Chapter Nineteen Understanding Money, Banking, and Credit

What Is Money? Barter System - first exchanges –stuff for stuff Money –Anything used to obtain products that has little value except in reuse to obtain products

The Functions of Money Medium of exchange –Anything accepted as payment Measure of value –A “yardstick” used to assign values and compare values of products & services Store of value –A means of retaining and accumulating wealth Careful - inflation causes a loss of stored value so saved money has to gain interest to maintain its value

Important Characteristics of Money Divisible Portable Difficult to counterfeit Durable So, how much money does a country have?

Three main measures of a supply of money –M 1 only 15% Currency, demand deposits, and travelers checks –M2–M2 M 1 plus short term bonds, time deposits ( & CD’s less than $100,000 –M3–M3 M 1 and M 2 plus time deposits of $100,000 or more Demand deposit –An amount on deposit in a checking account Time deposit –Money deposited in an interest-bearing savings account

The Supply of Money 15% 55% 15% So, who creates and controls all this money?

The Federal Reserve The central bank of the U.S. - the bank for banks Has 12 district banks and 25 branch banks

The Federal Reserve Main function -regulate nation’s money supply How? 1) controlling bank reserves requirements 2) regulating the discount rate 3) running open-market operations

The Federal Reserve System 1) Regulation of reserve requirements –Reserve requirement—% of its deposits a bank must retain, either in its own vault or on deposit with its Federal Reserve District Bank –More required reserves = less money in circulation –Less required reserves = more money in circulation to stimulate the economy

The Federal Reserve System 2) Regulation of the discount rate –Discount rate—the interest rate the Fed charges for loans to its member banks –Lower loan rates allow banks to lend more and stimulate the economy –Higher rates slow the economy and check inflation

The Federal Reserve System 3) Open-market operations –The buying & selling of U.S. government securities by the Fed –To reduce the money supply, the Fed sells government securities on the open market to take money out of circulation –To increase the money supply, the Fed buys government securities

Other Federal Reserve Responsibilities –Serving as the U.S. government bank –Clearing checks and electronic transfers of funds between banks –Inspection and replacement of worn and unfit currency –Two mints – 1) Denver 2) Philadelphia One printer – D.C.

Traditional Services Provided by Financial Institutions Checking accounts-money on demand Savings accounts- –statement savings account - short time deposit –Certificate of deposit (CD)-bank pays depositor a guaranteed interest rate for money left on deposit for a specified period of time

Traditional Services Provided by Financial Institutions Short- and long-term loans –Line of credit—a short-term loan that is approved before the money is actually needed –Revolving credit agreement—a guaranteed line of short term credit approved when you need it (credit cards) –Collateral—real estate or property pledged as security for a loan

Traditional Services Provided by Financial Institutions Credit card and debit card transactions –Banks pay the merchant for your purchases, but deduct a fee for their service. –Banks then bill you for the full price of the merchandise, imposing monthly finance charges on your unpaid balance –Debit card—electronic subtraction of a purchase from the cardholder’s account at time of purchase. No finance charge to user.

If I Leave It, Will It Be There Later? Federal Deposit Insurance Corporation (FDIC) –created in 1933 –restored public confidence in banking industry –insures deposits against bank failures –provides deposit insurance of $100,000 per account