At the end of Federalist 55, James Madison observed that, "republican government presupposes the existence of [civic virtue] in a higher degree than any other form." Political freedom requires limited government—that is, a government that for the most part leaves people alone, while ensuring that their rights are secured. But limited government is risky: When people are left alone, they might be tempted to violate the rights of others, or live irresponsibly, depending on others with money and resources to care for them.
If citizens are to live freely under a government of limited powers they should be mostly self reliant, providing the basic necessities of life for themselves and their families. This will usually require hard work, but so long as citizens can keep most of what they earn they will have a powerful incentive for work, and work makes the character of citizens sturdier. This, in fact, was the plan of the original Constitution, which provided for a government that would protect individual rights, while leaving the economic well being of the American people primarily to themselves.
Only industrious, self-reliant citizens are able to enjoy fully the blessings of liberty. Self-reliant citizens are free in the sense that they are not dependent on others for their basic needs. They do not need a large welfare-government, which has the potential to become an intrusive or oppressive government, to meet those needs. But how is a citizen, especially those who grow up with little money, to become economically self-reliant? They can begin by learning how to make money, manage money responsibly, and use money and other resources to expand one’s personal wealth, which is the road to economic independence. The “alphabet of economics” that follows provides useful definitions and explanations of the most important principles and practices to achieve that independence.
The second type of account is a checking account. Unlike the savings account, checking accounts do not allow people to earn more money on the amount of money that they put into the bank. Checking accounts are set up in the same way as a savings account. After setting up a checking account in a bank, the bank will give a person a check book, which is small book that allows people to pay for things without cash as long as they have enough money in the bank. Checking accounts are useful for people who do not want to pay for items with cash or carry cash on them at all times. For example, if a person wishes to purchase something in a store but does not have cash on them, they can write a check for the amount of the purchase as long as they have money in their checking account. Now, in addition to check books, banks can also give people a debit card which serves the same purpose of the check book. (See Debit Card).
Assets are any items that have value that can be turned into cash or exchanged in the market. There are two main types of assets. The first type of asset is a real asset. A real asset is an item which has physical properties. Real assets help individuals and companies make money. Examples of real assets are: buildings, land, automobiles, machinery, or homes. The second type of asset is a financial asset. Financial assets are items used by an individual or company which allow an individual or company to claim or receive income from others. Examples of financial assets are: cash, equities, and bonds. (See Equities and Bonds for further definitions.)
Example: Company A sells two bonds with different maturity rates, but both cost $100. One bond is a one year bond which pays 10% interest. The other bond is a five year bond which pays 15% interest. Kimberlee has been learning a lot about bonds in her junior high economics course, and decides to spend her allowance that she’s been saving up for the past year to buy some bonds from Company A. She buys both the one year bond and the five year bond. After one year she cashes in the first bond and receives $110. Five years later she cashes in the five year bond and receives $115. By investing her $200 in bonds from Company A, Kimberlee was able to make $225 with a $25 return.
Capital goods are any items that are created in order to make other items. For example, machinery is a capital good since it is created to produce other items such as buildings, homes, or any such products.
A commodity is any object that is made or produced for people to buy. Commodities are also made to be exchanged or traded for other items. (See Trade).
A credit card is something that a person can use to buy things if he or she does not have any or the right amount of money on them at the time of purchase. People can get credit cards from many companies, but first they have to apply for one. If they are accepted, the company that gives the credit card will tell them how much money they can spend on the credit card and how much interest, or additional money, that they will have to pay. In general, credit card bills come once a month and include interest.
Example: James just turned 18 and decided to get a credit card. The Master Kard that James received had a spending limit of $1000 and an interest rate of 20%. A week later he went to the mall and found a pair of tennis shoes that he desperately wanted to buy. Since he didn’t have the money to buy the shoes, James decided to use his credit card and buy them. The shoes were $100, but James didn’t worry about it since he wouldn’t receive the credit card bill until next month. He figured by then he would have made enough money to pay for his purchase. However, James was shocked the following month when he received a bill for $120. His friend explained to him that the shoes only cost $100, but the 20% interest rate on the credit card made the bill for his purchase more expensive. James has now decided to use his credit card only for emergencies since he learned that the interest rate on the credit card makes any purchase more expensive.
