Chapter 17 Money and Banking

Section 1 Money Money has three functions Medium of Exchange Store of Value Measure of Value - allows you to compare the values of goods and services Anything that people are willing to accept in exchange for goods and services can serve as money Most familiar type of money is coins and currency Coins are metallic forms of money such as pennies, nickels and dimes Currency includes both coins and paper money

Money We value and accept money because we are sure that someone else will accept it as well Money by itself has no value, it has value ONLY because we accept that it has value Characteristics of our Money Acceptable Can be counted and measured accurately Durable and not easily destroyed Convenient and easy to carry and use Inexpensive to produce Money supply is easily controlled

Section 2 Our Banking System People with money to save take it to financial institutions, or banks Banks put the money to work by lending it to other people or businesses that need funds Banks cover its costs and makes a profit from the interest it charges on these loans

Types of Banks Commercial Banks - Financial institutions that offer full banking services to individuals and businesses Most people have their checking and savings accounts in commercial banks Savings and loan associations - banks that traditionally loan money to people buying homes] They also take deposits and issue savings accounts in return Credit Unions - work on a not-for-profit basis Often sponsored by large businesses, labor unions or government institutions Open to members of the group that sponsors them. They give workers a financial institution that has low costs

Banks Each of those banks bring savers and borrowers together, they give people a safe place to deposit money, and a source for people to borrow money To keep banks safe, they are closely regulated Most banks have to report to one or more regulatory agencies on a regular basis They are also required to follow rules and accounting practices that minimize unnecessary risk

Banks When the banking system collapsed in 1934 (Great Depression) the crisis wiped out people’s savings Congress and President FDR created the FDIC to protect people’s deposits in the banks (like an insurance agency for banks). The Federal Deposit Insurance Corporation (FDIC), is a federal corporation that insures individual accounts for up to $100,000. Banks need to attract depositors to survive They offer checking accounts, which allow customers to write checks or use check/debit cards People don’t keep money in checking accounts long Funds that people can leave untouched they put in savings accounts

Banks Banks pay interest to customers based on how much money they have deposited This money grows larger the longer it is left in the bank Certificate of Deposits (CDs), or time deposits, are also offered by banks Loan the bank money for a specific amount of time and in return the bank pays a higher interest rate Cannot withdraw money before the time has elapsed or they must pay a penalty

Banks Banks will also lend money to people through loans, which can increase the supply of money Loans have interest that the borrower must pay back to the bank Banks keep a % of checking and savings deposits in reserve - fractional reserve banking - they loan the rest of the money out Allows the banks to make more money off of interest

Section 3 The Federal Reserve System The Federal Reserve Act of 1913 set up the Federal Reserve (Fed) as the nation’s central bank; controlling the money supply of the United States When people or a corporation need money, they borrow from a bank When a bank needs money, they borrow from the Fed. The United States is divided into 12 Federal Reserve districts and each district has one main bank The president and the Senate choose the 7 members on the Fed’s Board of Governors so that the banks cannot become too powerful

Functions of The Fed Fed acts as the government’s bank Holds the government’s money Sells U.S. bonds and Treasury bills (used to borrow money) Fed issues and controls the nation’s currency Conduct monetary policy Controls the supply of money and the cost of borrowing money according to the needs of the economy Fed can change the money supply by changing the interest rate

The Fed When there is less money in the economy, the demand for goods and services decrease and then businesses cut down on production and a recession occurs The Fed will try to help by controlling and manipulating the money supply The Fed can change the discount rate - the rate it charges member banks for loans Stimulate the economy - lower discount rate Slow the economy - higher discount rate Fed can also raise or lower the reserve requirement How much money banks hold in reserve

Tight Money vs. Easy Money Tight money policy is when the Fed tries to reduce the amount of money available for loans. This happens when interest rates are raised. Easy money puts more money into the money supply. This happens when interest rates are lowered.

Stocks Stocks are a way in which people will invest and save their money Price of stock is determined by supply and demand There are 3 major stock markets: Dow Jones Standard and Poor’s (S&P 500) NASDAQ New York Stock Exchange (NYSE) is the world’s largest market When stock prices are rising it is known as a bull market, when they are falling it is known as a bear market. The stock market is an indication of how the economy is doing.

Governments are also asked to solve economic problems: In the late 1800s and early 1900s, the U.S. economy stopped growing. The nation began to go through a period of great suffering. Businesses closed, banks failed, and many workers lost their jobs. People began to panic and wanted to withdraw all the money they had deposited in the banks. This forced many banks to close, and depositors lost their savings. People wanted to government to help solve these economic problems but did not want it to change the free enterprise system into a command economy. There were several possible solutions. The government could give money to businesses and banks so that they could remain open. This would cost a lot of money and create national debt. The government could create jobs and retrain people who were unemployed, but this would take time and was expensive. Another alternative was to give people food and money so they could survive without jobs. This might solve some problems for awhile, but the government could not afford to support so many people forever. The government could become more involved in overseeing the economy by creating agencies and passing laws to try to prevent this situation from happening again, but this would interfere with the free market economy. What’s the problem? What are other reasonable solutions? Choose the solution you believe is best. Use advantages and disadvantages to explain why it is the best option.