Slide 1FOMC Press Release, September 21, 2010OVERVIEW / Questions of the Day15.1 MoneyMONEY: KindsMONEY: FunctionsMONEY: Functions (cont)SUPPLY OF MONEYMoney Supply: M1Money Supply: M2Current U.S. Money SupplyMoney Supply: M1 and M2Historical U.S. Money Supply (M1)Money, or Not?15.2 The Federal ReserveOVERVIEW: What is the “Fed”?STRUCTURE AND ORGANIZATIONOrganization of the Federal Reserve SystemStructure and organization (cont)Federal Open Market Committee (FOMC)FUNCTIONS OF THE FEDEarly History of U.S. Commercial BankingKey Terms and ConceptsAre bank runs still possible?Are bank runs still possible?What Happens When a Bank Fails?TOPIC XV:MONEY & THE FED1A bank run on American Union Bank during the Great Depression“…Banking establishments are more dangerous than standing armies…”Thomas Jefferson, 1816; Correspondence to Francis GilmerFOMC Press Release, September 21, 2010•Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending … is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak.•Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the long run, with its mandate to promote maximum employment and price stability. …inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.•The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate for an extended period.•The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economy recover and return inflation, over time, to levels consistent with its mandate.OVERVIEW / Questions of the Day•What is “money”?•How is ‘money’ different from other assets?•What does money “do”?•Why do we use it?•What is the money supply?•How much money is floating around our economy?•What is the Federal Reserve and what do they do?315.1 MONEYWhat is money?What does money do?MONEY: Kinds Commodity Money: a commodity that serves the function of money but also has intrinsic value It can serve as money, but also has other uses and value; It has value in and of itself as well as money•Examples• Sugar, rum, salt, beer, cigarettesFiat Money: a commodity that serves the function of money but has no intrinsic value•It serves as money only because of government decree•it has no other value and serves no other purpose•Examples• Dollars, Euros, Yen, pesosMONEY: Functions All Assets (items of value)Money: the set of assets that people regularly use to buy goods and servicesMoney: the commodity that is generally accepted as a means of payment•What is the distinction? What is the cutoff? •What actually counts as money?MoneyAll other assets(house, car, jewelry)MONEY: Functions (cont)Money serves several functions that separate it from other assets1. Medium of Exchange•be generally accepted as a means of payment2. Unit of Account•serves as a yardstick by which the relative value of all goods and services can be measured3. Store of Value•can be held and exchanged later for goods and servicesAn asset that performs these 3 functions is therefore considered “money” 7SUPPLY OF MONEYLiquidity: the ease of converting an asset into cashHow much money is actually out in the economy?•M1: the most narrow definition; the most liquid form (the least amount of things) •M2: slightly more broad and inclusive but less liquid•M3: more broad still, more inclusive than M2 and less liquid (discontinued by FED as of spring 2006)8Money Supply: M1M1 = Currency held outside of banks•cash (Federal Reserve Notes)•coin (token money)+ Total Checkable Deposits (Demand Deposit)•checking accounts in commercial banks •checking accounts in thrifts – credit unions, savings and loans •NOW accounts – negotiated order of withdrawal•ATS accounts – automatic transfer service+ Traveler’s Checks9Money Supply: M2M2 =M1 + Passbook Savings (Savings Accounts)•savings accounts+ Small-denomination Time Deposits •certificate of deposits (CD’s) under $100,000+ Retail Money Funds (RMF)•deposits invested in short term securities w/limited check writing capabilities10Current U.S. Money SupplyM1 Money Supply$0$500$1,000$1,500$2,000$2,500$3,000Traveler's ChecksTotal Checkable DepositsCurrencyM2 Money Supply$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000RMF'sCD'sSavingsM111Total: $2,855 BillionTotal: $11,474 BillionSource: www.federalreserve.gov; Table H.6; Numbers in billions; Data as of Sept, 2014M1Includes:Cash and coin (outside of bank vaults);Checking accounts;Travelers checksGenerally, the distinction in this class between M1 and M2 will usually not matter when we talk about the “money supply”Generally, the distinction in this class between M1 and M2 will usually not matter when we talk about the “money supply”Money Supply: M1 and M212M2Includes:Everything in M1, plusTime deposits;Savings accounts;RMF’sHistorical U.S. Money Supply (M1)$0$2$4$6$8$10$1213Note: Money Supply in Billions; Source: St. Louis Federal Reserve; Shaded areas represent recessionsMoney, or Not?Money, or Not?M1 M2 BothChecking accountQuartersTime deposit (CD)IBM stockGoldUS Savings Bonds14Money! Not Money!2. 10 shares of IBM stock (price=$50; value = $500)3. $500 in rolls of quarter4. $500 in you time deposit (CD)5. ½ ounce of gold (value = $500)6. $500 in US Savings Bonds1. $500 in your checking account15.2 THE FEDERAL RESERVEHave you seen this woman?OVERVIEW: What is the “Fed”?Federal Reserve is the central bank(s) of the U.S.•“…founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system”•To provide stability to the financial system•Monitor the overall health of the economy•Why so late in our history?•Started and stopped twice in U.S. history•1791 – 1811•1816 – 1836STRUCTURE AND ORGANIZATIONTaken from The Federal Reserve: www.federalreserve.gov/otherfrb.htmOrganization of the Federal Reserve SystemBoard of Governors(7 members)Regional Federal Reserve Banks