Like a credit card, a debit card can be used if a person wants to buy something but does not have cash on them or does not want to pay in cash. People can get debit cards when they open a checking account in a bank. A debit card works in the same way as a check book, but does not require a person to write down to whom they are paying, the date, the amount, or his or her signature at the time of the purchase. After a person uses his or her debit card to purchase something, the bank subtracts the amount of the purchase from his or her checking account. Unlike the credit card, people do not have to pay interest when paying with a debit card and do not receive bills.
Debt is an obligation or responsibility to repay an amount of money that was borrowed to purchase goods or services. Debt can also arise from purchasing or taking of goods or services on credit with a responsibility to pay later, such as paying for items with a credit card. In addition, when repaying certain debts, additional payments are due depending on the amount of time it takes to repay the debt and the predetermined interest rate. Individuals, companies, and governments can incur debt and have responsibilities to repay the amount of money borrowed or used on credit. When the government incurs debt, it issues bonds that can be purchased. The amount of the bond plus a predetermined interest rate are repaid to the purchaser of the bond depending on the bond’s maturity.
Example: Jordan really wants to buy a new MP3 player, but doesn’t have enough money. He even finds one on sale for $60, but still doesn’t have enough money. Jordan asks his father if he can borrow the $60 to buy the MP3 player. His father finally agrees to lend Jordan the $60, but requires Jordan to pay him back the full amount plus $10 in two months. Now Jordan is in debt to his father for $70. After Jordan pays his father back the full $70, his debt will be cleared.
When a company or organization is successful and they make money, the people who own stock in the company or organization will also receive some money. The people in charge of the company or organization will decide how much money to give the people who own stock and how much that they will need to keep for the company to continue to be successful or make a profit. (See Profit and Stock.)
Equities, also known as ordinary shares, are shares of a company that people can buy to make money. After buying equities or shares, people can become members of a company, vote in some meetings, and elect directors. If the company does well, a person who owns equities in the company will make money. However, in some cases, if the company does poorly and doesn’t make enough money, people who own the equities or shares will have to help pay for the losses. People can also make money by selling their equities if a company is doing well.
Created in 1913, the Federal Reserve System controls all of the banks in the U.S. In addition to setting the interest rate at which member banks can borrow money—which in turn affects the interest rates those banks charge borrowers—and controlling how the other banks work, the Federal Reserve System has set up 12 Federal Reserve Banks in the U.S. which represent 12 different areas or districts of banks across the country. The 12 Federal Reserve Banks help control the other banks and help with communication between the Federal Reserve System and the all other banks in the U.S.
A financial advisor is a person who helps other people and companies manage their money. For example, a financial advisor might teach people about investments, stocks, or savings. People and companies pay financial advisors to help them manage their money and make the best decisions about their money.
A free market economy is an economy that works without government intervention or regulation. In a free market economy, goods are bought and sold depending on the supply and demand for the goods. Capitalist countries, such as the United States, have free market economies, but countries that are governed by Communism or Socialism do not practice free market economics. Also in a free market economy, people can decide how much they want to sell their products for and how many items that they want to make. If a country does not have a free market, then the government will tell them what prices they have to charge and how much they can produce.
The Gold Standard is the practice of determining how much a country’s currency or money is worth in terms of gold. The Gold Standard was originally set up because different countries had different monies and it was sometimes difficult to figure out how much the monies around the world were worth. Since countries knew how much gold was worth, they began comparing their money to gold so people around the world would know how much the money in that country was worth. For example, in the United States, a bar of gold might be worth $500 while in Canada a bar of gold might be worth $350 Canadian dollars.
Many times when people want to buy a home they do not have all of the money that is needed to purchase the home. When that happens, people can take out loans from banks or other lending institutions to pay for the home. However, people must pay back the full amount of the loan plus an additional amount of money, known as interest, to the bank. Usually, after taking out a loan, people will pay monthly bills to cover the amount of the loan. The amount of time it takes to pay back a home loan can vary anywhere from 1 year to 20 or 30 years.
