contemporary economics© thomson south-western lesson 16.1 slide 1 money and banking 16 16.1origins...

CONTEMPORARY ECONOMICS © Thomson South-Western

LESSON 16.1 SLIDE

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Money and Banking1616.1 Origins of Money

16.2 Origins of Banking and the Federal Reserve System

16.3 Money, Near Money, and Credit Cards


MONETA – Roman Goddess in whose temples coins were minted SLIDE

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LESSON 16.1 SLIDE

3Three Functions of MoneyThree Functions of Money1) Medium of exchange1) Medium of exchange

Medium of exchangeMedium of exchange—anything generally —anything generally accepted by all parties in payment for goods accepted by all parties in payment for goods or servicesor services

Commodity moneyCommodity money—anything that serves —anything that serves both as money and as a commodity, such as both as money and as a commodity, such as gold, cattle, or saltgold, cattle, or salt

2) Unit of account – standard on which to 2) Unit of account – standard on which to base pricesbase prices

3) Store of value – ability to retain 3) Store of value – ability to retain purchasing power over timepurchasing power over time


15.1 The Evolution of Fiscal Policy SLIDE

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The Power to CoinThe Power to CoinCoinage determined both the amount and Coinage determined both the amount and

quality of the metalquality of the metalPower originally vested in a feudal lord (Power originally vested in a feudal lord (seigniorseignior) ) If the exchange value exceeded the cost of making If the exchange value exceeded the cost of making

it, minting coins became a source of revenueit, minting coins became a source of revenue

Token Money Token Money – money whose exchange value – money whose exchange value exceeds its cost of productionexceeds its cost of productionQuarter costs 5¢ to makeQuarter costs 5¢ to makeFederal govt. nets $500 million each year in Federal govt. nets $500 million each year in

seigniorageseignioragePaper money is the greatest source Paper money is the greatest source


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SeigniorageSeigniorage


16.2 Origins of Banking and the Federal Reserve System SLIDE

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The Earliest BanksThe Earliest Banks

Keeping money, such as gold coins, on Keeping money, such as gold coins, on deposit with a goldsmith was safer than deposit with a goldsmith was safer than carrying it around or leaving it at home.carrying it around or leaving it at home.

Still, visiting the goldsmith every time one Still, visiting the goldsmith every time one needed money was a nuisance. needed money was a nuisance.



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Bank ChecksBank Checks

Notes instructing the goldsmith to pay Notes instructing the goldsmith to pay someone were the first bank checks. someone were the first bank checks.

A A checkcheck is a written order for the bank to is a written order for the bank to pay money from amounts deposited.pay money from amounts deposited.



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Fractional Reserve Banking SystemFractional Reserve Banking System

In a In a fractional reserve banking systemfractional reserve banking system only a portion of bank deposits is backed only a portion of bank deposits is backed by reserves.by reserves.

The The reserve ratioreserve ratio measures bank reserves measures bank reserves as a share of deposits. as a share of deposits.



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Bank Notes and Representative MoneyBank Notes and Representative Money

Bank notesBank notes were pieces of paper promising the were pieces of paper promising the bearer a specific amount of gold or silver when bearer a specific amount of gold or silver when the notes were redeemed at the issuing bank. the notes were redeemed at the issuing bank.

A bank note was “as good as gold.”A bank note was “as good as gold.”Bank notes that exchanged for a specific Bank notes that exchanged for a specific

commodity, such as gold, were called commodity, such as gold, were called representative money.representative money.


Fiat MoneyFiat Money

US Currency is US Currency is fiat moneyfiat moneyMoney of no value in itself and not Money of no value in itself and not

convertible into gold, silver, or anything convertible into gold, silver, or anything else of valueelse of value

Fiat money is money because the Fiat money is money because the government says it isgovernment says it is


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Depository InstitutionsDepository Institutions

Commercial banksCommercial banksThriftsThrifts

Savings and loan associationsSavings and loan associationsMutual savings banksMutual savings banksCredit unionsCredit unions

Dual banking systemDual banking systemState banksState banksNational banksNational banks


The Federal Reserve (The Fed)The Federal Reserve (The Fed)


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15The Federal Reserve SystemThe Federal Reserve SystemBirth of the Federal Reserve SystemBirth of the Federal Reserve System

Established in 1913Established in 1913Federal Reserve System (the Fed)Federal Reserve System (the Fed)—the —the

central bank and monetary authority of the central bank and monetary authority of the United StatesUnited States

Powers of the Federal Reserve SystemPowers of the Federal Reserve SystemReserves Reserves Discount rateDiscount rate—interest rate the Fed charges —interest rate the Fed charges

banks that borrow reserves banks that borrow reserves

The Fed creates money by The Fed creates money by having banks having banks accept deposits and lending them outaccept deposits and lending them out



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17Organizational Chart for the Federal Reserve System

Figure 16.2



18The Twelve Federal Reserve Districts

Figure 16.1



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The US Treasury and the FedThe US Treasury and the Fed

US TreasuryUS TreasuryPrints the “Federal Prints the “Federal

Reserve Notes”Reserve Notes”

The FedThe FedHas the responsibility Has the responsibility

for putting the notes for putting the notes into circulationinto circulation


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Monetary PolicyMonetary Policy

The Fed is responsible for setting The Fed is responsible for setting and carrying out the nation’s and carrying out the nation’s monetary policymonetary policy

Monetary Policy:Monetary Policy: the regulation of the the regulation of the economy’s money supply and interest economy’s money supply and interest rates to promote full employment, price rates to promote full employment, price stability, and economic growthstability, and economic growth


Federal Open Market Committee Federal Open Market Committee (FOMC)(FOMC)

Twelve-member group that makes Twelve-member group that makes decisions regarding the decisions regarding the most important most important tool of monetary policytool of monetary policy – open market – open market operationsoperations

Open-market operationsOpen-market operations—buying or selling —buying or selling U.S. government securities as a way of U.S. government securities as a way of regulating the money supply and interest ratesregulating the money supply and interest rates


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16.3 Money, Near Money, and Credit Cards SLIDE

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Narrow Definition of Money: M1Narrow Definition of Money: M1

Money aggregatesMoney aggregates are various measures are various measures of the money supply. of the money supply.

