Chapter 24 What is Money?

What are the functions of money?  A medium of exchange-can be traded for what we need  Serves as a store of value-we can hold onto it till we are ready to use it  A measure of value-allows us to assign a value to something

What are 4 former types of money used in history? ssssalt aaaanimal hides ggggems ttttobacco

Why do we value money?  We are sure that someone else will accept its value  We all agree to use it

Where can we safely keep our money? Commercial banks:  Financial institutions that offer full banking services to individuals and businesses.  They offer checking and savings accounts  EX: Wachovia & RBC

Where can we safely keep our money? Savings and Loan institutions: FFFFinancial institutions that specialize in savings accounts that have higher interest rates than a traditional bank. TTTThey then turn around and give that money out in loans (usually home mortgages)

Credit unions:  Banks that work on a not-for-profit basis.  They are sponsored by large businesses, labor unions, or government institutions.  You must belong to that group to be a member

What do financial institutions do with the money we place there?  They put the money to work by lending it to other people that need funds.  It then makes a profit on the interest that they charge.

Why is your money safe in a bank? Federal Deposit Insurance Corporation (FDIC)  Designed to protect your investment in a bank.  The government will insure your deposit up to $250,000 in any given bank.  This increases consumers confidence in banks and stimulates economic growth

What is the Federal Reserve System (the FED)?  This is the central bank of the USA. They are the bank for banks.  The USA is divided into 12 federal reserve districts. Each district has at least 1 reserve bank branch.

Structure of the FED Board of Governors  Controls and coordinates the FED’s activities  Sets general policies for the FED and for it’s member banks to follow  Made up of 7 members appointed by the President and approved by the Senate for a term of 14 years  One person is appointed the Chair of the board for a 4 year term

Structure of the FED Advisory Councils  One council reports on the general condition in each district  Another tracks all financial institutions in each district  A third regulates consumer loans

What are the Functions of the FED?  Oversees many large commercial banks  Regulates connections between American and foreign banks  Oversees the international business of both American and Foreign banks that operate in this country  Enforces laws that deal with consumer borrowing

Structure of the FED Federal Open Market Committee (FOMC)  Tries to manipulate the general economy  Uses the amount of money in circulation to control consumer spending  Has 12 members appointed by the President and approved by the Senate

How is the FED a bank for commercial banks?  Holds the governments money.  All income is deposited here and it writes the government’s checks  Sells US government bonds and Treasury bills.  Issues the country’s currency, controls it’s distribution, and replaces old or damaged money

What is monetary policy?  How the government controls the supply of money and the cost of borrowing money (credit)  It may increase or decrease the supply as it sees fit.

How does the FED use monetary policy to control the economy? It can raise or lower the discount rate:  The rate it charges banks for money.  If it wants to stimulate the economy, it lowers the rate and makes it easier to get a loan.  To fight inflation, it raises the interest rate

How does the FED use monetary policy to control the economy? May lower the reserve requirement for banks:  The amount of money banks must keep on hand at all times  This gives banks more money to lend to stimulate major purchases.  It also can raise the requirement to fight inflation as there will now be less money for loans

How does the FED use monetary policy to control the economy? Through open market operations.  By buying bonds from investors, it puts more money in their hands, stimulating the economy.  By selling bonds, money comes out of circulation helping to fight inflation  See chart on page 664

Banks and personal finance Checking accounts:  Allows people to make purchases without the use of cash.  Allows us to send money safely from your own banking institution to another without fear of it being stolen.  Today it has been expanded to included debit cards which eliminate the need for paper.

Banks and personal finance Savings accounts:  You give your money to bank to use for loans  In return you collect interest on the money in that account.  The longer you leave the money there, the more money you make.

Banks and personal finance Certificates of deposit (CD):  You loan money to a bank for a specific period of time, in which you can not touch the money without a significant penalty.  In return you get a much higher interest rate than a normal savings account

Banks and personal finance Getting a loan:  Needed for a major purchase (car, house)  Must be able to convince the bank that you have the ability to pay back the loan. (based on credit score and money in personal bank accounts)  You must pay back the principal (money you ask for), plus the interest on the loan (money the bank charges you for the use of their resources)

Banking History Early History:  1 st attempt at a national banking system was from 1791 to It was not successful because most people felt banking should be left to the states  Without a national banking system, there were hundreds of different currencies and rapid inflation of prices

Banking History National Banking Act of 1863  This created a dual system of banks, with both state and federal banks.  The federal banks started to print uniform US currency backed US government bonds

Banking History Glass-Steagall Banking Act  Created in response to the many bank failures of the Great Depression.  It set up the FDIC to insure all deposits up to $100,000  Has helped to prevent “runs” on banks

Banking History Savings and Loan Crisis of the late 1980s  The government relaxed regulations on banks in the late 1970s  Many banks failed due to bad investments.  The United States government stepped in to bail out the S & Ls  It cost the government about $200 billion

Banking History Gramm-Leach-Bliley Act of 1999  Permits bank holding companies more freedom to engage in a wider series of financial options  Forces banks to put in safeguards to protect your money