1. The American Economy Personal Finances ~~~~~ Banks and Banking
Chapter Nineteen
The American Economy
Personal Finances
~~~~~
Banks and Banking

3. How Banking Began goldsmiths money-keeping business
kept their gold in strong sturdy safes
townspeople began to bring their money for safekeeping
money-keeping business
local goldsmiths began charging a small fee for the service
money-lending services
townspeople needing money came to the goldsmiths for loans
they signed a paper promising to repay the money by a certain date and to pay interest for using the money
borrowers guaranteed their loans by promising to give their property to the moneylender if the loans were not repaid on time
collateral
banking system
developed from these early money-lending practices

4. Bank Deposits demand deposits (checking accounts)
usually do not earn interest
easily access the money
depositors request their money when they write checks or use debit cards
may also have automated teller machine (ATM) cards
allows them to withdraw cash from their accounts at various locations at any time of day
time deposits (savings accounts)
often required to keep the money in their accounts for a minimum period of time
pay interest
certificates of deposit (CDs)
invest a certain amount of money for a specified period of time
NOW accounts - negotiable order of withdrawal
combines checking and savings
can write checks and receive interest on money in the account
often required to maintain a certain minimum balance

5. Types of Banks bank charters
determines whether the bank is supervised by state or federal officials
state bank
chartered under state laws
national bank
chartered under federal laws
determines many of the rules that guide the bank
four main types of banks in the United States
commercial banks
savings and loan associations
savings banks
credit unions

6. Types of Banks commercial banks most numerous type of banks
offer a full range of services
checking, savings, and NOW accounts
loans to individuals and businesses
issue credit cards and manage retirement accounts
manage property and invest money
accounts insured by FDIC
Federal Deposit Insurance Corporation - government agency
each depositor is insured up to $100,000 (now $250,000)
if for some reason a bank is unable to give its depositors their money, the FDIC will refund up to $100,000 per depositor
corporations owned by stockholders who buy shares in the bank
shareholders receive cash dividends from the bank profits

7. Types of Banks savings and loan associations (S&Ls)
began in the mid-1800s to help people buy homes
federal regulations have allowed them to expand their services
now offer many of the services that commercial banks do
loans, checking, savings, NOW accounts and credit cards
originally owned and operated by their depositors
now nearly half are owned and operated by shareholders
before 1989 insured by the FSLIC
Federal Savings and Loan Insurance Corporation
savings and loan crisis bankrupted it
now insured by RTC

8. Types of Banks savings banks credit unions
began in the early 1800s mostly located in the northeast U.S.
encourage savings by people who could make only small deposits
now offer a variety of services, including home loans
insured by the FDIC
were called mutual savings banks
passed on their profits to depositors in the form of interest
many now owned by shareholders
receive dividends from the profits
credit unions
established by people who work for the same company or belong to the same organization
owned and operated by their members
when members make deposits, they buy interest-paying shares
deposits are pooled to make low-interest loans available to members
depositors may also write checks, which are called share drafts.
insured by NCUA
National Credit Union Association - government agency
each depositor is insured up to $100,000 (now $250,000)

9. Government Regulation
bank runs
rumors might spread that the bank was shaky
sometimes loaned money without getting enough
collateral in return
sometimes did not keep enough money in reserve
depositors would start a "run" on the bank
people would panic, go to the bank, and demand their money
if too many depositors withdrew their money at once the bank would have no funds left
some depositors would lose their money when the bank failed
Federal Reserve System - “the Fed”
established by Congress in 1913
created to regulate U.S. banking and prevent bank failures
all national banks were required to belong to this system
state banks were permitted to join the system if they wished
law was passed stating that all U.S. banks must meet the Fed's requirements

10. The Federal Reserve System
divides the U.S. into 12 Federal Reserve districts
a Federal Reserve bank is located in each district
they do not usually do business with individuals or business firms
they act as bankers for the federal government and for other banks
Federal Reserve banks serve two main purposes
they handle the banking needs of the federal government
U.S. Treasury secretary deposits government funds in these banks
secretary writes checks on the federal government's account
the banks handle the sale of bonds issued by the government
most U.S. currency is put into circulation through the Fed
from these banks the money spreads out into the economy for use by businesses and consumers
they provide various services to state and national banks and control the banking system
member banks can go to the Federal Reserve bank in its district and borrow money to increase its own reserve
this allows the member bank to make more loans or investments
the bank must pay interest on the loans it receives from the Fed
discount rate = rate of interest charged to member banks by the Fed
this rate often influences the interest rates charged by these banks to their own customers

11. The Federal Reserve at Work
management of the Fed
seven-member board of governors in Washington, D.C.
makes most of the major decisions for the Federal Reserve System
each member appointed by the president confirmed by the Senate
serves a single 14-year term
money circulation
when the economy is growing and more goods and services are being produced, more money is needed in circulation
when the supply of money grows faster than the supply of goods, prices tend to rise
to prevent this, the Fed may try to slow the growth of the money supply or even take money out of circulation
if the Fed wants to speed economic growth, it puts more money into circulation
. buys U.S. government bonds from banks or individuals
these banks or people then have more money to spend or lend
this money soon enters the economy through purchases or loans
to take money out of circulation
sells government bonds back to banks or people
individuals or banks then have less money to spend or lend