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Chapter Nineteen The American Economy Personal Finances ~~~~~ Banks and Banking.

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Presentation on theme: "Chapter Nineteen The American Economy Personal Finances ~~~~~ Banks and Banking."— Presentation transcript:

1 Chapter Nineteen The American Economy Personal Finances ~~~~~ Banks and Banking


3 How Banking Began goldsmiths kept their gold in strong sturdy safes townspeople began to bring their money for safekeeping money-keeping business local goldsmiths began charging a small fee for the service money-lending services townspeople needing money came to the goldsmiths for loans they signed a paper promising to repay the money by a certain date and to pay interest for using the money borrowers guaranteed their loans by promising to give their property to the moneylender if the loans were not repaid on time collateral banking system developed from these early money-lending practices

4 demand deposits (checking accounts) usually do not earn interest easily access the money depositors request their money when they write checks or use debit cards may also have automated teller machine (ATM) cards allows them to withdraw cash from their accounts at various locations at any time of day time deposits (savings accounts) often required to keep the money in their accounts for a minimum period of time pay interest certificates of deposit (CDs) invest a certain amount of money for a specified period of time NOW accounts - negotiable order of withdrawal combines checking and savings can write checks and receive interest on money in the account often required to maintain a certain minimum balance Bank Deposits

5 Types of Banks bank charters determines whether the bank is supervised by state or federal officials state bank chartered under state laws national bank chartered under federal laws determines many of the rules that guide the bank four main types of banks in the United States 1.commercial banks 2.savings and loan associations 3.savings banks unions

6 Types of Banks commercial banks most numerous type of banks offer a full range of services checking, savings, and NOW accounts loans to individuals and businesses issue credit cards and manage retirement accounts manage property and invest money accounts insured by FDIC Federal Deposit Insurance Corporation - government agency each depositor is insured up to $100,000 (now $250,000) if for some reason a bank is unable to give its depositors their money, the FDIC will refund up to $100,000 per depositor corporations owned by stockholders who buy shares in the bank shareholders receive cash dividends from the bank profits

7 savings and loan associations (S&Ls) began in the mid-1800s to help people buy homes federal regulations have allowed them to expand their services now offer many of the services that commercial banks do loans, checking, savings, NOW accounts and credit cards originally owned and operated by their depositors now nearly half are owned and operated by shareholders before 1989 insured by the FSLIC Federal Savings and Loan Insurance Corporation savings and loan crisis bankrupted it now insured by RTC Types of Banks

8 savings banks began in the early 1800s mostly located in the northeast U.S. encourage savings by people who could make only small deposits now offer a variety of services, including home loans insured by the FDIC were called mutual savings banks passed on their profits to depositors in the form of interest many now owned by shareholders receive dividends from the profits credit unions established by people who work for the same company or belong to the same organization owned and operated by their members when members make deposits, they buy interest-paying shares deposits are pooled to make low-interest loans available to members depositors may also write checks, which are called share drafts. insured by NCUA National Credit Union Association - government agency each depositor is insured up to $100,000 (now $250,000) Types of Banks

9 Government Regulation bank runs rumors might spread that the bank was shaky sometimes loaned money without getting enough collateral in return sometimes did not keep enough money in reserve depositors would start a "run" on the bank people would panic, go to the bank, and demand their money if too many depositors withdrew their money at once the bank would have no funds left some depositors would lose their money when the bank failed Federal Reserve System - the Fed established by Congress in 1913 created to regulate U.S. banking and prevent bank failures all national banks were required to belong to this system state banks were permitted to join the system if they wished law was passed stating that all U.S. banks must meet the Fed's requirements

10 The Federal Reserve System divides the U.S. into 12 Federal Reserve districts a Federal Reserve bank is located in each district they do not usually do business with individuals or business firms they act as bankers for the federal government and for other banks Federal Reserve banks serve two main purposes 1.they handle the banking needs of the federal government U.S. Treasury secretary deposits government funds in these banks secretary writes checks on the federal government's account the banks handle the sale of bonds issued by the government most U.S. currency is put into circulation through the Fed from these banks the money spreads out into the economy for use by businesses and consumers 2.they provide various services to state and national banks and control the banking system member banks can go to the Federal Reserve bank in its district and borrow money to increase its own reserve this allows the member bank to make more loans or investments the bank must pay interest on the loans it receives from the Fed discount rate = rate of interest charged to member banks by the Fed this rate often influences the interest rates charged by these banks to their own customers

11 The Federal Reserve at Work management of the Fed seven-member board of governors in Washington, D.C. makes most of the major decisions for the Federal Reserve System each member appointed by the president confirmed by the Senate serves a single 14-year term money circulation when the economy is growing and more goods and services are being produced, more money is needed in circulation when the supply of money grows faster than the supply of goods, prices tend to rise to prevent this, the Fed may try to slow the growth of the money supply or even take money out of circulation if the Fed wants to speed economic growth, it puts more money into circulation. buys U.S. government bonds from banks or individuals these banks or people then have more money to spend or lend this money soon enters the economy through purchases or loans to take money out of circulation sells government bonds back to banks or people individuals or banks then have less money to spend or lend

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