Transcript Money, Banking and Central Banking

Chapter 15
Money, Banking,
and Central
Banking
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
Chapter Outline
• The Functions of Money
• Properties of Money
• Defining Money
• Financial Intermediation and Banks
• Federal Deposit Insurance
• The Federal Reserve System: The U.S.
Central Bank
15-2
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Did You Know That...
• It is illegal to carry more than $5 worth on pennies
or nickels out of the U.S.?
• Recent upswings in prices of zinc and copper have
pushed the value of these metals used in the coins
above the coins’ face value.
• By banning the international transport and melting
of pennies and nickels, the government is trying to
prevent people from profiting from selling coins
that are already generating losses to taxpayers.
15-3
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Did You Know That… (cont’d)
• Coins, paper currency, and bank accounts
from which people transmit debit-card and
check payments are included in the Federal
Reserve’s measure of the total amount of
money that we can use to purchase goods
and services.
• Money has been important to society for
thousands of years and is part of our
everyday existence.
15-4
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Money
• Money
– Any medium that is universally accepted in an
economy both by sellers of goods and services
and by creditors as payment for debts
15-5
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Table 15-1 Types of Money
2009: Mackerel fish?
15-6
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The Functions of Money
• The functions of money
– Medium of exchange vs. barter
– Unit of accounting
– Store of value (purchasing power) if ….
– Standard of deferred payment
15-7
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Properties of Money
• Liquidity
– The degree to which an asset can be acquired or
disposed of without much danger of any
intervening loss in nominal value and with small
transaction costs
– Money is the most liquid asset.
15-8
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The Properties of Money (cont’d)
• Question
– What is the cost of holding money (its
opportunity cost)?
• Answer
– It is the alternative interest yield obtainable by
holding some other asset.
15-9
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Properties of Money (cont’d)
• Questions
– What backs money?
– Is it gold, silver, or the federal government?
• Answer
– Your confidence
– “Fiducia”=trust
15-10
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Defining Money
• Money is important
– Changes in the rate at which the money supply increases
or decreases affect important economic variables (at least
in the short run) such as inflation, interest rates,
employment, and the level of real GDP.
• Money Supply
– The amount of money in circulation
15-11
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Defining Money (cont'd)
• M1
– Currency
– Checkable (transaction)
deposits
– Traveler’s checks not
issued by banks
– Where are credit cards?
15-12
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Defining Money (cont'd)
• M2
= M1 plus
1. Savings and small
denomination time
deposits
2. Balances in retail
money market
mutual funds
3. Money market
deposit accounts
15-13
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Financial Intermediation and
Banks
• Most nations have a banking system that
encompasses two types of institutions.
1. Private banking institutions.
2. Central bank.
15-14
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The Federal Reserve System
(cont'd)
• Depository institutions
– 7,500 commercial banks
– 1,300 savings and loans
– 11,000 credit unions
• All may purchase Fed services
15-15
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Figure 15-5 Bank Failures
Source: Federal Deposit Insurance Corporation.
15-16
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Federal Deposit Insurance
• In 1933, at the height of bank failures, the
Federal Deposit Insurance Corporation
(FDIC) was founded to insure the funds of
depositors and remove the reason for runs
on banks.
– The FDIC is a government agency that insures the deposits
held in banks and most other depository institutions; all
U.S. banks are insured this way.
– Problem: Moral Hazard
15-17
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Financial Intermediation and
Banks (cont'd)
• Central Bank
– A banker’s bank
– Usually an official institution
that also serves as a country’s
treasury’s bank
– Central banks normally
regulate commercial banks.
15-18
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The Federal Reserve System: The U.S.
Central Bank (cont’d)
• The Fed
– The Federal Reserve System; the central bank of
the United States
– The most important regulatory agency in the
U.S. monetary system
– Established in 1913 by the Federal Reserve Act;
signed by President Woodrow Wilson
15-19
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Figure 15-6 Organization of the
Federal Reserve System
Source: Board of Governors of the Federal Reserve System, The Federal Reserve
System: Purposes and Functions, 7th ed. (Washington, D.C., 1984), p. 5.
15-20
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Figure 15-7 The Federal Reserve
System
Source: Board of Governors of the Federal Reserve System.
15-21
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The Federal Reserve System
(cont'd)
• Functions of the Fed
1. Supplies the economy with currency (money)
2. Provides a payment-clearing system
3. Acts as the government’s fiscal agent
4. Supervises (regulates) depository institutions
5. Acts as a “lender of last resort”
6. Applies monetary policy
15-22
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Myth #15: The Fed is part of the
government
• The Federal Reserve is operationally
independent of the federal government
• However, the Fed was created out of the
Federal Reserve Act of 1913; and Congress
has the right to dissolve it and approve its
Board of Governors
• The Fed also has to report to Congress twice
a year
15-23
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