1. Money, Financial Institutions, and the Federal Reserve*
Chapter Twenty *
Money, Financial Institutions, and the Federal Reserve
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

2. BEN BERNANKE Federal Reserve*
BEN BERNANKE Federal Reserve
Profile *
A former economics professor at Princeton.
Former President George W. Bush appointed him Chairman of the Federal Reserve in 2006.
Almost every factor related to the economy is influenced by the choices he makes.
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3. *
WHAT’S MONEY?
What is Money? *
LG1
Money -- Anything people generally accept as payment for goods and services.
Barter -- The direct trading of goods or services for other goods or services.
See Learning Goal 1: Explain what money is and what makes money useful.
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4. STANDARDS for a USEFUL FORM of MONEY*
STANDARDS for a USEFUL FORM of MONEY
What is Money? *
LG1
Portability
Divisibility
Stability
Durability
Uniqueness
See Learning Goal 1: Explain what money is and what makes money useful.
Money should be portable. For a money system to be effective, money should be easy to handle and carry.
Money should be divisible. A good system makes exchange simple and easy in terms of daily transactions. (For example, prior to the introduction of the Euro, the French money supply system was difficult, because they had two kinds of money: money of account which is theoretical money with no coinage and money of exchange which has coins. The French system was not easily divisible and not easy to understand.)
Money should be durable. U.S. currency does wear out, but only after considerable usage and transfers. There has been continued discussion and several attempts towards making the dollar bill into a coin. Cost savings is the motivation behind this movement, since bills stay in circulation less than two years, and coins can last upwards of 20 years.
Money should be difficult to counterfeit. This is very important because easily duplicated currency could lead to a significant eroding of the value of a country’s currency
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5. *
The MONEY SUPPLY
What is the Money Supply? *
LG2
Money Supply -- The amount of money the Federal Reserve makes available for people. The money supply is referred to as:
M1 -- Money that can be accessed quickly (coins, paper money, travelers’ checks, etc.).
M2 -- M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.).
M3 -- M2 + big deposits like institutional money market funds.
See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
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6. HOW LONG DOES PAPER MONEY LAST?*
HOW LONG DOES PAPER MONEY LAST?
What is the Money Supply? *
LG2
Bill
How Long it Lasts $1
21 Months $5
16 Months
$10
18 Months
$20
24 Months
$50
55 Months
$100
89 Months
See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
How Long Does Paper Money Last?
This slide gives the students an idea of the life span of paper money in circulation.
The largest denomination ever printed was a $100,000 gold certificate.
Share with students some interesting facts regarding U.S. currency:
- Originally, U.S. currency included denominations of $500, $1,000, $5,000, and $10,000. No currency printed today is greater than $100 dollars.
- The percent of U.S. counterfeit currency in circulation is estimated to be .02%.
- U.S. Currency bills are 2.61 inches wide, 6.14 inches long, thickness of inches and weighs 1 gram.
- It costs 4.2 cents to produce a U.S. bill.
- The Bureau of Engraving prints about 16,650,000 one dollar bills per day.
(Source: enchantedlearning.com)
Source: Federal Reserve,
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7. * * MONEY MILESTONES What is the Money Supply? LG2 Year Milestone 1956
Congress set the minimum wage at $1 an hour
1960
$10 million presidential campaign by candidate Richard Nixon
1985
$100,000 bottle of wine sold at auction at Christie’s
1995
$1 million cost for a 30-second commercial during Super Bowl XXIX
2001
$10 movie ticket in New York
2004
$100 million Picasso painting sold at Sotheby’s
2007
$1 billion stadium built in London (Wembly)
See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
Money Milestones
This slide illustrates some interesting dates regarding U.S. money
Have students look through the dates. Which do they find most interesting or surprising and why?
Ask students: How do some of the amounts listed compare to today?
If time allows have students check out The U.S. Treasury’s Bureau of Engraving and Printing’s website for more interesting information.
Source: Conde Nast Portfolio
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8. EXCHANGING MONEY GLOBALLY*
EXCHANGING MONEY GLOBALLY
The Global Exchange of Money *
LG2
Falling dollar value: The amount of goods and services you can buy with a dollar decreases.
Rising dollar value: The amount of goods and services you can buy with a dollar increases.
What makes the dollar fall or rise is the position of the U.S. economy relative to other global economies.
See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
Since the United States abandoned the gold standard the U.S. dollar has depreciated by approximately 90 percent.
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9. The IMPACT of a FALLING DOLLAR*
The IMPACT of a FALLING DOLLAR
The Global Exchange of Money *
LG2
Overseas demand for U.S. products rise.