Example: Mr. and Mrs. Washington want to buy a home. They have looked at several different houses and found one that they wanted to buy. The price of the house is $100,000. Since Mr. and Mrs. Washington don’t have enough money to pay for the home, they are going to the bank to take out a loan. The bank has agreed to give them a home loan with a 10% interest rate and 20 years to pay back the full amount. After moving into the house, the Washingtons pay a monthly to the bank. After paying back the full amount plus the interest rate, the Washingtons have spent $110,000 on the home loan.
Hung-up is a term used to describe someone who has purchased a security that is now worth less than it was when it was purchased. If the person sells this security they will make a loss and not a profit. When a person is hung-up, he or she is not as able to make other investments that are profitable. (See Investments, Profit, and Securities.)
Example: After an awful ship wreck, Robinson Crusoe found himself on a tropical island. He soon met the natives of the island that informed him that there were only two goods on the island, shells and coconuts. The people would gather shells and exchange them for coconuts. So Mr. Crusoe began gathering shells in order to go to the market and purchase some coconuts. That night one of islanders forgot to put out his fire and it spread across the island, destroying nearly all of the coconuts. Since the supply of coconuts had drastically decreased, the islanders had to pay more shells for the coconuts. Now Mr. Crusoe and the other islanders have to compete even more when gathering shells. They will have to compete in this manner until the supply of coconuts returns to its previous level.
Insurance is basically a pool of money created by a group of people, and some amount of that money is then available to members of the group should they need it in case of an emergency or disaster. Insurance is based on the assumption that not every member of the group will need money at the same time, and therefore allows members of the insured group to share risk.
There are several different types of insurance, such as life, fire, house, health, or car. If someone has a car accident and they have insurance, the insurance company will help pay for the costs of the damage. Some types of insurance are required, such as car insurance. People are not allowed to drive without car insurance or they will face a penalty such as a fine or a ticket.
All insurance policies must be paid for. Some people purchase insurance from insurance companies, and sometimes an employer will provide insurance for employees, most often health insurance. But even when an employer provides insurance the employer must pay for the insurance, and therefore the employer has less money to pay the employee in wages or salary; in other words, insurance provided by an employer is earned by the employee.
Example: Jessie just got a new job and bought a Mustang. She followed the advice of her parents and immediately bought car insurance from her local insurance agent; the insurance costs $50 per month. On her way to work the next day, Jessie accidentally hit a garbage can. Jessie wasn’t injured, but her car had some damage. The cost to repair the car was $500, but since Jessie purchased the car insurance, the insurance company will pay the $500 to repair the car.I-Interest back
Interest is the additional amount of money that must be paid when a person takes out a loan or has to repay a debt. In general, interest payments are determined by the interest rate. The Federal Reserve Bank decides the interest rate and they can change it when necessary.
Example: Jim wants to attend the University of Michigan in the fall, but doesn’t have enough money. His parents tell him that he can take out a loan from the federal government. The next day Jim uses the internet to research federal loans and apply for them. After he was approved for the loan, Jim takes out $10,000 to pay for his first year. The school financial advisor warns him that when he repays the $10,000 after college, he will also have to pay an interest rate of 8%. So for the first year of college, Jim will have to repay the federal government $10,800, or an additional interest payment of $800.
People, companies, and governments purchase investments in hopes to make money off of them in the future. Some types of investments include: stocks, equities, education, property, and bonds. People usually do not make money off of investments right after they purchase them, but after time has passed. For example, a person might buy a bond but will not make money off of the bond until the bond expires.
Example: Mr. and Mrs. Jefferson have two kids that they want to send to college in the future. In order to help their kids pay for the expenses of college, they buy a piece of property in Los Angeles that they will sell when their kids start college. The current price of the property is $50,000, but they know that the property will be worth more in ten years when they sell it. After ten years, Mr. and Mrs. Jefferson sell the property for $200,000 and are able to use that money to send their kids to college. By investing their money, the Jeffersons were able to make $150,000 to help their kids.
