Congratulations, you have just been hired by the federal government to completely redesign our money. Before getting started on your design, think about how we use money. Working with a partner, create a design for the new bills and coins. Share your finished product with the class and explain why your money will serve the same purpose(s) as our existing money. Read Chapter 14 to learn more about our monetary system and how the government works to promote economic stability and growth. Chapter Intro 1

Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth. Chapter Intro 2

The Evolution, Functions, and Characteristics of Money The Federal Reserve System (Fed) issues most of the money in U.S. circulation. Paper currency—Federal Reserve notes Section 1

The Evolution of Money People invented money to make life easier. Section 1

The Evolution of Money (cont.) In a barter economy, exchange of goods and services must have a “mutual coincidence of wants.” Money in primitive societies Commodity money Fiat money Section 1

The Evolution of Money (cont.) The Continental Congress issued paper money to finance the Revolutionary War in 1775. Colonists also used specie like English shillings, Austrian talers, and Spanish pesos brought over by immigrants. The dollar is the basic monetary unit of currency in the U.S. money system. Section 1

Characteristics and Function of Money Anything can be used as money as long as it is portable, durable, divisible, and limited in supply. Section 1

Characteristics and Function of Money (cont.) Characteristics of money Portable Durable Divisible into smaller units In limited supply Section 1

Characteristics and Function of Money (cont.) Functions of money in the economy Medium of exchange Measure of value Store of value Section 1

Characteristics and Function of Money (cont.) Today’s money Federal Reserve notes Metallic coins issued by the U.S. Bureau of the Mint Demand deposit accounts (DDAs) Section 1

Characteristics and Function of Money (cont.) The Fed has different definitions for the money supply. M1 M2 Section 1

The Development of Banking in America The United States experimented with many different kinds of money before it created the Federal Reserve System. Section 2

The Development of Banking in America (cont.) Abuse and other problems in an unregulated money supply led to government intervention. After ratification of the U.S. Constitution, state banks issued their own paper currency. Section 2

The Development of Banking in America (cont.) Currency problems Each bank issued own currency in different sizes, colors, and denominations. Banks were tempted to issue more notes than backed with silver or gold. Counterfeiting became a problem. Section 2

The Development of Banking in America (cont.) Congress printed paper currency in 1861 declaring it legal tender. Individuals referred to new paper notes as “greenbacks. ” The National Currency Act in 1863 created a National Banking System (NBS). Section 2

The Development of Banking in America (cont.) A national bank issued its own notes called national currency. This was backed with bonds banks purchased from federal government. Government was engaged in bank inspections. 10% tax applied to all privately issued bank notes. Section 2

The Development of Banking in America (cont.) Gold certificates were issued. Silver certificates were introduced in 1878. Section 2

The Creation of the Fed The Federal Reserve System is the nation’s central bank. Section 2

The Creation of the Fed (cont.) By the 1900s, the National Banking System was showing signs of strain. Difficulty in providing enough currency for a growing nation System not designed for popular method of paying—checking accounts Minor recessions caused major problems for banks and lending institutions. Section 2

The Creation of the Fed (cont.) Congress created the Federal Reserve System, or Fed, as the nation’s central bank in 1913. Membership required by all national banks State-chartered banks were eligible for membership. Membership banks purchased stock in the Fed. Section 2

The Creation of the Fed (cont.) The Fed issued its own currency, replacing all other types of currency. Despite creation of the Fed, banking industry was overextended when Great Depression began in 1929. State and National Banks Section 2

The Creation of the Fed (cont.) Banks did not have deposit insurance for customers. Bank runs caused many banks to fail. Bank holiday—declared by President Roosevelt March 5th, 1933 Section 2

The Creation of the Fed (cont.) The Banking Act of 1933 (Glass-Steagall Act) created the FDIC: Insures customer deposits to a maximum specified amount if case of failure Provides sense of security Can seize banks and sell them if in danger of collapse Section 2

The Creation of the Fed (cont.) Popularity of checking accounts led to reforms in the use of fractional bank reserves. Fractional reserve system—banks are required to keep only a portion of their total deposits in the form of legal reserves. Size of reserve is determined by a reserve requirement and is set aside in vault as cash or in a member bank reserve (MBR). Section 2

The Creation of the Fed (cont.) Remaining excess reserves represents the bank’s lending power and can be loaned out. Fractional Reserves and the Money Supply Section 2

Structure of the Fed The Fed is organized as a corporation, owned by its member banks, and directed by a government-appointed board. Section 3

Structure of the Fed (cont.) Privately owned by its member banks Directed by a seven-member Board of Governors Appointed by the President and approved by the Senate Each serves a 14-year term Primarily a regulatory and supervisory agency to member banks Section 3

Structure of the Fed (cont.) Operates 12 Federal Reserve district banks The Federal Open Market Committee (FOMC) makes decisions about interest rates. Twelve voting members including seven- member Board of Governors Meet eight times a year to review the economy and make monetary changes Section 3

Structure of the Fed (cont.) Three committees advise the Board of Governors. The Federal Advisory Council advises on matters concerning overall health of economy. The Consumer Advisory Council advises on consumer credit laws. Profiles in Economics: Ben S. Bernanke Section 3

Structure of the Fed (cont.) Three committees advise the Board of Governors. Thrift Institutions Advisory Council advises on matters pertaining to Savings and Loan industry. Structure of the Federal Reserve System Section 3

Conducting Monetary Policy Monetary policy involves expanding and contracting the money supply to change the level of interest rates. Section 3

Conducting Monetary Policy (cont.) The Fed is responsible for monetary policy. More money is demanded when the interest rate is low. Easy money policy The Fed restricts the size of the money supply in a tight money policy. Short-Run Impact of Monetary Policy Section 3

Conducting Monetary Policy (cont.) Fed uses three major tools to conduct monetary policy: Reserve requirement Open market operations Discount rate—Prime rate The Reserve Requirement as a Tool of Monetary policy Section 3

Conducting Monetary Policy (cont.) Impact of monetary policy Impact is complex Length of time for impact is unknown. Money supply also affects general price level—quantity theory of money. Monetary Policy Tools Section 3

Other Fed Responsibilities As the nation’s central bank, the Fed is responsible for most aspects of banking and the payments system. Section 3

Other Fed Responsibilities (cont.) Additional Fed responsibilities Maintaining the money supply Currency—notes printed by the U.S. Bureau of Engraving and Printing Coins produced by the Bureau of the Mint Section 3

Other Fed Responsibilities (cont.) Additional Fed responsibilities Maintaining the payments system Electronic transfer of funds via clearinghouses Internet banking Section 3

Other Fed Responsibilities (cont.) Additional Fed responsibilities Regulating and supervising banks Establishes and monitors guidelines governing banking behavior including bank holding companies Section 3

Other Fed Responsibilities (cont.) Additional Fed responsibilities Preparing consumer legislation Implements consumer legislation such as federal Truth in Lending Act Regulation Z Serving as the federal government’s bank Section 3

Money People began using money because it made buying and selling easier than bartering. VS 1

Development of Modern Banking Problems with the money supply before 1914 led to the creation of the Federal Reserve System. VS 2

Monetary Policy The Federal Reserve System has three main policy tools at its disposal. It uses these tools to affect the money supply and interest rates. VS 3

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Ben S. Bernanke (1953– ) distinguished academic career as an economics professor sworn in as chairman of the Federal Reserve Board in 2006 Profile

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