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  • 1. Unit 6 – Finance I. Currency
  • 2. A. Money
    • Three Uses of Money
    • Medium of exchange (Barter) - Exchanging goods & services without use of set values.
    • Unit of Account.
    • Store of Value.
    • 2. Currency.
  • 3. B. Six Characteristics of Money
    • Durability – withstands wear & tear.
    • Portability – Easily transported from place to place.
    • Divisibility – Easily divided into smaller denominations.
    • Uniformity – Every unit must be the same for counting & measuring.
    • Limited Supply – The lower amount available, the value is more.
    • Acceptability – Everyone must be willing to accept the goods.
  • 4. C. Sources of Money’s Value
    • Commodity Money.
    • Representative Money.
    • Fiat Money.
  • 5. D. Bank
    • Early Republic
    • Federalists: Alexander Hamilton supported a centralized gov’t & national bank.
      • Single currency for the entire nation
      • Manages government’s funds
      • Monitors other banks.
    • Anti-federalists: Thomas Jefferson wanted a decentralized system.
  • 6. E. First Bank of the United States
    • 1791 – Bank given 20 year charter
    • Great success in bringing order to banking
    • Anti-federalists argued it was unconstitutional & let charter run out in 1811.
  • 7. F. Chaos Ensues
    • States issued notes without backing.
    • Chartered many banks without credibility.
    • Prices rose, different types of currency produced.
  • 8. G. Jacksonian Era
    • Second Bank of the United States
    • 1816 – 20 year charter
    • Jackson opposed centralized government & opposed re-chartering of the bank.
  • 9. H. Free Banking
    • Bank runs
    • Wildcat Banks – established on the frontier & were unreliable.
    • Fraud – Banks issued notes, collected gold & silver, then vanished.
    • Currency – Different states, cities, banks, businesses, & other organizations issued currency-creating chaos.
  • 10. I. Civil War & Reconstruction
    • North attempted stability.
      • Greenbacks – national currency
      • Nation Banking Acts of 1864 & 1865
      • Power to charter banks.
      • Power to require banks to hold gold & silver to back notes
    • South issued its own currency based on cotton, but became worthless.
  • 11. J. Gold Standard .
    • Definite value for the dollar.
    • Government issued currency only if it had gold to back it.
  • 12. K. Progressive Era
    • Bank chaos
    • Centralized system for currency, but not banking.
    • Panic of 1907 – Banks did not have enough reserves to back up $, banks failed, businesses stopped expanding.
  • 13. L. Federal Reserve System
    • Central Bank.
    • Member Banks.
    • Federal Reserve Board – Appointed by President of the USA to supervise banks.
    • Loans – Fed banks loaned money for short term needs to prevent bank failures.
    • Federal Reserve Notes.
  • 14. THE MEANING OF MONEY
    • Money is the set of assets in an economy that people regularly use to buy goods and services from other people.
  • 15. The Functions of Money
    • Money has three functions in the economy:
      • Medium of exchange
      • Unit of account
      • Store of value
  • 16. The Functions of Money
    • Medium of Exchange
      • A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services.
      • A medium of exchange is anything that is readily acceptable as payment.
  • 17. The Functions of Money
    • Unit of Account
      • A unit of account is the yardstick people use to post prices and record debts.
    • Store of Value
      • A store of value is an item that people can use to transfer purchasing power from the present to the future.
  • 18. The Functions of Money
    • Liquidity
      • Liquidity is the ease with which an asset can be converted into the economy’s medium of exchange.
  • 19. The Kinds of Money
    • Commodity money takes the form of a commodity with intrinsic value.
      • Examples: Gold, silver, cigarettes.
    • Fiat money is used as money because of government decree.
      • It does not have intrinsic value.
      • Examples: Coins, currency, check deposits.
  • 20. Money in the U.S. Economy
    • Currency is the paper bills and coins in the hands of the public.
    • Demand deposits are balances in bank accounts that depositors can access on demand by writing a check.
  • 21. THE FEDERAL RESERVE SYSTEM
    • The Federal Reserve (Fed) serves as the nation’s central bank.
      • It is designed to oversee the banking system.
      • It regulates the quantity of money in the economy.
  • 22. THE FEDERAL RESERVE SYSTEM
    • The Fed was created in 1914 after a series of bank failures convinced Congress that the United States needed a central bank to ensure the health of the nation’s banking system.
  • 23. THE FEDERAL RESERVE SYSTEM
    • The Structure of the Federal Reserve System:
      • The primary elements in the Federal Reserve System are:
        • 1) The Board of Governors
        • 2) The Regional Federal Reserve Banks
        • 3) The Federal Open Market Committee
  • 24. The Fed’s Organization
    • The Fed is run by a Board of Governors, which has seven members appointed by the president and confirmed by the Senate.