Sometimes people will open checking or savings accounts with another person or group of people, which is known as opening a joint account. By opening a joint account, both people will have access to the money in the account. Joint accounts are usually opened by married couples, children and their parents, or companies and the people that work for them.
Kiting is when a person or group of people deposit and withdraw checks from the same account at the same time. Kiting is done at two or more different banks at the same time. The time it takes for one bank to collect money from the other bank is known as float time. When people are trading securities, they will often practice kiting to make the price of the stock go up. When the price of the stock goes up, people will make more money. (See Accout, Securities, and Stocks.)
Labor is the total amount of people that are available to help produce goods or commodities. In other words, labor is the total amount of people who are working to make items or provide services for other people to purchase. There exists a direct relationship between the cost of labor and the cost of goods produced by labor: As the costs of labor increase—for example, as wages increase or as the price of employer-provided insurance increases—the costs of goods increase as well, because a business pays for its increased labor costs by raising prices of the goods produced by its labor.
Liquidity means the ability to exchange assets for cash without losing a lot of money. Assets can be turned into cash by trading or selling. Companies and firms need liquidity to make sure that they are able to pay for all of the items that they purchase and any other costs that they may have from doing business. Liquidity can also mean how much more valuable a company’s assets are compared to how much money they owe. (See Assets and Trade.)
A loan is money that is borrowed with a promise to repay the full amount. People can take out loans from banks, governments, companies, or other people. Sometimes people must apply for a loan and be approved before they can get the amount of money that they desire. To be “approved” means that you have good credit, or a history of paying loans back on time and earning money, and therefore a lender feels confident that you can and will pay back the loan for which you are applying. If you have poor credit, if you have failed to pay back loans in the past or if you cannot demonstrate an ability to make money, you might not be approved for a loan.
People can take out loans for many different reasons, including attending school, buying a home or car, or starting or expanding a business. In addition, people often have to repay interest plus the amount of the loan back to the person or place that gave them the loan. (See Home Loans and Interest.)
A market is anyplace where people can buy and sell goods or services. There are many different types of markets that depend on the type and amount of goods and services that are bought and sold. One famous market is the stock market where stock can be purchased and sold. (See Stocks.)
Maturities are the length of time it takes for a bond or investment to pay. Maturities can last for a month or as long as years. Bonds or investments with longer maturities pay a greater interest because they are considered more risky. (See Bond, Interest, and Investments.)
A note is a written promise to repay someone a certain amount of money. The person who will be repaid is called the payee. A note will contain the name of the payee, the amount to be paid, when the payment will be made, the signature of the person who promises to pay, and the date. Notes can be written to banks, governments, companies, or other people.
An option is an agreement between two people or two groups of people that allows the people in the agreement to buy or sell commodities or securities. An option will tell people what amount of time they have to buy or sell securities or commodities. A person will buy or sell a commodity or security if he or she thinks that he or she will be able to make more money by doing so. A contract or agreement or sell a commodity or security is known put option. A contract to buy a security or commodity is a call option. A contract or agreement that allows people to buy or sell together is known as a double option. (See Commodity and Securities.)
Principal is the amount of money that is repaid to the person who buys a bond after it reaches its maturity. The principal includes the original amount of the bond along with the return. The return depends on the maturity of the bond. (See Bond, Maturity, and Return.)
A portfolio is the collection of investments that a person owns. A portfolio can consist of such investments as stocks, equities, bonds, and securities. (See Bonds, Equities, Investments, Stocks, and Securities.)
Profit is the amount of money earned by an individual or company from selling a product or service once all costs are paid. When doing business, companies want to maximize their profits. If a business cannot make a profit—if it cannot make money—then it cannot pay all its expenses and will have to close.
Example: Jennifer needs to make some money if she wants to attend a concert next month. In order to earn some money, Jennifer decides to make and sell necklaces. At the craft store she purchases string and beads to make the necklaces for a price of $20. With the supplies that she bought, Jennifer is able to make 50 necklaces. She decides to sell them at school for $3 each. Luckily for Jennifer, the other students really like her necklaces and she sells all 50 of them in one week. From selling the 50 necklaces, Jennifer has made $150. When she subtracts the $20that she spent on the supplies, she is left with a $130 profit. That is more than enough money for Jennifer to attend the concert next month.
