1. Banking History Chapter 16 Section 1

2. Problems of the Federal Reserve
Initially the Federal Reserve System did not work well because the actions of one regional bank would counteract the actions of another.

3. The Federal Reserve Act of 1913
The Federal Reserve System, often referred to as “the Fed,” is a group of 12 regional, independent banks.
Woodrow Wilson created this system

4. A Stronger Fed
In 1935, Congress adjusted the Federal Reserve structure so that the system could respond more effectively to crises.
The Great Depression
Today’s Fed has more centralized powers so that regional banks can work together while still representing their own concerns.

5. Structure of the Federal Reserve
About 40 percent of all United States banks belong to the Federal Reserve.
These members hold about 75 percent of all bank deposits in the United States.

6. The Board of Governors The Federal Reserve System is overseen by
Seven-member Board of Governors of the Federal Reserve.
Actions taken by the Federal Reserve are called monetary policy.

7. Federal Reserve Districts
The Federal Reserve System consists of 12 Federal Reserve Districts
with one Federal Reserve Bank per district.
The Federal Reserve Banks monitor and report on economic activity in their districts.

8. Federal Reserve Functions Chapter 16 Section 2

9. Serving Government The U.S. Government has:
Operating budget of $1.7 Trillion
Revenue from taxes of $1 Trillion
$900 Billion revenue from its programs
It is obvious the government needs a banker

10. Federal Government’s Banker
The Fed maintains a checking account for the Treasury Department and processes payments
Social Security Checks
IRS refunds

11. Issuing Currency
The district Federal Reserve Banks are responsible for issuing paper currency
The Department of the Treasury issues coins

12. Serving Banks The Federal Reserve provides certain functions for banks
Its most well known function is clearing checks
It also:
Protects bank reserves
Lends money to banks

13. Check Clearing
Check clearing is the process by which banks record whose account gives up money, and whose account receives money when a customer writes a check.

14. The Journey of a Check
After you write a check, the recipient presents it at his or her bank.
The Path of a Check
Check writer
Recipient
The check is then sent to a Federal Reserve Bank.
Check writer’s bank
Your processed check is returned to you by your bank.
Federal Reserve Bank
The reserve bank collects the necessary funds from your bank and transfers them to the recipient’s bank.

15. Monetary Policy Tools Chapter 16 Section 3

16. Money Creation
Money creation is the process by which money enters into circulation.
Banks can put money into the economy to speed it up or take money out to slow it down.

17. Required Reserve Ratio
Assume that you have deposited $1,000 dollars in your checking account.
The bank doesn’t keep all of your money, but rather lends out some of it to businesses and other people.
The portion of your original $1,000 that the bank needs to keep on hand, or not loan out
This is called the required reserve ratio (RRR).
The RRR is set by the Fed.
As the bank lends a portion of your money to businesses and consumers, they too may deposit some of it.
Banks then continue to lend out portions of that money, although you still have $1,000 in your checking account. Hence, more money enters circulation.

18. The Money Creation Process
To determine how much money is actually created by a deposit, we use the money multiplier formula. The money multiplier formula is calculated as 1/RRR.
Money Creation
You deposit $1,000 into your checking account.
Your $1,000 deposit minus $100 in reserves is loaned to Elaine, who gives it to Joshua.
$100 held in reserve $900 available for loans
Joshua’s $900 deposit minus $90 in reserves is loaned to another customer.
At this point, the money supply has increased by $2,710.
$90 held in reserve $810 available for loans

19. Fiscal and Monetary Policy Tools
The federal government and the Federal Reserve both have tools to influence the nation’s economy.
Fiscal and Monetary Policy Tools
Fiscal policy tools
Monetary policy tools
1. increasing government spending
2. cutting taxes
Expansionary tools
1. open market operations: bond purchases
2. decreasing the discount rate
3. decreasing reserve requirements
Contractionary tools
1. decreasing government spending
2. raising taxes
1. open market operations: bond sales
2. increasing the discount rate
3. increasing reserve requirements