1. MONEY  NEED FOR MONEY Avoid “double coincidence of wants”  FUNCTIONS OF MONEY Medium of Exchange Unit of Account Store of Value

2. More About Money  Characteristics of “Good” Money Controlled Durable Divisible Portable  Examples Playing cards Shells Cigarettes

3. MONEY SUPPLY  TYPES OF MONEY Coins Currency Demand Deposits (checkbook money) “Near” Money But NOT Credit Cards  FIAT VS. COMMODITY MONEY

4. A Short History Of Money in the U.S.  Pre Revolutionary War—Foreign  Revolutionary War—fiat money  Revolution to Civil War Gold coins Bank money—currency and demand deposits  1862-1879—gold, bank notes, greenbacks  1879-1933—gold standard  Since 1933—fiat money  GRESHAM’S LAW—bad money drives out good money

5. 11-5 Measures of Money Components of M1Components of M2 Savings deposits (50%) Checking accounts (49%) Small-denomination time deposits (17%) Currency (51%) M1 (28%) Money market mutual funds (13%) Traveler’s checks (<1%) M1 (20%)

6. FINANCIAL INTERMEDIARIES  A Financial Transaction Mirrors Every Real Transaction Financial Intermediaries Bring Borrowers and Lenders Together

7. Financial Intermediaries Financial Sector Loans Saving Gov’t House- holds Corpor- ations Pension funds CDs Savings deposits Checkable deposits Stocks Bonds Government Securities Life insurance Large business loans Small business loans Venture capital loans Construction loans Investment loans Gov’t House- holds Corpor- ations

8. BANKING  Fractional Reserve Banking A Short History of Banking Bank profits & interest rates Bank reserves  Money not lent out Fractional reserve banking & consumer confidence Bank runs

9. Sources and Uses of Bank Funds  Sources of Funds Demand Deposits Savings and Time Deposits Shareholder Equity Interest Earned  Uses of Funds Operating Expenses (e.g., O&M, salaries) Reserves Interest Paid Purchase of Earning Assets (e.g., loans) Payments to shareholders (e.g., dividends)

10. Good Banking Practices  Conservative  Diversification  Primarily local  Adequate liquidity  Regulatory Oversight

11. FEDERAL RESERVE SYSTEM  A bank for banks  Organization 12 districts Board of Governors Chair: Ben Bernanke  Independence of FED Self-supporting Long terms—14 years

12. FEDERAL RESERVE SYSTEM (cont.)  Functions Currency to banks Clearing house for checks Specify reserve requirements Supervise banks Make loans to banks Regulate money supply  Change interest rates  Alter overall economic performance

13.  FEDERAL DEPOSIT INSURANCE CORPORATION $250,000 per account Banks contribute to fund the FDIC