A quota is a limit or maximum amount of goods that can be produced by a company. In some cases, a quota can be the minimum amount of goods or commodities produced by a company or person. Countries that do not have free markets sometimes have quotas for the minimum amount of goods or commodities that must be produced. There are also quotas on the amount of goods that can be purchased by a company or government. (See Commodity and Free Market.)
A return is the additional amount of money that is earned from making an investment by purchasing bonds, stocks, equities, or any other investments. A return can be calculated by subtracting the original price of the investment from the total amount earned from the investment.
Example: Josh’s father works in a bank and thinks it would be a good idea for Josh to learn a little bit about investing by purchasing his own bond. Josh goes to work with his father and buys a 2 year government bond with a 12% interest rate. The price of the bond is $50. Two years later Josh goes back to the bank to get the money that he has made from the bond. After spending $50 on the bond, Josh got back a total of $56, or a $6 return.
Revenue is the amount of money earned by selling a product or service without subtracting the amount of money that it cost to make the product or service.
Example: Vicky and her friends want to raise some money for the school dance. They decide to sell roses from the flower store that Vicky’s mom owns. Vicky’s mother donates 200 roses because she knows that Vicky and her friends don’t have any money and want to raise some for the school dance. If she didn’t donate the roses, they would have cost $200. Vicky and her friends sell all 200 roses for $1.50 to the other students in the school. Vicky and her friends make revenue of $300. Since they don’t have to pay Vicky’s mom $200 for the cost of the roses, their revenue of $300 is the same as their profit.
Securities are many types of financial assets. Securities are long-term assets, or assets that take a longer amount of time to mature. Securities can also include short-term assets, such as T-bills, but in general they refer to long-term assets. (See Assets and Treasury bills.)
Stock is owning a tiny piece of a company known as a share. When people buy more shares they own a larger part of the company. People will buy more shares if they want to make more dividends when the company makes money. There are two main types of stock that people can buy: preferred stock and common stock. Preferred stock is for people who mostly want to make money because this type of stock pays dividends on a regular basis. Common stock is bought by people who want to have more rights and authority in a company. Common stock lets people make more decisions about a company than preferred stock. (See Dividends.)
Sunk costs are amounts of money that people, companies, or governments have paid or lost that they cannot get back. People try not to concern themselves with sunk costs when making decisions about how to do business in the present or future. For example, if a company pays a person $1,000 to paint their building blue, but the person paints it red, the company has a sunk cost of $1,000.
Taxes are required amounts of money that individuals, companies, and organizations must pay to help buy public products, services, or projects. Governments decide the amount of taxes that people pay. There are several different types of taxes, such as income tax, sales tax, and property tax. For example, suppose the city of Los Angeles needs to build a new highway and plans to do so by using sales tax from the city. Now the city can take the sales tax from any purchase made, with the exception of food.
Example: Jim wants to buy a new CD for his brother’s birthday party. He goes to the music store and finds the exact CD that his brother has been wanting. The price of the CD is $15 and the sales tax is 7%. Jim knows that he will have to pay more for the CD because of the sales tax. The cashier rings up Jim’s purchase and the total comes to $16.05. Because of the sales tax, Jim will pay an extra $1.05 for the CD which the government will take to use for the new highway.
Trade is the exchange of one product or service for another product or service. When one product is exchanged for another product, which is known as barter. For example, David gives one of his DVDs to Tom and Tom gives David one of his DVDs. However, when one product or service is exchanged for something other than a product or service, the source used to get the product or service is called a medium of exchange. The most common medium of exchange is money. For example, when people buy things in a store, they are exchanging money for a product or service.
Treasury bills, known as T-bills, are government bonds that people can purchase to make money in the future. Governments sell T-bills when they are in debt or want to raise money for a public project or service. T-bills have maturities from 3 months to one year and pay interest depending on the length of the maturity. T-bills are less risky investments because the government, which possesses both the power to tax and (in the case of the federal government) to print money, is guaranteed to repay the purchaser of the T-bill the amount of the T-bill plus interest when the T-bill matures.
