1. Money and Financial Institutions CHAPTER 14

2. Money or another way?  Make a list of the things you have bought in the last week.  If money didn’t exist, how would you pay for them?

3. The History of Money  Monetary system- A system in which goods and services are exchanged indirectly using money as a medium  Money- can be anything that people accept as a standard for payment

4. Functions of Money Money has 3 basic functions  Medium of exchange – a seller will accept it in exchange for a good or service  Standard of Value- a fixed means for measuring the weight, amount, or value for something  Store of Value- it holds its value over time and can be stored or saved

5. Characteristics of Money 1.Money must be stable 2.To be used as money, it must be scarce 3.Money must be accepted 4.Money must be divisible into parts 5.Money has to be portable and durable

6. Would these items be acceptable as money? Item Function DurabilityPortabilityDivisibility Hammer Hamburger Bushel of Oats Rocks found on the ground

7. Types of Money  Commodity Money – a medium of exchange such as cattle or gems that has value as a commodity or good aside from its value as money  Representative Money – money that is backed by an item of value, such as gold or silver.  Fiat money – money that has value because a government fiat, or order, has established it as acceptable for payment of debts  Legal tender – money that by law must be accepted for payment of public and private debts

8. History of Banking MAKE A TIMELINE ON YOUR NOTES. ADD THE FOLLOWING DATES INTO THE CORRECT PLACE 1780’S – 1792: Amid state versus national controversy. First Bank of the US and US mint are created. Dollar becomes national currency valued in relationship with gold and silver. 1811 – 1816: Instability follows expiration of First Bank’s charter and rise of state charter banks. Second bank of the United States pressures state banks to limit lending and maintain gold/silver reserves. 1830 – 1860: End of Second bank’s charter sparks increase in state banks. Fluctuating money causes unstable prices and business activity.

9. History Continued  1863 -64 (Civil War): Fiat money “greenbacks” issued to pay for war. Federally chartered, private national banks created. Safe. Uniform currency established requiring backing of national banknotes by government bonds  1869’s – 1907: Monetary standard shifted to gold; greenbacks redeemed with gold coins. No regulation of banknote supply, money shortages occur. Four financial panics force closure of banks with low reserves.  1913: Federal Reserve System created to regulate reserves and money supply and make loans to member banks.  1933 (Great Depression): Thousands of banks close. FDR requires banks to prove soundness to open; Congress passes Glass- Steagall banking act FDIC insures funds. Gold standard switched to fiat; private ownership of gold prohibited.

10. History Continued  1940 – 1960: Reforms of 1930’s promote long term banking stability. 1959, first computer used for bank accounting and check handling.  1960 – 1970 New laws protect consumers.  1970’s: ATMs in use; money is transferred electronically.  1980 – 1988: Deregulation allows savings and loan associations to make many types of loans.  1989 - present: Congress okays 300 billion bailout of S&L’s; FDIC begins regulating them. Evolving technology adds online banking

11. Banking Services  Overdraft Checking – Checking account that allows a customer to write a check for more money than exists in his or her account  Electronic Funds Transfer - system of transferring funds from one bank account directly to another without any paper money changing hands  Automated Teller Machine - Unit that allows consumers to do their banking without the help of a teller (ATM)

12. EFT Concerns Electronic Funds Transfer Advantages1. Can do banking from home. 2. No teller needed. Disadvantages1. Privacy could be invaded. 2. Hacker could alter your accounts.

13. Money and Near Moneys Multiple types of money  Currency- 5% is coins; the remaining is federal reserve notes (cash)  Checks  Checking account – account in which funds can be withdrawn at any time by presenting a check  Checkable Deposits – funds deposited in a bank that can be withdrawn at anytime by presenting a check  The largest part of the money supply in the US consists of checkable accounts

14. Continued – Credit cards and debit cards  Credit cards  not considered money – no store of value or unit of accounting  Considered a loan of money  Debit Cards  Withdraws fro checkable account  Considered money

15. Near Moneys  Near Moneys – assets, such as savings accounts and time deposits, that can be turned into money relatively easily and without the risk of loss of value

16. Money Supply  The money supply in the US is hard to measure so 2 methods called M1 and M2 are currently being used.  M1 – narrowest definition of the money supply, consists of moneys that can be spent immediately and against which checks can be written  M2 – broader definition of money supply, includes all of M1 plus such near moneys as savings deposits, time deposits, money market deposits, and retail money market mutual fund balances

17. Chapter 15  The Federal Reserve System

18. The Federal Reserve System  Central banking organization in the US  Set up in 1913 by congress  Consists of:  12 Federal Reserve district banks  25 branch banks  About 5,000 member banks  Run by board of governors, headed by a chairperson