A favorable exchange rate for U.S. companies earning profits in foreign markets is provided.
U.S. tourism increases which is good for hotels, resorts, theme parks, and retailers that serve international travelers.
See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
The Impact of a Falling Dollar
This slide highlights some of the issues related to a falling dollar.
While these points are positive, the long term implications of a falling dollar are more serious.
A declining dollar will eventually result in the following:
Higher interest rates on government and consumer debt.
Higher inflation due to a rise in the price of imports, and commodity prices increase since most are priced in terms of U.S. dollars.
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10. FIVE MAJOR PARTS of the FEDERAL RESERVE SYSTEM*
FIVE MAJOR PARTS of the FEDERAL RESERVE SYSTEM
Basics About the Federal Reserve *
LG2
The Board of Governors
The Federal Open Market Committee
12 Federal Reserve Banks
3 Advisory Councils
The member banks of the system
See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
The Federal Reserve is a quasi-governmental agency not under the direct control of the U.S. government.
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11. The 12 FEDERAL RESERVE DISTRICT BANKS*
The 12 FEDERAL RESERVE DISTRICT BANKS
Basics About the Federal Reserve *
LG2
See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
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12. MANAGING the MONEY SUPPLY*
MANAGING the MONEY SUPPLY
Basics About the Federal Reserve *
LG2
The Fed uses three basic tools:
Reserve Requirement -- A percentage of commercial banks’ checking and savings accounts they must keep in the bank or in non-interest-bearing deposits at the local Federal Reserve district bank.
Open-Market Operations -- The buying and selling of government bonds.
Discount Rate -- The interest rate the Fed charges for loans to member banks.
See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
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13. * * PROGRESS ASSESSMENT What’s money?
What are the five characteristics of useful money?
What’s the money supply, and why is it important?
How does the Federal Reserve control the money supply?
What are the major functions of the Federal Reserve? What other functions does it perform?
What’s money? Money can be anything that people accept as payment for goods and services.
What are the five characteristics of useful money? Portability, divisibility, stability, durability, and uniqueness.
What’s the money supply, and why is it important? The money supply is the amount of money available for people to buy goods and services. It is important to manage the money supply, since too much money could cause inflation and too little money may cause deflation.
How does the Federal Reserve control the money supply? To control the money supply the Federal Reserve can increase or decrease the reserve requirement, buy or sell government securities, or change the discount rate.
What are the major functions of the Federal Reserve? What other functions does it perform? The Federal Reserve is responsible for creating an environment that fosters stable prices and full employment. It attempts to manage these two goals with monetary policy. As if that was not enough, the Federal Reserve is also responsible for the clearing of checks.
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14. CHECK-CLEARING PROCESS THROUGH the FEDERAL RESERVE*
CHECK-CLEARING PROCESS THROUGH the FEDERAL RESERVE
Basics About the Federal Reserve *
LG2
See Learning Goal 2: Describe how the Federal Reserve controls the money supply.
See Figure 20.3 in text for further information.
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15. The ESTABLISHMENT of the FEDERAL RESERVE SYSTEM*
The ESTABLISHMENT of the FEDERAL RESERVE SYSTEM
The History of Banking and the Need for the Fed *
LG3
A cash shortage problem in 1907 led to the creation of the Federal Reserve System.
Under the Federal Reserve Act of 1913, all federally chartered banks had to join the Federal Reserve.
See Learning Goal 3: Trace the history of banking and the Federal Reserve System.
State banks were also permitted to join.
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16. * * LARGEST BANK FAILURES Bank Year Assets Washington Mutual Bank 2008
The History of Banking and the Need for the Fed *
LG3
Bank
Year
Assets
Washington Mutual Bank
2008
$307 Billion
Continental Illinois NB&T
1984
$67 Billion
First Republic Bank Corp
1986
$49 Billion
American Savings & Loan Assn
1988
$45 Billion
IndyMac Bank
$32 Billion
See Learning Goal 3: Trace the history of banking and the Federal Reserve System.
Largest Bank Failures
This slide highlights the largest bank failures in U.S. banking history.
Two of these failures are a direct result of the financial crisis that occurred in 2008.
Ask students: Why didn’t the Washington Mutual and IndyMac Bank failures create a total loss of confidence in the United States banking system like we saw during the Great Depression? (Students should be able to recognize the stepped up role of the US government including the creation of the FDIC insurance program and the temporary increase in FDIC coverage from $100,000 to $250,000 until December 2009.)
