1. Chapter 17
Money
and
Banking

2. Section 1 Money Money has three functions Medium of Exchange
Store of Value
Measure of Value - allows you to compare the values of goods and services
Anything that people are willing to accept in exchange for goods and services can serve as money
Most familiar type of money is coins and currency
Coins are metallic forms of money such as pennies, nickels and dimes
Currency includes both coins and paper money

3. Money
We value and accept money because we are sure that someone else will accept it as well
Money by itself has no value, it has value ONLY because we accept that it has value
Characteristics of our Money
Acceptable
Can be counted and measured accurately
Durable and not easily destroyed
Convenient and easy to carry and use
Inexpensive to produce
Money supply is easily controlled

4. Section 2 Our Banking System
People with money to save take it to financial institutions, or banks
Banks put the money to work by lending it to other people or businesses that need funds
Banks cover its costs and makes a profit from the interest it charges on these loans

5. Types of Banks
Commercial Banks - Financial institutions that offer full banking services to individuals and businesses
Most people have their checking and savings accounts in commercial banks
Savings and loan associations - banks that traditionally loan money to people buying homes]
They also take deposits and issue savings accounts in return
Credit Unions - work on a not-for-profit basis
Often sponsored by large businesses, labor unions or government institutions
Open to members of the group that sponsors them. They give workers a financial institution that has low costs

6. Banks
Each of those banks bring savers and borrowers together, they give people a safe place to deposit money, and a source for people to borrow money
To keep banks safe, they are closely regulated
Most banks have to report to one or more regulatory agencies on a regular basis
They are also required to follow rules and accounting practices that minimize unnecessary risk

7. Banks
When the banking system collapsed in 1934 (Great Depression) the crisis wiped out people’s savings
Congress and President FDR created the FDIC to protect people’s deposits in the banks (like an insurance agency for banks). The Federal Deposit Insurance Corporation (FDIC), is a federal corporation that insures individual accounts for up to $100,000.
Banks need to attract depositors to survive
They offer checking accounts, which allow customers to write checks or use check/debit cards
People don’t keep money in checking accounts long
Funds that people can leave untouched they put in savings accounts

8. Banks
Banks pay interest to customers based on how much money they have deposited
This money grows larger the longer it is left in the bank
Certificate of Deposits (CDs), or time deposits, are also offered by banks
Loan the bank money for a specific amount of time and in return the bank pays a higher interest rate
Cannot withdraw money before the time has elapsed or they must pay a penalty

9. Banks
Banks will also lend money to people through loans, which can increase the supply of money
Loans have interest that the borrower must pay back to the bank
Banks keep a % of checking and savings deposits in reserve - fractional reserve banking - they loan the rest of the money out
Allows the banks to make more money off of interest

10. Section 3 The Federal Reserve System
The Federal Reserve Act of 1913 set up the Federal Reserve (Fed) as the nation’s central bank; controlling the money supply of the United States
When people or a corporation need money, they borrow from a bank
When a bank needs money, they borrow from the Fed.
The United States is divided into 12 Federal Reserve districts and each district has one main bank
The president and the Senate choose the 7 members on the Fed’s Board of Governors so that the banks cannot become too powerful

11. Functions of The Fed Fed acts as the government’s bank
Holds the government’s money
Sells U.S. bonds and Treasury bills (used to borrow money)
Fed issues and controls the nation’s currency
Conduct monetary policy
Controls the supply of money and the cost of borrowing money according to the needs of the economy
Fed can change the money supply by changing the interest rate

12. The Fed
When there is less money in the economy, the demand for goods and services decrease and then businesses cut down on production and a recession occurs
The Fed will try to help by controlling and manipulating the money supply
The Fed can change the discount rate - the rate it charges member banks for loans
Stimulate the economy - lower discount rate
Slow the economy - higher discount rate
Fed can also raise or lower the reserve requirement
How much money banks hold in reserve

13. Tight Money vs. Easy Money
Tight money policy is when the Fed tries to reduce the amount of money available for loans. This happens when interest rates are raised.
Easy money puts more money into the money supply. This happens when interest rates are lowered.

14. Stocks
Stocks are a way in which people will invest and save their money
Price of stock is determined by supply and demand
There are 3 major stock markets:
Dow Jones
Standard and Poor’s (S&P 500)
NASDAQ
New York Stock Exchange (NYSE) is the world’s largest market
When stock prices are rising it is known as a bull market, when they are falling it is known as a bear market.
The stock market is an indication of how the economy is doing.

15. Governments are also asked to solve economic problems:
In the late 1800s and early 1900s, the U.S. economy stopped growing. The nation began to go through a period of great suffering. Businesses closed, banks failed, and many workers lost their jobs. People began to panic and wanted to withdraw all the money they had deposited in the banks. This forced many banks to close, and depositors lost their savings. People wanted to government to help solve these economic problems but did not want it to change the free enterprise system into a command economy.
There were several possible solutions. The government could give money to businesses and banks so that they could remain open. This would cost a lot of money and create national debt. The government could create jobs and retrain people who were unemployed, but this would take time and was expensive. Another alternative was to give people food and money so they could survive without jobs. This might solve some problems for awhile, but the government could not afford to support so many people forever. The government could become more involved in overseeing the economy by creating agencies and passing laws to try to prevent this situation from happening again, but this would interfere with the free market economy.
What’s the problem?
What are other reasonable solutions?
Choose the solution you believe is best. Use advantages and disadvantages to explain why it is the best option.