19. Organization of the Fed Federal Open Market committee 12 members: Board of Governors, Head of NY Fed Bank and 4 other rotating heads of Fed Banks Board of Governor 7 members Federal Reserve Bank 12 District Banks 25 Branch Banks Most Banks and Thrift Institutions Federal Advisory Council 12 members

20. 12 District Banks and their territory

21. Federal Reserve Bank Identification Numbers Federal Reserve BankLetterNumber BostonA1 New York CityB2 PhiladelphiaC3 ClevelandD 4 RichmondE5 AtlantaF6 ChicagoG7 St. LouisH8 MinneapolisI9 Kansas City, MoJ10 DallasK11 San FranciscoL12

22. About Your Money http://www.history.com/shows/modern-marvels/videos/making-money

23. Security Features of Notes  Inclusion of Watermarks  Security Threads embedded into the paper  Fine line Printing patterns  Micro printing  Color shifting Ink  Low Vision Features

24. Security Features

25. Unique Paper  Red and Blue threads part of formula  Only one company has the formula and is able to produce the paper  Made of 75% Cotton and 25% Linen  Watermarks are included into the paper when it is produced

26. Functions of the Fed Supervising member banks- regulates member banks Regulating the money supply- determines the amount of money in circulation Setting reserve requirements- banks are required to keep a % of their deposits in reserve Supplying paper currency- Fed is responsible for printing and maintaining the nation’s paper currency Acting as the government’s fiscal agent Clearing checks- transfers funds from one bank to another

27. The Fed is responsible for monetary policy in the United States.monetary policy The Federal Reserve System Monetary Policy – policy that involves changing the growth of the supply of money in circulation in order to affect the cost and availability of credit.

28. The Fed has several tools at its disposal to use to regulate the money supply.

29. Loose and Tight Money Policies The goal of monetary policy is to promote economic growth and employment without causing inflation.

30. Loose and Tight Money Policies (cont.) If the Fed implements a loose money policy (often called expansionary) credit is abundant and inexpensive to obtain, possibly leading to inflation.loose money policy

31. Loose and Tight Money Policies (cont.) If the Fed implements a tight money policy (also called “contractionary”), credit is in short supply and is expensive to obtain, which slows the economy.tight money policy

32. Figure 5

33. Fractional Reserve Banking Fractional Reserve banking – a system in which only a fraction of the deposits in a bank is kept on hand, or in reserve; the remainder is available to lend Reserve Requirements - Regulations set by the Fed requiring banks to keep a certain percentage of their checkable deposits as cash in their own vaults or as a deposit in their Federal Reserve bank.

34. Changing Reserve Requirements (cont.) The Federal Reserve can choose to control the money supply by changing the reserve requirements of financial institutions. – If the Fed raises the reserve requirements, it would decrease the amount of money in the economy. – If the Fed lowers the reserve requirements, it would increase the amount of money in the economy.

35. Changing the Discount Rate (cont.) If a bank does not have enough reserves to meet its reserve requirement, it can ask the Federal Reserve district bank for a loan. If the discount rate is high, the bank passes its increased costs on to customers in the form of higher interest rates on loans.discount rate Discount rate – interest rate the Fed charges on loans to commercial banks and other depository institutions.

36. Changing the Discount Rate (cont.) Banks might raise their prime rate.prime rate – High interest rates discourage borrowers and may keep down the growth of the money supply. – Low interest rates encourage borrowers and may lead to growth of the money supply. Prime Rate – rate of interest that banks charge on loans to their best business customers

37. Changing the reserve requirement or the discount rate is now rarely used by the Fed. Rather, the Fed states periodically that it is going to change the federal funds rate.federal funds rate Federal funds rate – interest rate that banks charge each other on loans If the Fed causes the federal funds rate to drop, banks will borrow more and, thus, lend more—and vice versa. Changing the Discount Rate (cont.)

38. Open-Market Operations – buying and selling of United States securities by the Fed to affect the money supply The major tool the Fed uses to control the money supply is a practice known as open-market operations.open-market operations When the Fed buys securities—such as Treasury bills, notes, and bonds—it pays for them by making a deposit in the dealer’s bank. This increases the bank’s reserves, thus increasing the money supply.

39. When the Fed sells Treasury bills to a dealer, the dealer’s bank must use its deposits to purchase securities. This decreases the bank’s reserves, thus decreasing the money supply. Some people feel that the Fed should not engage in monetary policy due to misjudgments in the past. Open-Market Operations (cont.)

40. Figure 8

41. Concept Trans 1