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Page 1: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Money andBanking

Chapter 31

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter Objectives

• The functions of money • Components of the money supply• What “backs” the money supply• The Federal Reserve and the

U.S. banking system• The functions and responsibilities

of the Federal Reserve

31-2

Page 3: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Functions of Money

• Medium of exchange–Used to buy/sell goods

• Unit of account–Goods valued in dollars

• Store of value–Hold some wealth in money form

• Money is liquid

31-3

Page 4: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Money Defined

• M1–Currency–Checkable deposits

• Institutions offering checkable deposits–Commercial banks–Savings and loan associations–Mutual savings banks–Credit unions

31-4

Page 5: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Money Defined

• M2–M1 plus near-monies–Savings deposits including money

market deposit accounts (MMDA)–Small time deposits–Money market mutual funds

(MMMF – individuals only)

31-5

Page 6: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Money DefinedM1 M256%

44%M118%

Savings Deposits,Including Money Market

Deposit Accounts

Small Time Deposits

Money Market MutualFunds Held By Individuals

Currency

Checkable Deposits

16%

14%

52%

$1,365Billion

$7,499Billion

January 2008

Totals

++

+

+

+

Source: Federal Reserve System31-6

Page 7: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Money Supply

• Are credit cards money?

• What “backs” the money supply?–Nothing!

• Why is money valuable?–Acceptability

–Legal tender• FDIC - $250,000 per depositor per bank

–Relative scarcity31-7

Page 8: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Money and Prices

• Prices affect purchasing power of money

• Hyperinflation renders money unacceptable

• Stabilizing money’s purchasing power–Intelligent management of the

money supply – monetary policy–Appropriate fiscal policy 31-8

Page 9: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Pro-Penny•Prices may increase to account for rounding policies•Regressively punishes the poor•Charities•Nickel costs even more to produce (7.7₵ each)•Sentimental Value•AbrahamLincoln is straightTHUG-LIFE.

Anti-Penny:•Worthless•Waste of taxpayer money•Waste of Time/Resources•Rounding may equal out over time•Not even making minimum wage if picked up•Many are tossed aside/thrown away

Page 10: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Federal Reserve System

• Board of Governors

– 7 members, 14 yr terms

• 12 Federal Reserve Banks

–Serve as the central bank

–Quasi-public banks

–Banker’s bank

31-10

Page 11: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Federal Reserve System

Commercial BanksThrift Institutions

(Savings and Loan Associations,Mutual Savings Banks,

Credit Unions)

The Public(Households and

Businesses)

12 Federal Reserve Banks

Board of Governors

Federal Open Market Committee

31-11

Page 12: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Federal Reserve System

The 12 Federal Reserve Banks

Source: Federal Reserve Bulletin

31-12

Page 13: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Federal Reserve System

• Federal Open Market Committee– 7 board members, Prez of NY, 4 other

Prez

– Aids Board of Governors in setting monetary policy

– Conducts open market operations

• Commercial banks and thrifts–7,300 commercial banks

–11,000 thrifts – mostly credit unions31-13

Page 14: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Federal Reserve Functions

• Issue currency• Set reserve requirements• Lend money to banks

– Lender of last resort• Set discount rate• Check collection between regions

– Adjusts reserves accordingly• Fiscal agent for U.S. government• Supervise banks• ***Control the money supply***

31-14

Page 15: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Federal Reserve System

• Federal Reserve independence–Free of political pressures

• Recent developments–Relative decline of banks and thrifts–Consolidation –Convergence of services provided

by financial institutions–Globalization of financial markets–Electronic payments 31-15

Page 16: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Financial Institutions

World’s 12 Largest Financial Institutions, 2007

Barclays (UK)BNP Paribas (France

Citigroup (USA)HSBC Group (UK)UBS (Switzerland)

Royal Bank of Scotland (UK)ING Group (Netherlands)

Mitsubishi UFJ (Japan)Deutsche Bank Group (Ger)

Bank of America (US)Allianz Worldwide (Ger)JPMorgan Chase (USA)

0 1,300,000 1,600,000 1,900,000

Source: Organization for Economic Cooperation and Development

Assets (Billions of U.S. Dollars)

31-16

Page 17: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

U.S. Financial Institutions

• Commercial banks

• Thrifts

• Insurance companies

• Mutual fund companies

• Pension funds

• Securities firms

• Investment banks31-17

Page 18: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

The Global Greenback

• U.S. currency circulating abroad– Russia $80 billion– Argentina $50 billion– $450 billion total– 60% of total US currency

• U.S. profits from dollars leaving• Black markets and illegal activities• Dollar offers stable purchasing power• Exchange rate risk

31-18

Page 19: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Key Terms• medium of exchange• unit of account• store of value• M1• Federal Reserve Notes• token money• checkable deposits• commercial banks• thrift institutions• near-monies• M2• savings account• money market deposit

account (MMDA)

• time deposits• money market mutual

fund (MMMF)• legal tender• Federal Reserve

System• Board of Governors• Federal Reserve Banks• Federal Open Market

Committee (FOMC)• financial services

industry• electronic payments

31-19

Page 20: Money and Banking Chapter 31 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Next Chapter Preview…

Money Creation

31-20


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