Banking and the Federal Reserve Unit 7

money Money is how we measure economic value. The cash and coins we use, called currency, are what we use in our society to pay for goods and services. All the coins and bills in the U.S. are created, or “minted,” by the Treasury of the federal government. The Treasury carefully controls how many dollars and coins are distributed. Money changes hands frequently – it’s exchanged everyday between people, businesses and banks. • Money is the glue that binds products, services, and people together in our economy. Our country’s economic engine is fueled by what people create, and money allows people to both produce and buy what is created. • People earn money by working and being paid for their work. • Aside from being fun to have, money helps you handle the necessities of everyday life • Money may come to a bank from many sources. It starts at the Treasury, which keeps banks supplied with the money they need for their customers. But money that’s already in the economy also goes to banks – from individuals and businesses who keep their money in banks. • People put their money in a bank for safekeeping. Banks pay interest on the money people put in the bank for extended periods of time. Banks lend the money to borrowers and investors. Banks charge interest on the money they lend.

Money is anything that any group of people accepts as a means of exchange. Money serves three functions: as a medium of exchange, as a store of value, and as a measure of value. Money must be portable, divisible, and durable, and it must be limited in supply. 4

Financial Institutions Financial institutions allow people to store their money, and they also lend money to individuals and businesses. Types of financial institutions include commercial banks, savings and loans, and credit unions. Money deposited in financial institutions is protected from loss up to a limit by government-backed insurance. Government regulates financial institutions in order to ensure that the institutions follow all laws and remain in good financial shape. These efforts also protect consumers’ deposits. 6

Banks in the Economy Financial institutions such as banks offer many types of products, such as savings, checking, and money market accounts, as well as certificates of deposit. Banks use deposits to loan money to individuals and businesses to finance large expenses. Technology has expanded the range of banking services to include online banking and the use of ATMs. 7

How Banking Has Changed Banking has changed over the course of history, often in response to crises. The first banks in the United States were state banks. Only in 1863 did the United States finally establish a permanent national banking system. Crises in the early 1900s, in the 1930s (the Great Depression), in the 1980s, and in 2008 have led to banking reforms. 8

Types of Investment KEY Certificates of Deposit (CDs) Type of Investment What is it? Return (Income Generated) Risk Comments Checking Accounts Account where money is stored and easily accessed. Money is accessed through Automated Teller Machines and Bank Tellers Low – very low interest rate Very Low Generally in commercial banks. Popular Debit Cards, Checkbooks Savings Accounts Account where money is saved. Not meant to be accessed regularly. Low – low interest rate Where people put majority of their $ Certificates of Deposit (CDs) Loan money to a bank for specific amount of time Can’t remove $$ from CD early or you get charged a fee. Low – Moderate interest rates Low - CDs last between 9 months and several years Bonds Loan money to business or government for a specific amount of time (generally long term) Similar to CD Low to Moderate interest rates Moderate - Can be unsafe if govt or business is unreliable Stocks Ownership of a corporation Money gained through capital gains and dividends Can be affected by performance of overall stock market High Some companies are much less reliable than others. Mutual Funds Pool of $$ investment banks use to invest in stocks, bonds, CD, etc.   Moderate-High Moderate -High Functions a lot like stocks

The Federal Reserve’s Structure The Federal Reserve System, or Fed, was established in 1913 to serve as the nation’s central bank. The Fed manages the nation’s currency, regulates commercial banks, serves as the bank of the government, and helps manage the overall economy. The Fed consists of a board of governors as well as district banks, member banks, the Federal Open Market Committee, and several advisory councils. 10

What the Fed Does The Fed manages the nation’s money supply—that is, carries out monetary policy—which is a key part of keeping the economy strong. The Fed has several tools for carrying out monetary policy, including open market operations and manipulation of the discount rate and reserve requirement. The Fed regulates the nation’s financial system, maintains the currency, and provides banking services to the federal government. 11