Money, Banking, and the Federal Reserve

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Chapter 10 and 16

• Money, Banking, and the Federal Reserve

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Money

• Money is anything that serves 3 purposes
• Medium of Exchange used when exchanging goods
  or services

3
Money

• Money is anything that serves 3 purposes
• Unit of Account means of comparing value of
  goods and services

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Money

• Money is anything that serves 3 purposes
• Store of Value if you hold on to it, it will
  maintain its value

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6 Characteristics of Currency

• Currency coins and paper bills society uses for
  money
• More useful than bartering because of 6
  characteristics

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The 6 Characteristics of Currency

• Durability lasts for a long time
• Portability easy to carry
• Divisibility can be divided into smaller
  denominations
• Uniformity looks universally the same,
  difficult to counterfeit

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The 6 Characteristics of Currency

• Limited Supply
• Acceptability everyone in the economy must
  accept its value

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History of the Value of Money

• Commodity Money beginning of time until about
  1600s, people traded in commodities (salt,
  cattle, tobacco, pretty rocks) rather than money

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History of the Value of Money

• Representative Money starting in 1600s
• Gold and silver were difficult to carry around
• Banks issued paper receipts that represented gold
  or silver kept in a town safe
• Became more convenient to trade these receipts
  with other townspeople

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History of the Value of Money

• Fiat Money Started in 1930s, government issued
  currency and passed laws saying that all people
  must accept it as payment for debts

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What is a Bank?

• Bank institution for receiving, keeping, and
  lending money

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Brief History

• Start of U.S. History (1780s 1800s)
• Federalists vs. Anti-Federalists
• Federalists favored a national bank
• Anti-Federalists believed states should control

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Brief History

• National Banks were created, and accomplished a
  number of purposes
• Held government tax revenue
• Lend and borrow money for government purposes

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Brief History

• National Banks were created, and accomplished a
  number of purposes
• Issue representative money backed by gold or
  silver
• Watch over states use of representative money

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Brief History

• Later, because of politics, the national bank is
  killed

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Banking With No National Bank

• Problems
• Bank runs, panics
• High rates of bank failure
• Fraud
• Many different currencies

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The New National Banking System

• Federal Reserve Bank Established in 1913
• Gives short term loans to private banks to
  prevent failures
• Created a national currency todays dollars
• Federal Reserve controls number of dollars in
  circulation

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The New National Banking System

• Federal Reserve Bank Established in 1913
• Monetary Policy Tools of the Federal Reserve
• Open Market Operations buying/selling
  government bonds to expand/contract the money
  supply
• Controls the discount rate (primarily the
  decision of the Chairman of the Federal Reserve
  Board)
• Reserve Requirement Ratio (RRR) amount of
  deposits banks must keep in reserve (rarely ever
  used)

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The New National Banking System

• Federal Reserve Bank Established in 1913
• Monetary Policy Goals of the Federal Reserve
• Expansionary Policy Grows the economy, but may
  cause inflation to go up
• Lower the discount rate, encourage borrowing
• Buy bonds from investors, injects cash into the
  economy
• Contractionary Policy Controls inflation, but
  may cause economic growth to slow
• Raise the discount rate, discourage borrowing
• Sell bonds to investors, takes cash out of the
  economy

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Other Federal Regulations on Banks

• Federal Deposit Insurance Corporation (FDIC)
  insures customer deposits up to 100,000 in the
  event of bank failure