11 14 13 Chapter 20 Notes Money Financial Institutions and the Federal Reserve Federal Reserve is in charge of money in the United States Economic growth and the creation of jobs depend upon the ready availability of Money anything people generally accept as payment for goods and services Barter direct trading of goods or services for other goods or services Five standards for useful money money has simplified exchanges money 1 Portability 2 Divisibility 3 Stability 4 Durability 5 Uniqueness Money supply amount of money the Fed makes available for people to buy goods and services o M 1 includes coins and paper bills money that s available by writing checks and money held in travelers checks o M 2 includes everything in M 1 plus money in savings accounts and money in money market accounts mutual funds certificates of deposit and the like money that may take a little more time to obtain than coins and paper bills most commonly used definition of money o M 3 M 2 plus big deposits like institutional money market funds If more money exists but the same amount of goods and services inflation would occur If less money existed but the same amount of goods and services deflation would occur Controlling the money supply allows us to manage the prices of goods and services also the size of the money supply affects unemployment and economic growth or decline The Global Exchange of Money Falling dollar value amount of goods and services you can buy with a dollar decreases rising amount you can buy with a dollar decreases The position of the US economy relative to other economies what makes it weak or strong Value of the dollar depends on a relatively strong economy Controlling the Money Supply Fed consists of 5 major parts 1 Board of governors administers and supervises the 12 Federal Reserve banks a Sets monetary policy 2 Federal Open Market Committee a 12 voting members and is the policymaking body b Made up of the 7 member board of governors plus the president of the NY reserve bank and four members who rotate in from the other reserve banks 3 12 Federal Reserve banks 4 3 advisory councils a Represent the various banking districts consumers and member institutions including banks savings and loan institutions and credit unions b Offer suggestions to the Federal Open Market Committee 5 The member banks of the system Fed determines the reserve requirement o Reserve requirement percentage of commercial banks checking and savings accounts they must keep in the bank or in a non interest bearing deposit at the local Federal Reserve district bank o Increasing the reserve requirement money becomes scarcer reducing inflation o Decrease in the reserve requirement increases the funds available to the banks for loans good when in a recession Fed buys and sells government securities in open market operations o Open Market Operations buying and selling of government bonds o Selling government bonds decreases money supply o Buying government bonds back from individuals corporations or organizations increases money supply o Bernanke bought bonds during the recession Fed lends money to member banks at an interest rate called the discount rate o Discount Rate interest rate the Fed charges for loans to member banks o Lowering the discount rate encourages member banks to borrow money an increases the funds they have available for loans which increases the money supply o Fed lowered discount rate to almost zero hoping to increase bank lending banks are still reluctant to make loans o Fed also controls the federal funds rate Check Clearing Role Banks take many measures to lessen the use of checks because it is a long involved They do this by implementing credit cards debit carbs and other electronic transfers and costly process of money History of Banking and the Need for the Fed Land banks were established to lend money to farmers Great Britain ended them New banks were formed during the American Revolution to fund the war Alexander Hamilton persuaded Congress to create a Central Bank bank at which other banks could keep their funds and borrow funds if needed after we won State chartered banks were opened and eventually central bank was closed Many banks failed and people became nervous and in a run on the banks attempted to withdraw their funds Banking and the Great Depression Stock market crash lead to bank failures People withdrew their cash and banks ran out of money in spite of federal reserve and states were forced to close them Congress passed legislation to strengthen the bank system o Establish federal deposit insurance to further protect the public bank failures The US Banking System Consists of commercial banks saving and loan associations and credit unions Commercial Banks Profit seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and uses these funds to make loans 2 customers depositors and borrowers If revenue generated by loans exceeds interest paid to depositors plus operating expenses the bank makes a profit Demand deposit checking account o Charge a service charge plus handling fee Time deposit savings account Certificate of deposit time deposit account that earns interest to be delivered on the certificates maturity date Savings and Loan Associations A financial institution that accepts both savings and checking deposits and provides home mortgage loans Used to offer better rates than banks not anymore Credit Unions Nonprofit member owned financial cooperatives that offer the full variety of banking Organized by government agencies corporations unions and professional services to their members associations Exempt from federal income taxes Financial Institutions Nonbanks financial organizations that accept no deposits but offer many of the services provided by regular banks o Life insurance companies pension funds brokerage firms commercial finance companies and corporate financial services Pension funds monies put aside by corporations nonprofit organizations or unions to help fund their members financial needs when they retire o Contributions are made by employees employers or both o Invest in low but safe corporate stocks or other conservative investments such as government securities and corporate bonds to generate additional income The Recent Banking Crisis and How the Government Protects Your Money Community Reinvestment Act encourages loans to families with questionable Organizations pressured banks to make risky
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