    • Among the seven members, the most important is the chairman.
      • The chairman directs the Fed staff, presides over board meetings, and testifies about Fed policy in front of Congressional Committees.
  • 25. The Fed’s Organization
    • The Board of Governors
      • Seven members
      • Appointed by the president
      • Confirmed by the Senate
      • Serve staggered 14-year terms so that one comes vacant every two years.
      • President appoints a member as chairman to serve a four-year term.
  • 26. The Fed’s Organization
    • The Federal Reserve System is made up of the Federal Reserve Board in Washington, D.C., and twelve regional Federal Reserve Banks.
  • 27. The Fed’s Organization
    • The Federal Reserve Banks
      • Twelve district banks
      • Nine directors
        • Three appointed by the Board of Governors.
        • Six are elected by the commercial banks in the district.
      • The directors appoint the district president, which is approved by the Board of Governors.
  • 28. The Federal Reserve System Copyright©2003 Southwestern/Thomson Learning
  • 29. The Fed’s Organization
    • The Federal Reserve Banks
      • The New York Fed implements some of the Fed’s most important policy decisions.
  • 30. The Fed’s Organization
    • The Federal Open Market Committee (FOMC)
      • Serves as the main policy-making organ of the Federal Reserve System.
      • Meets approximately every six weeks to review the economy.
  • 31. The Fed’s Organization
    • Monetary policy is conducted by the Federal Open Market Committee.
      • Monetary policy is the setting of the money supply by policymakers in the central bank
      • The money supply refers to the quantity of money available in the economy.
  • 32. The Federal Open Market Committee
    • Three Primary Functions of the Fed
      • Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices.
      • Acts as a banker’s bank, making loans to banks and as a lender of last resort.
      • Conducts monetary policy by controlling the money supply.
  • 33. The Federal Open Market Committee
    • Open-Market Operations
      • The money supply is the quantity of money available in the economy.
      • The primary way in which the Fed changes the money supply is through open-market operations .
        • The Fed purchases and sells U.S. government bonds.
  • 34. The Federal Open Market Committee
    • Open-Market Operations
      • To increase the money supply, the Fed buys government bonds from the public.
      • To decrease the money supply, the Fed sells government bonds to the public.
  • 35. BANKS AND THE MONEY SUPPLY
    • Banks can influence the quantity of demand deposits in the economy and the money supply.
  • 36. BANKS AND THE MONEY SUPPLY
    • Reserves are deposits that banks have received but have not loaned out.
    • In a fractional-reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest.
  • 37. BANKS AND THE MONEY SUPPLY
    • Reserve Ratio
      • The reserve ratio is the fraction of deposits that banks hold as reserves.
  • 38. Money Creation with Fractional-Reserve Banking
      • When a bank makes a loan from its reserves, the money supply increases.
      • The money supply is affected by the amount deposited in banks and the amount that banks loan.
        • Deposits into a bank are recorded as both assets and liabilities.
        • The fraction of total deposits that a bank has to keep as reserves is called the reserve ratio.
        • Loans become an asset to the bank.
  • 39. Money Creation with Fractional-Reserve Banking
    • When one bank loans money, that money is generally deposited into another bank.
    • This creates more deposits and more reserves to be lent out.
    • When a bank makes a loan from its reserves, the money supply increases.
  • 40. The Money Multiplier
    • How much money is eventually created in this economy?
  • 41. The Money Multiplier
    • The money multiplier is the amount of money the banking system generates with each dollar of reserves.
  • 42. The Fed’s Tools of Monetary Control
    • The Fed has three tools in its monetary toolbox:
      • Open-market operations
      • Changing the reserve requirement
      • Changing the discount rate
  • 43. The Fed’s Tools of Monetary Control
    • Open-Market Operations
      • The Fed conducts open-market operations when it buys government bonds from or sells government bonds to the public:
        • When the Fed buys government bonds, the money supply increases.
        • The money supply decreases when the Fed sells government bonds.
  • 44. The Fed’s Tools of Monetary Control
    • Reserve Requirements
      • The Fed also influences the money supply with reserve requirements .
      • Reserve requirements are regulations on the minimum amount of reserves that banks must hold against deposits.
  • 45. The Fed’s Tools of Monetary Control
    • Changing the Reserve Requirement
      • The reserve requirement is the amount (%) of a bank’s total reserves that may not be loaned out.
        • Increasing the reserve requirement decreases the money supply.
        • Decreasing the reserve requirement increases the money supply.
