Chapter 20 Money Financial Institutions and the Federal Reserve Why Money is Important Federal Reserve Fed organization in charge of money in the USA Economic growth and the creation of jobs depends on the ready availability What happens to any major country s economy has an effect on the US of money economy and vice versa Money anything that ppl generally accept as payment for goods and services o Portability divisibility stability durability uniqueness Barter the direct trading of goods or services for other goods or services o Problem difficult to carry around Money supply the amount of money the Federal Reserve Bank makes available for people to buy goods and services o M1 money that can be accessed quickly and easily coins and paper money checks traveler s check ect o M2 money included in M1 plus money that may take a little more time to obtain savings accounts money market accounts mutual funds certificates of deposit ect o M3 M2 plus big deposits like institutional money market funds o Inflation too much money in the money supply prices go up o Deflation federal reserve takes money out of the money supply prices go down o Size of money supply affects employment and economic growth decline allows us to manage the prices of goods services Falling dollar value the amount of goods and services you can buy with a dollar decreases Rising dollar value the amount of goods and services you can buy with a What makes the dollar weak or strong is the position of the US economy dollar increases relative to other economies Control of the Money Supply Federal Reserve system consists of 5 major parts o 1 The board of governors administer and supervise the 12 federal reserve banks appointed by the President confirmed by the Senate primary function is to set monetary policy o 2 The federal open market committee FOMC policy making body made up of the 7 board of governors NY reserve bank president 4 other rotating reserve bank presidents o 3 12 federal reserve banks o 4 3 advisory councils represent the various banking districts consumers and member institutions offer suggesting to the board of FOMC o 5 The member banks of the system Fed buys sells foreign currencies regulates various types of credit supervises banks and collects data on the money supply and other economic activity determines the reserve requirement the level of reserve funds all financial institutions must keep at one of the 12 federal reserve banks buys sells government securities in open market operations lends money to member banks at a discount interest rate Reserve requirement a percentage of commercial banks checking and savings accounts that must be physically kept in the bank o Powerful tool o When Fed increases reserve requirements money becomes scarcer which tends to reduce inflation o When fed decreases reserve requirements there is more funds available to banks to loan which can stimulate the economy but also can create inflation problems Open market operations the buying and selling of US government bonds by the Fed with the goal of regulating the money supply o To decrease the money supply the federal gov sells US gov bonds to the public o To increase the money supply the fed buys government bonds from individuals corporations or organizations Discount rate the interest rate that the Fed chargers for loans to member banks o An increase in the discount rate discourages banks from borrowing and reduces the number of available loans decreasing the money supply o A decrease in the discount rate encourages member banks to borrow money and increases the funds they have available for loans which increases the money supply o Fed also regulates the federal funds rate which is the rate banks charge each other Checks is a lengthy and sometimes costly process therefore banks take measures to lessen the use of checks The History of Banking and the Need for the Fed At first there were no banks then Mass issued its first paper money but continental money became worthless Land banks were established to lend money to farmers but Great Britain ended land banks New banks founded in Penn during American Revolution Hamilton persuaded Congress to form a central bank central banks vs state banks central bank closed Civil War time different banks issued different types of currencies gold silver worth more than money ppl distrusted banks Despite the long history of opposition of the central bank the cash shortage problems of 1907 led to the formation of the Federal Reserve System Federal Reserve Act of 1913 all federally chartered banks had to join the Federal Reserve the banks bank The US Banking System Commercial banks savings and loans associations credit unions Commercial banks a profit seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and then uses some of these funds to make loans o 2 customers depositors and borrowers o Makes a profit by efficiently using depositor s funds as inputs on which pay interest to invest in interest bearing loans to other customers o Demand deposit the technical name for a checking account the money in a demand deposit can be withdrawn anytime on demand from the depositor Money can make interest in a checking account o Time deposit the technical name for a savings account the bank can require prior notice before the owner withdraws money from a time deposit o Certificate of deposit CD a time deposit savings account that earns interest to be delivered at the end of the certificate s maturity date depositor agrees not to withdraw any of the funds until then higher the period higher the interest rate o Commercial banks also offer credit cards life insurance inexpensive brokerage services financial counseling automatic payment of bills safe deposit boxes individual retirement accounts traveler s checks trust departments automated teller machines ATMs overdraft checking account privileges o Loans given out based on creditworthiness Savings and loan association S L a financial institution that accepts both savings and checking deposits and provides home mortgage loans Credit unions nonprofit member owned financial cooperatives that offer the full variety of banking services to their members o Exemption from federal taxes bc nonprofit institution o Fewer branches than banks and less access to ATMs o Compare services offered by banks vs credit unions see which is better for you Nonbanks financial organizations that accept no deposits
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