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Chapter 15.  Over 30,000 different currency  Anyone could create currency  Some currencies worth more than others  Some banks didn’t keep enough reserve.

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Presentation on theme: "Chapter 15.  Over 30,000 different currency  Anyone could create currency  Some currencies worth more than others  Some banks didn’t keep enough reserve."— Presentation transcript:

1 Chapter 15

2  Over 30,000 different currency  Anyone could create currency  Some currencies worth more than others  Some banks didn’t keep enough reserve to do everyday banking of customers  Banks constantly going BANKRUPT  Congress creates The Federal Reserve Bank (THE FED) in 1913

3  Board of Governors  Directs the operations  7 full time members  Appointed by Pres – approved by Senate  14 year term – new member every 2 years  Decisions not approved by anyone  Federal Advisory Council  12 members chosen by directors of each bank  Meets 4 times a year – reports directly to BoG  Federal Open Market Committee  Meet 8 times a year  Controls Money Supply  Made up of 7 BoG, head of NY Fed Bank, 4 other bank heads rotate  12 District Banks  25 Branch Banks  Most other banks and lending institutions

4  U.S. divided into 12 Federal Reserve Districts  Each district has one Fed Reserve Bank  Set up as corporation with member banks as owners  25 Branch banks assist in carrying out duties  All national banks must join  State banks have choice  Advantages:  Stockholders of district bank  Receive Dividends  Vote for 6 of district banks 9 board members

5  Check Clearing  Government’s Fiscal Agent  Supervising Banks  Holding Reserves and Setting Reserve Requirement  Supplying Paper Currency  Regulating the Money Supply  Main function  Affects interest rates for borrowers  Affects availability of credit  Affects business activity

6  Monetary Policy  Changing the rate of growth of the money supply in order to affect the cost and availability of credit  Cost of Credit – Interest paid  As cost goes up???  As cost goes down???  Loose Money Policy (AKA Expansionary)  Lots of credit  Credit is cheap  Consumers buy more  Businesses expand  More employment  Tight Money Policy (AKA Contractionary)  Difficult to get credit  Cost more to borrow  Businesses postpone expansion  Unemployment increases  Reduction in production

7  Fed sets Reserve Requirement  Amount of checkable deposits that must be in “reserve” at all times  Held in case customers want to withdraw funds  Currently 10%  Rest of money is used to create “New Money”

8  Board of Governors can do 3 things to control money supply  Changing Reserve Requirement  Changing Discount Rate  Open Market Operations

9 Raising the Reserve???  Less money (deposits) available to loan out  Used to slow economy if too much spending Lowering the Reserve???  More money (deposits) available to loan out  More loans means more in supply  Consumers can spend more

10  Banks may have to borrow from the Fed  If goes below Reserve Requirement  Customers borrowing  Customers withdraw  Fed charges Discount Rate (Interest) to banks  If Discount Rate High???  Banks charge higher interest to customers  Customers/Businesses likely won’t borrow  Lowering the Discount Rate???  Banks charge lower interest to customers  Customers/Businesses will borrow at this times  Can also alter the Federal Funds Rate  Rate that banks charge when lending to each other  When do banks borrow from each other???

11  Buying/Selling Treasury Bonds, Notes, Bills  How does this alter Money Supply?  Government buys securities  Deposits money into dealer’s bank  Bank then keeps RR and loans rest out  Increases Money Supply  Government sells securities  Dealer’s banks must use deposits to purchase  Banks have less money above reserve so less loans  Decreases Money Supply

12  No matter what tool used  Takes about 12 months before fully felt  Criticisms of Fed Policies  Have caused higher than necessary inflation because improperly increasing money supply  Has made recessions worse by causing tight money policy when economy already contracting  Some people call for The Fed to increase money supply by same amount each year (steady inflation)  Tax policies of Federal Government can also affect The Fed policy  Sometimes work against each other


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