budget to track income and expenses.
   • Identify areas where you can cut back to save money.
   • Set financial goals and work towards them.

2. Emergency Fund:

   • Build an emergency fund to cover unexpected expenses, such as medical bills or car repairs.
   • Aim to save at least three to six months' worth of living expenses.

3. Seek Professional Help:

   • Consult with a financial advisor to develop a personalized financial plan.
   • Consider seeking credit counseling or debt management services.

4. Explore Alternative Financing Options:

   • Consider taking out a personal loan from a bank or credit union.
   • Explore options like peer-to-peer lending or crowdfunding.

5. Honest Communication:

   • If you must borrow money from a friend, be upfront about the terms of the loan, including the repayment schedule and interest rate.
   • Maintain open and honest communication throughout the process.

By following these guidelines, you can protect your friendships and your financial well-being. Remember, borrowing money from friends can be a risky proposition. It's always best to exhaust other options before turning to friends for financial assistance.

NEW YORK SAFETY FUND SYSTEM

The New York Safety Fund System represents one of the early efforts to protect the public from bank failures and is an ancestor to the Federal Depositary Insurance Corporation (FDIC) in the United States. The Safety Fund System required that banks chartered by the state of New York contribute to a safety fund to pay for the redemption of banknotes issued by failed banks.

Under the pre–Civil War banking system individual banks issued their own banknotes, which in principle they stood ready to redeem in specie. Banknotes played the role that checking accounts play in the modern banking system. When banks, failed the public could no longer convert the banknotes of failing banks into gold and silver coins. In the modern banking system, bank failures, in the absence of deposit insurance, leave the banking public unable to withdraw bank deposits in cash.

The legislature enacted the New York Safety Fund Act on April 2, 1829, and the system remained in effect until the era of free banking that began in 1838. Some of the public skepticism toward banks at the time can be read in the wording of the act, which referred to a bank as a “monied corporation.” The act 300 | New York Safety Fund System required that each bank annually contribute 0.5 percent of its capital to a fund

until the bank’s contribution to the fund  equaled 3 percent of its capital. The interest earned on the fund, after

allowances for administering the fund, was paid back to the banks. When a bank failed, the safety fund paid the debts of the failing bank, but the fund did not reimburse the owners of the bank for loss of capital. The act put the administration of the fund in the hands of three commissioners, one appointed by the governor, and two by the banking community. The act provided that a bank could be liquidated if the bank was two months

behind in its contribution to the safety fund, had sustained a loss of half of its capital stock, had suspended specie payments on its banknotes for 90 days, or had refused access to bank commissioners. The act also required that bank officers pledge an oath that a bank’s stock was not purchased with a bank’s own banknotes, a common abuse of banking laws at the time. 

The safety fund system worked well until 1837, but the crisis of 1837 was more than the fund could handle. The safety fund appears to have remained in existence into the era of free banking, but not on sound footing. In 1842, the act was revised to remove the safety fund from responsibility for bank deposits and debts, but maintained the fund’s responsibility for banknotes. R. Hildreth, writing in 1837 on the banking system, commented on the safety fund, saying: “it does not level the root of the evil; and it has the obvious defect of taxing the honest for the sins of the fraudulent” (Chown, 1994). 

See also: Central Bank, Free Banking, National Bank Act of 1864, Suffolk System

References:

Chown, John F. 1994. A History of Money.

Hepburn, A. Barton. 1924/1964. A History of the Currency in the United States.

Myers, Margaret G. 1970. A Financial History of the United States.

NEGOTIABLE ORDER OF WITHDRAWAL ACCOUNTS

Negotiable order of withdrawal (NOW) accounts are interest-bearing checking accounts offered by banks and, particularly, thrift institutions, in the United States. The so-called M1, the narrowest definition of the money supply in the United States, includes NOW accounts. NOW accounts came about from a process of

regulatory evolution rather than consciously thought-out planning for the monetary system.

The Glass–Steagall Act of 1933 banned payment of interest on checking accounts, reflecting the Depression-era thinking that interest-paying checking accounts had contributed to the high incidence of bank failures. Payment of attractive interest rates on checking accounts was one means banks used to attract depositors away from other banks, and banks that lost a large quantity of deposits faced bankruptcy.

Because savings and loan and other thrift institutions were not authorized to issue demand deposits, the zero-interest rate ceiling on demand deposits did not directly affect them. Thrift institutions were authorized to issue passbook accounts and regular savings accounts, which allowed customers to deposit funds or make withdrawals anytime during business hours. Technically, thrift institutions could require a seven-day

notice before allowing the withdrawal of funds from these accounts, but in practice this requirement was usually waived.

The first NOW accounts were offered in 1972 by the Consumer Savings Bank in Worchester, Massachusetts, a mutual savings bank. Massachusetts had mutual savings banks, which were insured by a

state insurance fund and therefore independent of the regulations imposed on the federally insured depository institutions. By 1970, Massachusetts savings banks were already authorized to waive a 30-day withdrawal notice for regular savings accounts, and depositors could walk into a savings bank and transfer funds to a third party by using counter checks devised for that purpose. The Worchester bank only proposed changing

the location at which the third-party draft was written. The idea came before the Massachusetts Supreme Judicial Court, and the court took two years before deciding that the Consumer Savings Bank had

a point. After 1972, NOW accounts spread rapidly among mutual savings banks in Massachusetts. Regulatory bodies allowed NOW accounts to penetrate the rest of New England, and then New York

and New Jersey. Title III of the Depository Institution Deregulation and Monetary Control Act of 1980, called the Consumer Checking Account Equity Act, authorized the savings and loan industry to offer NOW accounts nationwide. The act also authorized credit unions to issue similar accounts called share drafts. Theoretically, share drafts pay dividends rather than interest, but the practical implications are the same.

