Money and Banking

1. Money and Banking Notes

2. Prior to money we used bartering to exchange goods and services. • Problems with bartering? • People had different opinions as to what items were worth • You might not be interested in what someone has available for trade • Not all items were easily divided • Goods and services can not always be stored for later use

3. Function of Money • Measure of value • Medium of exchange • Store of value

4. Characteristics of Money • Acceptable • Divisible • Stable • Portable

5. Legal Tender or Fiat Money • money that has value because the government says it does • Confederate currency was only worth the paper it was printed on at the end of the Civil War, because the government no longer existed • There is very little natural value to the currency we use, it’s good paper, but only paper (actually it is a blend of linen and cotton fiber) • Our money is no longer backed by gold and silver, just our government’s good name. However, because we have a strong, stable gov’t and economy, our currency is often sought after.

6. The Federal Reserve (The FED) • the central banking system, governs other banks, controls the money supply through Monetary Policy • THE FEDERAL RESERVE is a quasi-private bank • Current Chairperson – Janet Yellen

7. Monetary Policy • actions taken by the FED to balance the economy by controlling the money supply • In short adding, removing currency from circulation in order to effect a change in the direction of the economy

8. Tools used by the Federal Reserve • Reserve Requirement – The percentage of each bank deposit that must be held in reserve by the bank (currently 10% of liabilities) • Discount rate – interest rate that the FED charges member banks (1% - 1.5%) • Open Market Operations – the buying and selling of government securities (gov’t bonds)

9. Pro-Cyclical Policy • – economic policies that increase the direction the economy is currently moving in • Example – a recession getting deeper

10. Countercyclical – • economic policies that reverse the direction the economy is moving in • Example – reverse a recession • Banks have a tendency to follow pro-cyclical policies, for example when the economy is in a recession they do not want to loan money for fear that the borrower will not be able to pay back the loan • The FED forces banks to be countercyclical through monetary policy (this however cannot be enforced)

11. FDIC or Federal Deposit Insurance Corporation • protects your bank deposits up to $250,000 per account (the gov’t raised this amount from $100,000 after the economic crisis of 2008 and under the Obama administration it was extended)

12. Banks often failed in the early years before regulation and the establishment of the Federal Reserve because: • Banks were fully loaned up with no reserves, and when depositors wanted their money none was available. (now there is a reserve requirement that must be met each month by each and every bank or lending institution) • People were fearful of depositing money in banks because if the bank went out of business they lost any money deposited in that bank (now the FDIC protects your deposits)

13. Assets – anything of value that you own • Liabilities – debts or expenses

14. Expansion of Money • the creation of money in the banking system, through the process of deposits and loans

15. DEPOSITSRESERVE REQUIREMENT LOANS ( 10% for this example) $1,000 $100 $900 $ 900 $ 90 $810 $ 810 $ 81 $729 $ 729 $ 72.9 $656.10 $ 656.10 $ 65.61 $590.41$ 590.49 $ 59.04 $531.45 $10,000 total $1,000 total $9,000 total

16. From the original $1,000 deposit in the system, the economy grew by an additional $9,000 in loans and the original $1,000 is held on reserve by the bank. • On paper $9,000 was created in loans • This creation is based on 2 key expectations: 1) the banks will not hold excess reserves, 1) all money will be loaned out and then re-deposited

17. The amount U.S. Dollars in Circulation and the effect it has on the real value of the Dollar