1. Money, Banking, and the Federal Reserve
Chapter 10 and 16
Money, Banking, and the Federal Reserve

2. 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

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

5. 6 Characteristics of Currency
Currency – coins and paper bills society uses for money
More useful than bartering because of 6 characteristics

6. 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

7. The 6 Characteristics of Currency
Limited Supply
Acceptability – everyone in the economy must accept its value

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

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

10. History of the Value of Money
Fiat Money – Started in 1930’s, government issued currency and passed laws saying that all people must accept it as payment for debts

11. What is a Bank?
Bank – institution for receiving, keeping, and lending money

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

13. Brief History
National Banks were created, and accomplished a number of purposes
Held government tax revenue
Lend and borrow money for government purposes

14. 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

15. Brief History
Later, because of politics, the national bank is killed

16. Banking With No National Bank
Problems
Bank runs, panics
High rates of bank failure
Fraud
Many different currencies

17. 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 – today’s dollars
Federal Reserve controls number of dollars in circulation

18. 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)

19. 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

20. Other Federal Regulations on Banks
Federal Deposit Insurance Corporation (FDIC) – insures customer deposits up to $100,000 in the event of bank failure