  • 46. The Fed’s Tools of Monetary Control
    • Changing the Discount Rate
      • The discount rate is the interest rate the Fed charges banks for loans.
        • Increasing the discount rate decreases the money supply.
        • Decreasing the discount rate increases the money supply.
  • 47. Problems in Controlling the Money Supply
    • The Fed’s control of the money supply is not precise.
    • The Fed must wrestle with two problems that arise due to fractional-reserve banking.
      • The Fed does not control the amount of money that households choose to hold as deposits in banks.
      • The Fed does not control the amount of money that bankers choose to lend.
  • 48. M. Great Depression
    • Economic decline starts 1929.
    • Banks loaned large sums of $ in the 20’s that businesses could not pay back.
    • Crop failures & dropping prices mean farmers unable to pay debts.
    • Stock market crash -1929 created panics in market & banks across nation.
    • FDR established bank holiday so banks would close & give time for people to calm down & the industry to regain footing.
    • FDIC established.
  • 49. N. Deregulation and the Reagan Era
    • Deregulation was sought by banks & was given by Republicans and Democrats.
    • Several industries were deregulated.
    • Savings & Loans also deregulated although they had been closely watched since Great Depression.
  • 50. O. Conflicting Progress
    • Congress passed legislation to restrict S&L’s.
    • Glass-Steagall Act passed that allows banks to sell stocks and bonds.
    • Bank mergers became extremely popular.
    • From the evidence you have seen in this set of notes and the reading, should the government be involved in the banking industry? Why or why not?
  • 51. II. Modern Banking
    • A. Money Supply – all $ USA.
    • M1
    • Liquidity - money that people can gain access to easily and immediately
    • (Traveler’s checks)
    • M2 = assets that cannot be used as cash within a short period of time. (Deposits in savings accounts).
  • 52. B. Managing Money
    • Storing – fireproof vaults and protected by the FDIC
    • Saving accounts
    • Checking accounts
    • Money market accounts- Save and write a limited number of checks. Interest is high, but variable.
    • Certificates of Deposit – Guaranteed rate of interest over a period of time, in which you are not allowed to withdrawal unless you pay a fee.
  • 53. C. Loans
    • – banks let borrowers take money, as longs as they pay it back with interest.
    • Mortgages.
    • Credit Cards.
    • Simple and Compound Interest
    • Simple interest – $ made off of original borrowed sum.
    • Compound interest – $ made of original sum and previous interest.
    • Profit- banks make more $ off interest from $ they loaned out than the interest they pay to accounts.
  • 54. D. Financial Institutions
    • Commercial Banks – usually for businesses, play largest role in economy. 1/3 belong to Fed and are national banks.
    • Savings and Loans- Members deposited money into a general fund and borrowed money to buy homes.
    • Savings Banks- banking available to individuals. Depositors owned shares of banks.
    • Credit Unions- Organized for specific groups of people, with low interest rates, and loans for automobiles and homes.
    • Finance Companies – Provide installment loans for large purchases. People are more likely to fail paying these back and so interest rates are high.
  • 55. III. Investments
    • Financial System
      • Flow of Savings – from savers to financial institutions to investors.
      • Intermediaries
        • Bank
        • Life Insurance Companies – provides financial protection for families. Company collects premiums from customers and lends to investors.
        • Pension Funds – receives income after working a certain number of years or reaching a certain age. Pension funds invest money in stock, bonds, or other assets.
  • 56. B. Financial Assets
    • 1. Bonds
        • Coupon Rate.
        • Maturity.
        • Par Value (face value or principal).
        • Yield.
        • Discounts – occur when bonds are sold at less than par value.
        • Ratings – Similar to academic grading. Two firms provide grade for bonds. Standard and Poor’s and Moody’s bond rates go from AAA/Aaa to D.
  • 57. 2. Stock Market
    • Stock or equities are shares of ownership in a corporation.
    • Dividends – payments to stockholders from the profits of a corporation. Usually paid four times a year.
  • 58. C. Stock Exchange – Markets for buying and selling stock.
        • NYSE – New York Stock Exchange (1792) represents the largest/most respected companies in the nation. Largest companies are known as blue chips. Blue chips profit over the long run.
        • NASDAQ –Mostly trading technology and energy stocks, this exchange deals with smaller and riskier companies
        • OTC Market –New and growing companies have stock traded here and usually offer no dividends.
  • 59. D. History
        • Investors panicked and 16.4 million shares sold on 10/29/29 (Black Tuesday) compared to a normal 4 to 8 million.
        • Fed limits money supply to discourage lending. Little money was available for recovery.
        • Americans were cautious about stock until 1990’s. Almost half of households own mutual funds.