1 ECON Designed by Amy McGuire, B-books, Ltd. McEachern CHAPTER Money and the Financial System Macro

2 The Evolution of Money LO 1  Properties of the ideal money  Durable  Portable  Divisible  Uniform quality  Low opportunity cost  Relatively stable in value

3 LO 1 Six Properties of Ideal Money Exhibit 1

4 Coins LO 1  Coinage  Amount and quality of the metal  By count  Problems  Getting clipped  Counterfeiting  Token money  Face value > cost of coinage  Seigniorage – profit from coinage

5 Representative Money and Fiat Money LO 1  Bank notes  IOUs  Paper money  As good as gold  Representative money  Fiat money  From the power of the state  Legal tender

6 The Value of Money LO 1  Purchasing power of money  Rate of exchange for goods and services  Higher price level in economy  Smaller purchasing power  Purchasing power of $ in a year  100 ÷Price index in same year  Evolution over time  Steady decline since 1960

7 When Money Performs Poorly LO 1  Hyperinflation in Zimbabwe  Prices grow by the hour  Not reliable store of value  Exchange for stable currency  Barter

8 Financial Institutions in the U.S. LO 2  Depository institutions  Commercial banks  Loans to businesses  Thrift institutions  Savings banks  Credit unions  Loans to households

9 The Fed LO 3  1913 Federal Reserve System –Central bank –Monetary authority –12 Federal Reserve districts  National banks –Had to join the Fed  State banks –Voluntary membership to the Fed

10 The Twelve Federal Reserve Districts The map shows by color the area covered by each of the 12 Federal Reserve districts. Black dots note the locations of the Federal Reserve Bank in each district. Identified with a star is the Board of Governors headquarters in Washington, D.C. LO 3 Exhibit 3

11 The Fed LO 3  Powers of the Fed –Issue bank notes –Buy and sell government securities –Extend loans to member banks –Clear checks in the banking system –Reserve requirement for member banks  Banker’s bank

12 LO 4  Board of Governors –7 members Appointed by the President Confirmed by the Senate 14-year nonrenewable term Insulated from political pressure 1 chair: 4 years –Set and implement monetary policy –Oversees the 12 reserve banks

13 LO 4  Federal Open Market Committee FOMC –Open-market operations The Fed buys, sells government securities –7 board governors –5 presidents of reserve banks –Advise the board

14  Regulating the money supply –Open-market operations –Discount rate –Reserve requirements  Deposit insurance –Federal Deposit Insurance Corporation, FDIC $250,000 per depositor per bank 90% banks LO 4

15 LO 4  Large number of U.S. banks –Past restrictions on bank branches  Branching restrictions –Inefficiencies –Bank failures (Great Depression)  Bank holding company –Owns several banks –Offers other services  Bank mergers –Expand geographically

16 Number of Commercial Banks Declined over the Last Two Decades, but the Number of Branches Continues to Grow LO 4 Exhibit 7

17 Largest U.S. Banks Based on Total Domestic Deposits LO 4 Exhibit 8(a)

18 World’s Largest Banks Based on Total Assets LO 4 Exhibit 8(b)