Before the introduction of NOW accounts, savings deposits at thrifts fluctuated with opportunities to earn interest in other types of financial investments. A period of rising interest rates was invariably attended with a withdrawal of funds from savings deposits at thrift institutions. The availability of interest on NOW

accounts eased some of the pressure on depositors to find investments for their money outside of the thrift institutions. NOW accounts increased the costs of funds to thrift institutions, but also have added stability to savings accounts. From the consumer’s stand point, accounts that pay interest are not as vulnerable to inflation, because the interest earned offsets the deterioration in purchasing power from inflation.

See also: Certificate of Deposit, Depository Institution Deregulation and Monetary Control Act, Monetary Aggregates, Money Market Mutual Fund Accounts References

Rose, Peter S. 1986. Money and Capital Markets, 2nd ed.

Woerheide, Walter J. 1984. The Savings and Loan Industry.

NATIONAL BANK ACT OF 1864 (UNITED STATES)

NATIONAL BANK ACT OF 1864 (UNITED STATES).

The National Bank Act of 1864 gave the United States a uniform currency, universally accepted at par, sparing merchants the necessity to consult banknote detectors to appraise the value of various banknotes received from customers.Banknote detectors were regularly published

booklets showing the discount on each banknote.

Before the National Bank Act of 1864, the United States had no permanent and uniform national currency but only a confusing medley of state banknotes trading at various discounts, usually depending on the distance from the issuing bank. The National Bank Act established a system of note-issuing national banks, with national charters, to compete with the state banking system, which was regulated by separate banking

regulations in individual states.

The National Bank Act bore a striking similarity to much of the states’ free banking regulations, allowing any group of five or more persons meeting certain capitalization requirements to obtain a national charter. Capital requirements varied from $50,000 to $200,000, depending on the size of the city the bank proposed to serve. Larger cities required larger capitalization. A third of the capital, or $30,000, whichever was smaller, had to be held as U.S. government bonds deposited with the comptroller of the currency, a new position created to supervise the national banking system. In exchange for the government bonds, the bank received national banknotes. Aside from other advantages, the new national banking system created a market for U.S. government debt.

The act provided for a hierarchy of reserve banks that led to a pyramiding of reserves in New York, creating an unstable link between the banking system and Wall Street financial markets. Country banks had to meet a 15 percent reserve requirement, three-fifths of which could be deposited in banks located in 18 large cities designated as redemption centers. The act subjected banks in the redemption centers to a 25 percent reserve requirement, half of which could be deposited with New York banks. The reserve requirement was the fraction of outstanding checking accounts or other deposits that a bank had to keep as reserves—vault cash or a reserve deposit at an acceptable institution.

Separate legislation effectively gave national banks a monopoly on the privilege to issue banknotes. In 1862, Congress put a 2 percent tax on the issuance of state banknotes. In 1866, Congress increased the tax to 10 percent, putting an end to the profits of state banknotes, and leaving only national banknotes in circulation. About one-fourth of the state banks in northern states survived the National Bank Act and the tax on state banknotes. In the later 1800s, the substitution of the personal check for banknotes brought a resurgence

of the more gently regulated state banks. The National Bank Act significantly advanced the monetary system in the United States, but it made no provision for a lender of last resort to act as a safety net during financial crises. Concern over recurring financial crises led the United States to further centralize its monetary system with the establishment of the Federal Reserve System in 1913.

See also:

Federal Reserve System, Greenbacks

References

Hepburn, A. B. 1924/1964. A History of the Currency of the United States.

Myers, Margaret G. 1970. A Financial History of the United States.

Selgin, George A., and Lawrence H. White.

“Monetary Reform and the Redemption of National Bank Notes.” Business History

Review, vol. 68, no. 20 (Summer 1994): 205–243.

Nails

In the most famous of books on economics, Wealth of Nations, published in 1776, Adam Smith wrote that “there is at this day a village in Scotland where is not uncommon, I am told, for a workman to carry nails instead of money to the baker’s shop or the alehouse.”

Smith goes on to speculate why metals have been the money of choice for many countries. According to Smith:

[M]en seem at last to have been determined by irresistible reasons to give the preference for this employment to metals above every other commodity. Metals can be kept with as little loss as any other commodity, scarce anything being less perishable than they are, but they can likewise, without any loss, be divided into any number of parts, as by fusion those parts can easily be reunited again, a quality which no other equally durable commodities possess, and which more than any other quality renders them fit to be the instruments of commerce and circulation. The man who wanted to buy salt, for example, and had nothing but cattle to give in exchange for it, must have been obliged to buy salt to value of a whole ox, or a whole sheep at a time. If, on the contrary, instead of oxen or sheep, he had metals to give in exchange for it, he could easily proportion the quantity of the metal to the precise quantity of the commodity which he had immediate occasion for.

There is some evidence that nails served as money in one of the nineteenth-century French coal fields. Nails were perhaps a convenient form of a metallic currency, functioning without the service of a mint, and putting the metal in a form that was equally serviceable as a medium of exchange or as a practical commodity.