Chapter 10 and 16Chapter 10 and 16

Money, Banking, and the Money, Banking, and the Federal ReserveFederal Reserve

MoneyMoney

Money is anything that serves 3 Money is anything that serves 3 purposes:purposes:Medium of Exchange – used Medium of Exchange – used

when exchanging goods or when exchanging goods or servicesservices

MoneyMoney

Money is anything that serves 3 Money is anything that serves 3 purposes:purposes:Unit of Account – means of Unit of Account – means of

comparing value of goods and comparing value of goods and servicesservices

MoneyMoney

Money is anything that serves 3 Money is anything that serves 3 purposes:purposes:Store of Value – if you hold on Store of Value – if you hold on

to it, it will maintain its valueto it, it will maintain its value

6 Characteristics of Currency6 Characteristics of Currency

Currency – coins and paper bills Currency – coins and paper bills society uses for moneysociety uses for moneyMore useful than bartering More useful than bartering

because of 6 characteristicsbecause of 6 characteristics

The 6 Characteristics of CurrencyThe 6 Characteristics of Currency

Durability – lasts for a long timeDurability – lasts for a long time Portability – easy to carryPortability – easy to carry Divisibility – can be divided into Divisibility – can be divided into

smaller denominationssmaller denominations Uniformity – looks universally the Uniformity – looks universally the

same, difficult to counterfeitsame, difficult to counterfeit

The 6 Characteristics of CurrencyThe 6 Characteristics of Currency

Limited SupplyLimited Supply Acceptability – everyone in the Acceptability – everyone in the

economy must accept its valueeconomy must accept its value

History of the Value of MoneyHistory of the Value of Money

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

History of the Value of MoneyHistory of the Value of Money Representative Money – starting in 1600’s Representative Money – starting in 1600’s

Gold and silver were difficult to carry aroundGold and silver were difficult to carry around Banks issued paper receipts that represented Banks issued paper receipts that represented

gold or silver kept in a town safegold or silver kept in a town safe Became more convenient to trade these Became more convenient to trade these

receipts with other townspeoplereceipts with other townspeople

History of the Value of MoneyHistory of the Value of Money

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

What is a Bank?What is a Bank?

Bank – institution for receiving, Bank – institution for receiving, keeping, and lending moneykeeping, and lending money

Brief HistoryBrief History

Start of U.S. History (1780’s – Start of U.S. History (1780’s – 1800’s)1800’s)Federalists vs. Anti-FederalistsFederalists vs. Anti-Federalists

Federalists favored a national Federalists favored a national bankbank

Anti-Federalists believed Anti-Federalists believed states should controlstates should control

Brief HistoryBrief History

National Banks were created, and National Banks were created, and accomplished a number of accomplished a number of purposespurposesHeld government tax revenueHeld government tax revenueLend and borrow money for Lend and borrow money for

government purposesgovernment purposes

Brief HistoryBrief History

National Banks were created, and National Banks were created, and accomplished a number of accomplished a number of purposespurposes Issue representative money Issue representative money

backed by gold or silverbacked by gold or silverWatch over states use of Watch over states use of

representative moneyrepresentative money

Brief HistoryBrief History

Later, because Later, because of politics, the of politics, the national bank is national bank is killedkilled

Banking With No National BankBanking With No National Bank

ProblemsProblemsBank runs, panicsBank runs, panicsHigh rates of bank failureHigh rates of bank failureFraudFraudMany different currenciesMany different currencies

The New National Banking SystemThe New National Banking System

Federal Reserve Bank – Established in Federal Reserve Bank – Established in 19131913 Gives short term loans to private Gives short term loans to private

banks to prevent failuresbanks to prevent failures Created a national currency – today’s Created a national currency – today’s

dollarsdollarsFederal Reserve controls number of Federal Reserve controls number of dollars in circulationdollars in circulation

The New National Banking SystemThe New National Banking System Federal Reserve Bank – Established in 1913Federal Reserve Bank – Established in 1913

Monetary Policy Tools of the Federal ReserveMonetary Policy Tools of the Federal ReserveOpen Market Operations – buying/selling Open Market Operations – buying/selling

government bonds to expand/contract the government bonds to expand/contract the money supplymoney supply

Controls the discount rate (primarily the Controls the discount rate (primarily the decision of the Chairman of the Federal decision of the Chairman of the Federal Reserve Board)Reserve Board)

Reserve Requirement Ratio (RRR) – amount Reserve Requirement Ratio (RRR) – amount of deposits banks must keep in reserve (rarely of deposits banks must keep in reserve (rarely ever used)ever used)

The New National Banking SystemThe New National Banking System Federal Reserve Bank – Established in 1913Federal Reserve Bank – Established in 1913

Monetary Policy Goals of the Federal ReserveMonetary Policy Goals of the Federal ReserveExpansionary Policy – Grows the economy, but Expansionary Policy – Grows the economy, but

may cause inflation to go upmay cause inflation to go up Lower the discount rate, encourage borrowingLower the discount rate, encourage borrowing Buy bonds from investors, injects cash into the Buy bonds from investors, injects cash into the

economyeconomy

Contractionary Policy – Controls inflation, but Contractionary Policy – Controls inflation, but may cause economic growth to slowmay cause economic growth to slow Raise the discount rate, discourage borrowingRaise the discount rate, discourage borrowing Sell bonds to investors, takes cash out of the Sell bonds to investors, takes cash out of the

economyeconomy

Other Federal Regulations on Other Federal Regulations on BanksBanks

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