Unemployment refers to the amount of people who are not currently working or who do not currently have a job. People who have lost their jobs or are currently looking for jobs or who are going to school and not working are considered unemployed.
Utility is how useful or valuable something is to a person. Everything has utility and each person measures an item’s utility differently. If a person values product A more than product B, then he or she considers product A to have more utility. For example, a person who collects baseball cards will consider baseball cards to have more utility than football cards.
All countries have different types of money known as currency. Because different countries trade and produce different things, currencies from other countries aren’t worth the same amount in each country. For example, the U.S. dollar is worth more in some countries and less in other countries. When a currency is worth more in another country, it is considered to have more purchasing power, or the ability to buy more things. Similarly, if a currency is worth less in another country, it has less purchasing power since a person is not able to buy as much in another country as he or she is able to buy in his or her own country. The amount that a country’s currency is worth in another country is known as the exchange rate. Exchange rates can change depending on how well a country is performing. If a country has a strong or wealthy economy, then the exchange rates can change and their currency will be worth more and more in other countries that aren’t performing as well. Similarly, if a country is doing poorly, exchange rates can also change so that their currency won’t be worth as much in other countries that are performing better. The following table shows how much the U.S. dollar was worth on June 24, 2004 compared to some other countries.
Australian- Dollar 1.42939Botswana- Pula 4.6729
Brazilian- Real 3.103
Canadian- Dollar 1.343
Chinese- Yuan 8.2766
Danish- Krone 6.1055
Hong Kong- Dollar 7.7995
Hungarian- Forint 209.04
Indian- Rupee 45.85
Japanese- Yen 107.1
Malaysian- Ringgit 3.8
Mexican- Peso 11.303
New Zealand- Dollar 1.57803
Norwegian- Kroner 6.873
Singapore- Dollar 1.7097
South African- Rand 6.2987
South Korean- Won 1156
Sri Lanka- Rupee 102.6
Swedish- Krona 7.532
Swiss- Franc 1.2425
Taiwan- Dollar 33.59
Thai- Baht 40.85
Venezuelan- Bolivar 1920
The most common type of welfare today is government welfare. With government welfare, people pay taxes that help support people who need money, food, clothing, shelter, or health care. Private groups, such as churches or volunteer groups still offer welfare to help people in need. Private organizations raise their own money to help people while the government uses tax money. There are many different reasons why people receive welfare, such as job loss or health problems.
A yield is the amount of the return that is earned each year on a security. A yield is determined by the percentage of the current price of a security. (See Return and Security.)
Z-Zero-Coupon Bond back
Zero-coupon bonds are bonds that companies or corporations sell that do not pay interest before the bond makes it to its maturity. Some other types of bonds can pay interest once or twice a year before the bond matures. (See Interest and Maturity.)
Freedom is a great blessing; it is man's natural right. Free society offers maximum opportunities for human prosperity and happiness. But freedom is also a great responsibility. More is required of a free people than any other. They must be informed, civic-minded, and self-reliant. In addition to thinking of themselves as individual men and women, and as members of families, churches, and other private associations, Americans must think of themselves as citizens of a free country. The Alphabet of Freedom is a summary of the principles, institutions, and practices of American constitutional government and free society.
In his First Inaugural Address, George Washington described what was, and still is, at stake in the great American experiment in freedom: "The preservation of the sacred fire of liberty and the destiny of the republican model of government are justly considered as deeply, perhaps as finally, staked on the experiment entrusted to the hands of the American people." If freedom cannot flourish in America, it likely cannot flourish anywhere. On the other hand, if America succeeds, it becomes a model for people around the world who love liberty and seek to make their own governments freer.
The destiny of America is in our hands. America trusts its future and its security to each new generation of Americans who can and will make America what they want it to be. All American citizens should take ownership and pride in their country because, in truth, this land is their land. But Americans must always remember that their own well being, and the well being of their families and friends, is intrinsically connected to the well being of our country. It is to our advantage, and it is our duty, to make America the best it can be. In carrying out this duty, we can find no better guidance than the principles of freedom, the abc’s of freedom that form the Alphabet of Freedom.