Transcript Chapter 24 - MrGilliamsPatriots

Money and Banking
Chapter 24
What is Money?
Section 1
Functions of Money
1. Serves as a Medium, or form of
exchange.
-We can trade money for other goods and
services.
Functions of Money
3. Serves as a measure of value
-Used to assign value to a good or
service.
Function of Money
2. Serves as a store of value
-We can hold our wealth in the form of
money until we are ready to use it.
Types of Money
• Coins= metallic forms of money such
as pennies and nickels.
• Currency= Both coins and paper
money.
What Gives Money Value?
• Why do we value and
accept money?
– Because we are
absolutely sure that
someone else will accept
its value as well.
– A $10 only costs a few
cents to make.
Financial Institutions
• Commercial Banks= are financial
institutions that offer full banking
services to individuals and businesses.
– Most people have their checking and
savings accounts in commercial banks.
Financial Institutions
• Saving and Loan Associations
(S&L)= are financial institutions that
traditionally loaned money to people
buying homes.
– Perform many of the activities that
commercial banks do,
Financial Institutions
• Credit Unions= work on a non-for-profit
basis.
• Open only to member of the group that
sponsors them.
• Offer better rates on savings and loans
Safeguarding Our Financial
System
• FDIC
– This is a national corporation that insures
individual accounts in financial institutions
for up to $200,000.
– Came after the Great Depression.
Consumer Confidence
• Consumers continue to deposit their
money in banks and those deposits give
the financial institutions the funds they
need to make loans that help fuel
economic growth.
The Federal Reserve System
Section 2
Structure and Organization
• The Central Bank of the United States
is the Federal Reserve System, known
as the Fed.
• When banks need money, they borrow
from the Fed.
Structure and Organization
• The U.S. is divided into 12 Federal
Reserve districts.
• Each District has one main Federal
Reserve Bank, along with branch
banks.
• Thousands of banks are members of
the Federal Reserve sysem.
Board of Governors
• The President
appoints and the
senate ratifies the
seven members
who make up the
board of Governors.
• The President
selects the chair of
the Board.
Board of Governors
• Controls and coordinates the Fed’s
activities
• The board acts independent from the
President and Congress. So they are
free from political pressure.
Advisory Councils
1. Reports on the general condition of
the economy in each district.
2. Reports on financial institutions.
3. Reports on issues related to consumer
loans.
Advisory Councils
• FOMC (Federal Open Market
Committee)= Makes the decisions that
affect the economy as a hole by
manipulating the money supply.
– FOMC has 12 members.
Functions of the Fed
1. Deals with banking regulation
2. Deals with Consumer Credit
The Fed as Regulator
• The Fed oversees and regulates large
commercial banks.
• Regulates connections between
American and foreign banking and
oversees the international business of
banks that operate in this country.
• Enforce laws that deal with consumer
borrowing.
Acting as the Government’s
Bank
1. It holds government money
-Government revenues are deposited in the
Fed.
2. The Fed sells U.S. government bonds
and Treasury bills, which the
government utilizes to borrow money.
Acting as the Government’s
Bank
3. The Fed manages the nation’s
currency, including paper money and
coins.
– When coins and currency become
damaged, banks send them to the Fed for
replacement.
How monetary Policy Works
• Monetary Policy= controlling of the
supply of money and the cost of
borrowing money.
– The Fed can increase or decrease the
supply of money.
Changing the Supply of
Money
• The point where supply of money and
demand for money meet sets the
interest rate--the rate that people and
businesses must pay to borrow money.
• The Fed can change the interest rate by
changing the money supply.
Changing the Supply of
Money
• If the Fed wants a lower interest rate, it
must expand the money supply by
moving the supply curve to the right.
• If the Fed wants to raise the interest
rate, it has to reduce the money supply
by shifting the supply curve to the left.
Monetary Policy Tools
1. Lower or raise the discount rate= the
rate the Fed charges member banks
for loans.
-If the Fed wants to stimulate the
economy, it lowers the discount rate.
-Low discount rates encourage banks
to borrow money from the Fed to
make loans to their customers.
Monetary Policy Tools
2. The Fed may raise or lower the
reserve requirement for member banks.
• Member banks must keep a certain %
of their money in the Federal Reserve
Bank as a reserve against their
deposits.
– If the Fed raises the reserve requirements,
banks must leave more money with the
Fed, and they have less to lend.
Monetary Policy Tools
3. The Fed can change the money supply
through open market operations=
purchase or sale of U.S. government
bonds and Treasury bills.
-Buying bonds from investors puts more cash
in investors’ hands, increasing the money
supply.
-This shifts the supply curve or money to the
right, which lowers interest rates.
-Consumers and businesses then borrow more
money, which increases consumer demand
and business production.
Why is Monetary Policy
Effective?
• It can be implemented quickly and Fed
officials can easily fin tune its policy.
• If the Fed wants to encourage business
investment, it can lower interest rates.
– Raising rates will have the opposite effect.
How Banks Operate
Section 3
Banking Services
• Banks are started by investors.
• Banks need to attract depositors to
survive.
• To earn money, banks accept deposits
to create different types of accounts and
then use deposited funds to make
loans.
Accepting Deposits
• Checking Accounts= allow customers
to write checks or use check or debit
cards.
• Use the funds deposited in the account
to pay for expenses.
Accepting Deposits
• Savings Accounts
– Banks pay interest to
customers based on how
much money they have
deposited.
• Certificate of Deposit
(CDs)
Making Loans
• The main functions of banks is to lend
money to businesses and customers.
• Loans can increase the supply of
money
– Suppose you deposit $1000 in a bank.
The bank can use that money to lend to
other customers. Those customers then
deposit their loans in the bank.
The National Banking Act
• In 1863, Congress passed the National
Banking Act
• Federally chartered private banknotes,
or national currency, which were
uniform in appearance and backed by
the U.S. government bonds.
The Federal Reserve
• The Panic of 1907
resulted in the
passage of the
Federal Reserve Act
of 1913.
The Great Depression
• When FDR became
president he closed all
banks.
• Banks could only
reopen after in proved it
was financially sound.
• Congress established
the FDIC.
The Savings and Loan Crisis
• S&Ls were allowed to make higher-risk
loans and investments.
• When these investments went bad,
several S&Ls failed.
• As a result the FDIC intervened and
took over regulation of the S&L industry.
The Gramm-Leach Bliley Act
• Passed in 1999 permits bank holding
companies greater freedom to engage
in a full range of financial services,
including banking, insurance, and
securities.
• Banks must also protect their
customers’ personal financial
information.