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17. * * The U.S. BANKING SYSTEM Commercial banks
LG4
Commercial banks
Savings and loan associations
Credit unions
Nonbanks
See Learning Goal 4: Classify the various institutions in the U.S. banking system.
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18. *
COMMERCIAL BANKS
Commercial Banks *
LG4
Commercial Bank -- A profit-seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and uses those funds to make loans.
A commercial bank has two types of customers:
Depositors
Borrowers
See Learning Goal 4: Classify the various institutions in the U.S. banking system.
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19. COMMERICAL BANKS’ SERVICES*
COMMERICAL BANKS’ SERVICES
Services Provided by Commercial Banks *
LG4
Demand Deposit -- The technical name for a checking account; money is available on demand from the depositor.
Time Deposit -- A savings account; a bank can require a prior notice before you make a withdrawal.
Certificate of Deposit -- A savings account that earns interest, to be delivered on the certificate’s maturity date.
See Learning Goal 4: Classify the various institutions in the U.S. banking system.
Commercial banks also offer credit cards, financial counseling, automatic payment of bills, brokerage services, safe-deposit boxes, travelers checks, and individual retirement accounts (IRAs).
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20. WHAT to TELL the TELLER Making Ethical Decisions*
WHAT to TELL the TELLER Making Ethical Decisions *
The bank teller mistakenly gives you $320 instead of the $300 you asked for.
You bring the error to her attention, but she disagrees she miscounted the money.
You wonder whether to just keep the extra $20 even though you know her accounts will not balance at the end of the day.
What are your alternatives? What do you do?
See Learning Goal 4: Classify the various institutions in the U.S. banking system.
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21. SAVINGS and LOAN ASSOCIATIONS*
SAVINGS and LOAN ASSOCIATIONS
Savings and Loan Associations *
LG4
Savings and Loan Associations (S&Ls) -- A financial institution that accepts both savings and checking deposits and provides home mortgage loans.
Often known as thrift institutions because their original purpose was to promote customer thrift and home ownership.
See Learning Goal 4: Classify the various institutions in the U.S. banking system.
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22. *
CREDIT UNIONS
Credit Unions *
LG4
Credit Unions -- Nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members.
As nonprofits, credit unions enjoy an exemption from federal income taxes.
See Learning Goal 4: Classify the various institutions in the U.S. banking system.
Due to their exemption from federal income taxes, the fees are typically less and the interest rates paid on deposits are higher at credit unions.
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23. *
NONBANKS
Other Financial Institutions *
LG4
Nonbanks -- Financial institutions that accept no deposits, but offer many of the services provided by regular banks. Nonbanks include:
Life insurance companies
Pension funds
Brokerage firms
Commercial finance companies
Corporate financial services
See Learning Goal 4: Classify the various institutions in the U.S. banking system.
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24. WHAT ATTRACTS CUSTOMERS to ONLINE BANKING*
WHAT ATTRACTS CUSTOMERS to ONLINE BANKING
Other Financial Institutions *
LG4
Free identity theft protection
Free credit score monitoring
Personal financial management
Instant messaging service
Bank’s blog
See Learning Goal 4: Classify the various institutions in the U.S. banking system.
What Attracts Customers to Online Banking
This slide illustrates what attracts customers to online banking.
Households have increased their use of online banking from approximately 8 million households to an estimated 51 million households in 2009.
Leading the growth of online banking are California, Florida and Texas. Combined, these states made up more than 40 percent of the growth in online banking. Others in the top 10 for growth were Washington, Georgia, Arizona, North Carolina, Missouri, and Maryland.
More than 71 percent of online banking customers report they are highly satisfied with their online banking experience.
According to ComScore the adoption of online banking is rising at a rate of 13 percent each year. And by 2011, 76 million households will bank online compared with an estimated 51 million in 2009.
Source:
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25. * * PROGRESS ASSESSMENT Why did the U.S. need a Federal Reserve Bank?
What’s the difference between a bank, a savings and loan association, and a credit union?
What’s a consumer finance company?
Why did the U.S. need a Federal Reserve Bank? The Federal Reserve emerged after the banking crisis of 1907 and was organized originally to be a lender of last resort.
What’s the difference between a bank, a savings and loan association, and a credit union? After bank deregulation the services offered by banks and S&Ls are now similar. They both offer many of the same services. Credit Unions are tax- exempt member-owned cooperatives that operate like banks.
What’s a consumer finance company? Consumer finance companies offer short- term loans to those who cannot meet the credit requirements of regular banks.
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26. *
HOW the BANKING CRISIS AFFECTED SMALL BUSINESS Spotlight on Small Business *
The tightening of loan money led small businesses to seek alternative sources of funds.
