Money, Banking, and the Federal Reserve Chapter 10 and 16 Money, Banking, and the Federal Reserve

Money Money is anything that serves 3 purposes: Medium of Exchange – used when exchanging goods or services

Money Money is anything that serves 3 purposes: Unit of Account – means of comparing value of goods and services

Money Money is anything that serves 3 purposes: Store of Value – if you hold on to it, it will maintain its value

6 Characteristics of Currency Currency – coins and paper bills society uses for money More useful than bartering because of 6 characteristics

The 6 Characteristics of Currency Durability – lasts for a long time Portability – easy to carry Divisibility – can be divided into smaller denominations Uniformity – looks universally the same, difficult to counterfeit

The 6 Characteristics of Currency Limited Supply Acceptability – everyone in the economy must accept its value

History of the Value of Money Commodity Money – beginning of time until about 1600’s, people traded in commodities (salt, cattle, tobacco, pretty rocks) rather than money

History of the Value of Money Representative Money – starting in 1600’s Gold and silver were difficult to carry around Banks issued paper receipts that represented gold or silver kept in a town safe Became more convenient to trade these receipts with other townspeople

History of the Value of Money Fiat Money – Started in 1930’s, government issued currency and passed laws saying that all people must accept it as payment for debts

What is a Bank? Bank – institution for receiving, keeping, and lending money

Brief History Start of U.S. History (1780’s – 1800’s) Federalists vs. Anti-Federalists Federalists favored a national bank Anti-Federalists believed states should control

Brief History National Banks were created, and accomplished a number of purposes Held government tax revenue Lend and borrow money for government purposes

Brief History National Banks were created, and accomplished a number of purposes Issue representative money backed by gold or silver Watch over states use of representative money

Brief History Later, because of politics, the national bank is killed

Banking With No National Bank Problems Bank runs, panics High rates of bank failure Fraud Many different currencies

The New National Banking System Federal Reserve Bank – Established in 1913 Gives short term loans to private banks to prevent failures Created a national currency – today’s dollars Federal Reserve controls number of dollars in circulation

The New National Banking System Federal Reserve Bank – Established in 1913 Monetary Policy Tools of the Federal Reserve Open Market Operations – buying/selling government bonds to expand/contract the money supply Controls the discount rate (primarily the decision of the Chairman of the Federal Reserve Board) Reserve Requirement Ratio (RRR) – amount of deposits banks must keep in reserve (rarely ever used)

The New National Banking System Federal Reserve Bank – Established in 1913 Monetary Policy Goals of the Federal Reserve Expansionary Policy – Grows the economy, but may cause inflation to go up Lower the discount rate, encourage borrowing Buy bonds from investors, injects cash into the economy Contractionary Policy – Controls inflation, but may cause economic growth to slow Raise the discount rate, discourage borrowing Sell bonds to investors, takes cash out of the economy

Other Federal Regulations on Banks Federal Deposit Insurance Corporation (FDIC) – insures customer deposits up to $100,000 in the event of bank failure