Transcript Unit 5 – Money and Banking with the Federal Reserve System

Text Chapters 14 and 15
Chapter 15
 Medium
of Exchange – able to barter or
exchange for other goods
 Unit of Accounting – measuring tool used
to compare the value of goods or
services
 Store of Value – store purchasing power
for later use
 Durable
 Portable
 Divisible
 Stable
in Value
 Scarce
 Accepted
 Commodity
Money – something that have
value as a medium of exchange aside
from its value as money. (ex. Cattle)
 Representative Money – money that is
backed by gold or silver
• Gold Standard
• Silver Standard
 Fiat
Money – money that has value
because the government has established
that it is acceptable payment for debt.
 Legal Tender – money that by law must
be accepted as payment for public and
private debt
 History
of money is closely tied with the
history of banking in the United States.
 Why was it important for the United
States for develop a reliable form of
currency in its early years?
• Standardize commerce
• Help build a strong economy
• Create greater equality and continuity
 Research
the history of money in the
United States from the signing of the
constitution through the present.
• Pg. 374 – 375
• Use additional sources as well
 Write
a short 1 pg reflection on how
money has changed.
• Make sure to include; gold standard and silver
standard in your paper
BANKS

Banks are federally insured by
the Federal Deposit Insurance
Corporation. A paid Board of
Directors makes all of the
decisions for the bank, which
are usually profit-driven and
hold little benefit for the
customers of the bank.
Anyone, in any city or state,
can open an account with a
bank, and customers hold no
voting privileges or decisionmaking power within the
institution.
CREDIT UNIONS

Credit unions, on the other
hand, are designed to serve a
particular group or
neighborhood. People who
use credit unions for their
financial services are
members of the credit union,
rather than customers. Since
credit unions are not-for-profit
organizations, the profits
incurred by the credit union
directly benefit the members
after covering overhead costs.
 Checking
Account
• See how a check clears on pg. 395
 Savings
Account
 Electronic Funds Transfer
 Debit and Credit Cards
 They
do not have a banking license
 They are not supervised by international
banking regulatory agencies
 They include…
• insurance firms
• pawn shops
• cashier's check issuers
• check cashing locations
• currency exchanges
• microloan organizations (payday loans)
Chapter 15
 Directs
operations of the FED
 Supervises the 12 Federal Reserve Banks
 7 members chosen by the President and
approved by Senate serve for 14 years.
• Every 2 years a new member is chosen
 12
members who are elected by the 12
district banks
 They meet 4 times a year and report their
findings on the general business
conditions of the nation.
 12
voting members who meet 8 times a
year to determine how the FED should
handle the money supply
• Raise or lower interest rates
 The
nation is divided up into 12 districts,
each with a single district bank.
• Which district does ND belong to? Pg. 394
 25
branch banks are also a part of the
system by assisting the district banks in
their duties.
 Check
Clearing- transferring of funds when
you write a check
 Federal government’s fiscal agent
 Supervising banks
 Holding reserves and setting reserve
requirements
• Reserve Requirement – the amount or percentage of
each deposit that is kept at the bank rather than
loans out to customers.
 Supplying
paper currency
 Regulating the money supply
“The amount of money in circulation
directly affects the level of interest rates,
the availability of credit, and business
activity in general”
LOOSE MONEY SUPPLY







Makes credit inexpensive
and abundant
Possibly leads to inflation
Borrowing is easy
Consumers buy more
Businesses expand
More people are employed
People spend more money
TIGHT MONEY SUPPLY






Credit is expensive and in
short supply
Slows the economy down
Borrowing is difficult
Businesses postpone
expansion
Unemployment increases
Production is reduced
 Which
do we have right now? Can it
change?
 What factors indicate our current
financial state?
 Analyze
this…
• How can fractional reserve banking increase the
amount of money in the economy by 500%?
• Why are banks required to keep a certain
percentage of the money in the bank rather than
loan it all out?
 What
caused the run on the bank in the
video?
 Why couldn’t the people get their money
out?
 How does the bank run video show us the
expansion of money?
 What has the government done to protect
consumers bank investments since the
great depression?
 Changing
the Reserve Requirement
 Changing the discount rate
 Open-Market Operations
 When
banks increase the reserve
requirement they are increasing their
amount of money on reserve. This means
that they will have less money to loan out
and this will create less flow of money
into the economy.
• This is not currently being used because it is too
precise of a tool
 Discount
rate – interest rate that the FED
charges on loans to commercial banks
and other depository institutions.
 Prime rate – rate of interest that banks
charge on loans to their best customers.
 Open-market
– is not controlled by
government but is open to private business.
 Open-Market Operations – the buying and
selling of government securities by the FED
to affect the money supply.
• When the FED buys securities it is making a deposit
in a dealer bank…increasing its reserve and
allowing it to loan out more money. Increasing the
money supply.
• When the FED sells securities it is taking money
from dealer banks…decreasing its reserve and
slowing the loaning of money. Decreasing the
money supply.
 Some
say the FED has worsened both
recession and inflation by engaging in
monetary policy.
 Other suggest that the FED should not
engage in monetary policy, but allow the
economy to fix itself.
• They should increase the money supply by a
certain percentage every year.