Angel investors can be a source of funds for some firms, especially high-growth firms in technology or biotech.
Peer-to-peer lending is an alternative source of capital.
See Learning Goal 5: Briefly trace the causes of the banking crisis of and explain how the government protects your funds during such crises.
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27. PROTECTING DEPOSITORS’ MONEY*
PROTECTING DEPOSITORS’ MONEY
Protecting Your Funds *
LG5
The Federal Deposit Insurance Corporation (FDIC) -- An independent agency of the U.S. government that insures bank deposits up to $100,000 ($250,000 until December 2013).
The Savings Association Insurance Fund (SAIF) -- Insures holders of accounts in savings and loan associations.
The National Credit Union Administration (NCUA) -- Provides up to $100,000 coverage per individual depositor per institution.
See Learning Goal 5: Briefly trace the causes of the banking crisis of and explain how the government protects your funds during such crises.
The amount of depositors’ insurance was temporarily increased to $250,000 to create confidence in the banking system.
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28. The BANKING CRISIS GOES GLOBAL Reaching Beyond Our Borders*
The BANKING CRISIS GOES GLOBAL Reaching Beyond Our Borders *
The banking crisis of wasn’t limited to the U.S., even high growth nations felt the pinch.
The International Monetary Fund (IMF) has received requests from countries like Pakistan, Ukraine, Hungary, Turkey, and Bahrain.
Many nations are wondering where future funds will come from.
See Learning Goal 5: Briefly trace the causes of the banking crisis of and explain how the government protects your funds during such crises.
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29. TECHNOLOGICAL ADVANCEMENTS in BANKING*
TECHNOLOGICAL ADVANCEMENTS in BANKING
Using Technology to Make Banking More Efficient *
LG6
Electronic Funds Transfer System -- Messages about a transaction are sent from one computer to another so firms can transfer funds quickly and more economically.
Debit Card -- Serves the same function as a check; it withdrawals funds from a checking account.
See Learning Goal 6: Describe how technology helps make banking more efficient.
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30. *
SMART CARDS
Using Technology to Make Banking More Efficient *
LG6
Smart Card -- A combination of a credit card, debit card, phone card, driver’s license, and more.
See Learning Goal 6: Describe how technology helps make banking more efficient.
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31. MAKING TRANSACTIONS in OTHER COUNTRIES*
MAKING TRANSACTIONS in OTHER COUNTRIES
International Banking and
Banking Services *
LG7
Letter of Credit -- A promise by the bank to pay the seller a given amount if certain conditions are met.
Banker’s Acceptance -- A promise the bank will pay some specified amount at a particular time.
Money exchange allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros).
See Learning Goal 7: Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund.
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32. LEADING INSTITUTIONS in INTERNATIONAL BANKING*
LEADING INSTITUTIONS in INTERNATIONAL BANKING
International Banking and
Banking Services *
LG7
World Bank -- Lends most of its money to less- developed nations to improve their productivity and help raise standards of living and quality of life.
International Monetary Fund (IMF) -- Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. About 185 countries are a part of the IMF.
See Learning Goal 7: Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund.
Both the World Bank the IMF were created to rebuild the world economy after World War II.
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33. * * PROGRESS ASSESSMENT
What are some of the causes for the banking crisis of ?
What’s the role of the FDIC?
How does a debit card differ from a credit card?
What’s the World Bank and what does it do?
What’s the IMF and what does it do?
What are some of the causes for the banking crisis of ? After the internet bubble of the late 1990s, the Federal Reserve lowered interest rates creating a situation in which mortgage rates were low thus fueling a housing boom. Banks relaxed their underwriting standards and created mortgage-backed securities and sold them to organizations throughout the world. The government did not regulate these transactions well and banks collapsed as housing values fell and individuals defaulted on their loans.
What’s the role of the FDIC? The role of the FDIC is to insure bank deposits if a bank were to fail. Bank deposits are currently insured up to $250,000 (until December 2013).
How does a debit card differ from a credit card? Unlike a credit card a debit card functions as a check, withdrawing funds directly from a checking account. The debit card only allows you to spend money that is in your account; once the balance is zero the card cannot be used. If the card is used with a zero balance, it will result in overdrafts.
What’s the World Bank and what does it do? The World Bank also called the International Bank for Reconstruction and Development is responsible for financing economic development.
What’s the IMF and what does it do? The IMF was established to assist the smooth flow of money among nations. Nations must join the IMF and allow for flexible exchange rates, inform the IMF of changes in a countries monetary policy, and to modify policies on the advice of the IMF.
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