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Section 1: The Evolution, Functions, and Characteristics of Money Chapter Introduction Section 1: The Evolution, Functions, and Characteristics of Money Section 2: The Development of Modern Banking Section 3: The Federal Reserve System and Monetary Policy Visual Summary Chapter Menu

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

Chapter Intro-End

Section Preview In this section, you will learn that money functions as a medium of exchange, a measure of value, and a store of value. Section 1-Preview

Content Vocabulary Academic Vocabulary Federal Reserve System (Fed) Federal Reserve notes barter economy commodity money fiat money specie monetary unit medium of exchange measure of value store of value demand deposit accounts (DDAs) M1 M2 Academic Vocabulary evolution converted Section 1-Key Terms

B. exchanging paper currency Would you prefer to obtain goods by bartering or exchanging paper currency? A. bartering B. exchanging paper currency A B Section 1

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

A “mutual coincidence of wants” refers to A. A barter economy B. Commodity money C. Fiat money A B C 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

What areas of the world were participants in the “triangular trade” ? A. Africa, Spain, and the North American colonies B. Spain, North American colonies, and the Caribbean C. Africa, Caribbean, and North American colonies D. Caribbean, Spain, and Africa A B C D Section 1

Section 1-End

Section Preview In this section, you will learn that many different types of money have been used throughout American history, and fiat money is used today. Section 2-Preview

Content Vocabulary Academic Vocabulary state bank legal tender national bank national currency gold certificate silver certificate central bank bank run bank holiday fractional reserve system legal reserves reserve requirement member bank reserves (MBR) excess reserves Academic Vocabulary clauses initially Section 2-Key Terms

Do you think the government should regulate banking? A. Yes B. No C. Sometimes A B C Section 2

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

What event changed the commercial banking industry in the United States forever? A. Revolutionary War B. Industrialization C. Civil War D. Mining of silver A B C D 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

What is the percentage of reserve requirement currently used by banks? Section 2

Section 2-End

Section Preview In this section, you will learn how the Federal Reserve System is organized and conducts monetary policy. Section 3-Preview

Content Vocabulary Academic Vocabulary member bank monetary policy interest rate easy money policy tight money policy open market operations discount rate prime rate quantity theory of money currency coins bank holding companies Regulation Z Academic Vocabulary aspects functions Section 3-Key Terms

The chairman of the Federal Reserve Board is considered to be the second most powerful individual in the nation. A. True B. False A B Section 3

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

What are some trends in the economy that the FOMC reviews? A. Construction B. Employment C. Consumer spending D. All of the above A B C D 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

A. Interest rate decreases lowering the cost of financing. If the Fed lowers the discount rate, what effect does that have on your purchase of a used car? A. Interest rate decreases lowering the cost of financing. B. Interest rate increases; therefore, cost of financing goes up. C. No impact on your purchase A B C 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

Which is not considered an action conducted by the government’s bank? A. Nationwide auctions of Treasury securities B. Regulation Z disclosures C. Maintains demand deposit accounts for Treasury D. Operation of clearinghouses A B C D Section 3

Section 3-End

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

VS-End

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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

Select a transparency to view. Economic Concepts Transparencies Transparency 5 Economic Institutions and Incentives Transparency 6 Exchange, Money, and Interdependence Transparency 18 Monetary Policy Select a transparency to view. Concept Trans Menu

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Federal Reserve System (Fed) privately owned, publicly controlled central bank of the United States Vocab1

Federal Reserve notes paper currency issued by the Fed in use today Vocab2

barter economy moneyless economy that relies on trade or barter Vocab3

commodity money money that has an alternative use as an economic good Vocab4

fiat money money by government decree Vocab5

specie money in the form of gold or silver coins Vocab6

monetary unit standard unit of currency in a country’s money supply Vocab7

medium of exchange money or other substance generally accepted as payment for goods and services Vocab8

measure of value a function of money that allows it to serve as a common way to express value Vocab9

store of value a function of money that allows people to preserve value for future use Vocab10

demand deposit account (DDA) account from which funds can be removed by writing a check and without having to gain prior approval from the depository institution Vocab11

M1 component of the money supply relating to money’s role as a medium of exchange Vocab12

M2 component of the money supply relating to money’s role as a store of value Vocab13

revolution an overthrow of government Vocab14

converted changed into a different form Vocab15

state bank bank that receives its charter from the state in which it operates Vocab16

legal tender fiat currency that must be accepted for payment by decree of the government Vocab17

national bank commercial bank chartered by the National Banking System Vocab18

national currency currency backed by government bonds and issued by commercial banks in the National Banking System Vocab19

gold certificate paper currency backed by gold and issued between 1863 and 1934 Vocab20

silver certificate paper currency backed by, and redeemable for, silver from 1878 to 1968 Vocab21

central bank bank that can lend money to other banks in times of need Vocab22

bank run sudden rush by depositors to withdraw all deposited funds, generally in anticipation of bank failure or closure Vocab23

bank holiday brief period during which all banks or depository institutions are closed to prevent bank runs Vocab24

fractional reserve system system requiring financial institutions to set aside a fraction of their deposits in the form of reserves Vocab25

legal reserves currency and deposits used to meet the reserve requirement Vocab26

reserve requirement formula used to compute the amount of a depository institution’s required reserves Vocab27

member bank reserve (MBR) reserves kept by member banks at the Fed to satisfy reserve requirements Vocab28

excess reserves financial institution’s cash, currency, and reserves not needed for reserve requirements Vocab29

clauses distinct articles or provisions in a contract, treaty, will, or other formal or legal document Vocab30

initially originally; at the beginning Vocab31

member bank bank belonging to the Federal Reserve System Vocab32

monetary policy actions by the Federal Reserve System to expand or contract the money supply in order to affect the cost and availability of credit Vocab33

interest rate the price of credit to a borrower Vocab34

easy money policy monetary policy that results in lower interest rates and greater access to credit Vocab35

tight money policy monetary policy that results in higher interest rates and restricted access to credit Vocab36

open market operations sales or purchases of U.S. government securities by the Fed Vocab37

discount rate interest rate that the Federal Reserve System charges on loans to the nation’s financial institutions Vocab38

prime rate lowest rate of interest rate that banks charge their best customers Vocab39

quantity theory of money hypothesis that the supply of money directly affects the price level over the long run Vocab40

currency paper component of the money supply, today consisting of Federal Reserve notes Vocab41

coins metallic forms of money such as pennies, nickels, dimes, and quarters Vocab42

bank holding company company that owns and controls one or more banks Vocab43

Regulation Z provision extending truth-in-lending disclosures to consumers Vocab44

aspects parts, phases Vocab45

functions roles or purposes Vocab46

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