The narrow definition, called The narrow definition, called M1M1, consists , consists of currency (including coins) held by the of currency (including coins) held by the nonbanking public, checkable deposits, nonbanking public, checkable deposits, and traveler’s checks.and traveler’s checks.



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Currency in CirculationCurrency in Circulation

Dollar bills and coins in circulation are part Dollar bills and coins in circulation are part of the money supply as narrowly defined. of the money supply as narrowly defined.

Money in bank vaults or on deposit at the Money in bank vaults or on deposit at the Fed is not in circulation as a medium of Fed is not in circulation as a medium of exchange and so is not counted in the exchange and so is not counted in the money supply.money supply.

Currency makes up about half of M1.Currency makes up about half of M1.



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U.S. Currency AbroadU.S. Currency Abroad

More than half of all Federal Reserve notes, More than half of all Federal Reserve notes, particularly $100 notes, are in foreign hands. particularly $100 notes, are in foreign hands.

Wealthy people around the world, especially in Wealthy people around the world, especially in unstable countries or countries that have unstable countries or countries that have experienced high inflation, often hoard U.S. experienced high inflation, often hoard U.S. currency as insurance against hard times. currency as insurance against hard times.

Some countries, such as Panama, Ecuador, and Some countries, such as Panama, Ecuador, and El Salvador, even use U.S. dollars as their own El Salvador, even use U.S. dollars as their own currency, a process called currency, a process called dollarizationdollarization..



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CounterfeitingCounterfeiting

Improvements in copy machines, Improvements in copy machines, computers, and printers allow even computers, and printers allow even amateurs to make passable counterfeits of amateurs to make passable counterfeits of U.S. currency. U.S. currency.

U.S. currency is being redesigned to U.S. currency is being redesigned to make it harder to copy. make it harder to copy.

The Fed and the Treasury have The Fed and the Treasury have announced plans to redesign the currency announced plans to redesign the currency every 7 to 10 years.every 7 to 10 years.



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Checkable DepositsCheckable Deposits

Checkable depositsCheckable deposits—deposits in financial —deposits in financial institutions against which checks can be written institutions against which checks can be written and ATM, or debit, cards can be appliedand ATM, or debit, cards can be applied

About half of checkable deposits are About half of checkable deposits are demand demand depositsdeposits. .

In recent years, banks have developed other In recent years, banks have developed other types of checking accounts,types of checking accounts,

Checkable deposits of all types make up nearly Checkable deposits of all types make up nearly half of M1.half of M1.



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Broader Definitions of Money: M2Broader Definitions of Money: M2

M2M2—A broader definition of the money —A broader definition of the money supply, consisting of M1 plus savings supply, consisting of M1 plus savings deposits, small-denomination time deposits, small-denomination time deposits, and money market mutual fund deposits, and money market mutual fund accounts owned by householdsaccounts owned by households



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Savings DepositsSavings Deposits

Savings depositsSavings deposits earn interest but have earn interest but have no specific maturity date. no specific maturity date.

This means that you can withdraw them This means that you can withdraw them any time without a penalty.any time without a penalty.



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Time DepositsTime Deposits

Time depositsTime deposits earn a fixed rate of interest earn a fixed rate of interest if held for a specified period. if held for a specified period. The holding period ranges from several The holding period ranges from several

months to several years. months to several years. Holders of time deposits are issued Holders of time deposits are issued

certificates of deposit, or CDs for short. certificates of deposit, or CDs for short. Early withdrawals are penalized by forfeiture Early withdrawals are penalized by forfeiture

of several months’ interest.of several months’ interest.



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Debit Cards but Not Credit CardsDebit Cards but Not Credit Cards

A credit card itself is not money.A credit card itself is not money.Using a credit card is a convenient way of obtaining a Using a credit card is a convenient way of obtaining a

short-term loan from the card issuer. short-term loan from the card issuer. You don’t use money until you pay your credit card You don’t use money until you pay your credit card

bill. bill. The credit card has not eliminated your use of money.The credit card has not eliminated your use of money.It has merely delayed it. It has merely delayed it.

When you use a debit card you draw down your When you use a debit card you draw down your checking account—part of M1.checking account—part of M1.



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Electronic MoneyElectronic Money

Much of modern money consists of Much of modern money consists of electronic entries in bank computers.electronic entries in bank computers.

So, money has evolved from a physical So, money has evolved from a physical commodity to an electronic entry. commodity to an electronic entry.

Money today not so much changes hands Money today not so much changes hands as it changes computer accounts through as it changes computer accounts through electronic funds transfers.electronic funds transfers.

contemporary economics© thomson south-western lesson 16.1 slide 1 money and banking 16 16.1origins...

Documents

origins of banking

federal reserve systemslide

federal reserve system16

evolution of fiscal

evolution of fiscal

seignioragepaper money

needed money

valuefiat money