How has money changed over the centuries? What are the functions of money? Where does our money come from?

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2 How has money changed over the centuries? What are the functions of money? Where does our money come from?

3 Section Preview In this section, you will learn that money functions as a medium of exchange, a measure of value, and a store of value.

4 The Evolution, Functions, and Characteristics of Money The Federal Reserve System (Fed) issues most of the money in U.S. circulation. Paper currency Federal Reserve notes are the paper currency used in the United States.

5 The Evolution of Money People invented money to make life easier.

6 The Evolution of Money (cont.) In a barter economy, exchange of goods and services must have a mutual coincidence of wants. Money in primitive societies Commodity money Fiat money

7 Characteristics and Function of Money Anything can be used as money as long as it is portable, durable, divisible, and limited in supply.

8 The Evolution of Money (cont.) The Continental Congress issued paper money to finance the Revolutionary War in Colonists also used specie like English shillings, Austrian talers, and Spanish pesos brought over by immigrants. The dollar is the basic monetary unit of currency in the U.S. money system.

9 The new nation of the United States decided to create a new money system rather than use the British system of coins. Benjamin Franklin and Thomas Jefferson largely created the new system. Using the Spanish dollar as a basis. To make the system easier they abandoned the British system. The pound was the basic unit made up of 20 shillings, each of 12 pence (or pennies).

10 The new system got rid of the intermediate domination (shillings) and used only dollars and cents (pennies). A mill was a coin valued at 100 to the penny. Mills are still used to calculate tax rates on property tax but no longer are issued as coins.

11 Paper money is printed by the Federal Reserve while coins are minted by the U.S. Bureau of the Mint. They operate three mints that turn out millions of coins each year. The mint loses money on both pennies and nickels.

12 Money People began using money because it made buying and selling easier than bartering.

13 Characteristics and Function of Money (cont.) Characteristics of money Portable Durable Divisible into smaller units In limited supply

14 Characteristics and Function of Money (cont.) Medium of exchange Measure of value Store of value

15 Characteristics and Function of Money (cont.) Today s money Federal Reserve notes Metallic coins issued by the U.S. Bureau of the Mint Demand deposit accounts (DDAs)- checking accounts and debit cards.

16 Characteristics and Function of Money (cont.) The Federal Reserve keeps track of how much money is in circulation. They break the number down into 2 catergories. M1-liquid assets- relates to money s function as a medium of exchange M2- relates to money s function as a store of value. Includes assets that could be liquidified in a matter of days.

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18 Section Two The history of American Banking and Money

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20 The Development of Banking in America The United States experimented with many different kinds of money before it created the Federal Reserve System.

21 The Development of Banking in America (cont.) Abuse and other problems in an unregulated money supply led to government intervention. After ratification of the U.S. Constitution, state banks issued their own paper currency.

22 The Development of Banking in America (cont.) Currency problems Each bank issued own currency in different sizes, colors, and denominations. Banks were tempted to issue more notes than backed with silver or gold. Counterfeiting became a problem.

23 The Development of Banking in America (cont.) Congress printed paper currency in 1861 declaring it legal tender. Individuals referred to new paper notes as greenbacks. The National Currency Act in 1863 created a National Banking System (NBS).

24 The Development of Banking in America (cont.) A national bank issued its own notes called national currency. This was backed with bonds that banks purchased from federal government. Government was engaged in bank inspections. 10% tax applied to all privately issued bank notes.

25 The Development of Banking in America (cont.) Gold certificates were issued. Which meant the bill could be traded for gold at the bank. The U.S. had to hold a amount of gold equal to the currency in circulation. Silver certificates were introduced in 1878.

26 The Creation of the Fed The Federal Reserve System is the nation s central bank. Before a national bank was created money held by the government was deposited in many privately owned banks. With each change of political control the money was withdrawn and deposited in different banks.

27 The Creation of the Fed (cont.) By the 1900s, the National Banking System was showing signs of strain. Difficulty in providing enough currency for a growing nation System not designed for popular method of paying checking accounts Minor recessions caused major problems for banks and lending institutions.

28 The Creation of the Fed (cont.) Congress created the Federal Reserve System, or Fed, as the nation s central bank in Membership required by all national banks State-chartered banks were eligible for membership. Membership banks purchased stock in the Fed.

29 The Creation of the Fed (cont.) The Fed issued its own currency, replacing all other types of currency. Despite creation of the Fed, banking industry was overextended when Great Depression began in 1929.

30 The Creation of the Fed (cont.) Banks did not have deposit insurance for customers. Bank runs caused many banks to fail. Bank holiday declared by President Roosevelt March 5 th, 1933

31 The Creation of the Fed (cont.) The Banking Act of 1933 (Glass-Steagall Act) created the FDIC: Insures customer deposits to a maximum specified amount if case of failure. $250,000 currently Provides sense of security Can seize banks and sell them if in danger of collapse

32 The Creation of the Fed (cont.) Popularity of checking accounts led to reforms in the use of fractional bank reserves. Fractional reserve system banks are required to keep only a portion of their total deposits in the form of legal reserves. Size of reserve is determined by a reserve requirement and is set aside in vault as cash or in a member bank reserve (MBR).

33 The Creation of the Fed (cont.) Remaining excess reserves represents the bank s lending power and can be loaned out.

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35 Fractional banking meant that banks had a limited amount of money to loan. The Glass-Steagall act also limited certain types of loans to only banks which kept the number of home loans strictly limited.

36 Congress in 1989 removed the limitation on mortgage loans allowing other types of financial institutions to own or service the loans. Banks were allowed to sell their mortgage loans to brokers. The result was to remove any limit on the number of mortgages that could be in circulation in the country.

37 Banks were no longer limited by their excess reserves when making loans. The more loans a bank could make the more money it made. This led to banks making thousands of risky loans and then passing them on to investment brokers.

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39 Section Preview In this section, you will learn how the Federal Reserve System is organized and conducts monetary policy. The nation is divided into 12 Federal Reserve regions. Our regional bank is in St. Louis The St. Louis bank has a branch bank in Little Rock that oversees all banking in this part of Arkansas.

40 The Chairman of the Federal Reserve Since his appointment in 2006 as head of the Fed. Ben Bernanke: a former professor of economics at Princeton He follows Alan Greenspan who served for 19 years as the chairman. Bernanke has believed in using detailed research to base all of his policy decisions for the past eight years.

41 Bernanke took over the job just as the US entered the worse economic recession since the Great Depression. Under his direction the Fed has taken action to restore the economy. Lowering the Federal Funds rate to 0% to encourage lower interest rates for borrowers. Buying back government bonds called Quantitative Easing Supporting major banks with government money Buying some of the bad loans that big banks had made to prevent their bankruptcy

42 President Obama has nominated Janet Yellen to take over the job next year. Yellen would be the first woman to ever hold this job. She currently is president of the Federal Reserve bank in San Francisco.

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45 Structure of the Fed The Fed is organized as a corporation, owned by its member banks, and directed by a governmentappointed board. In Plain English video

46 Structure of the Fed (cont.) The Fed Privately owned by its member banks Directed by a seven-member Board of Governors Appointed by the President and approved by the Senate Each serves a 14-year term Primarily a regulatory and supervisory agency to member banks

47 Structure of the Fed (cont.) The Fed Operates 12 Federal Reserve district banks The Federal Open Market Committee (FOMC) makes decisions about interest rates. Twelve voting members including sevenmember Board of Governors Meet eight times a year to review the economy and make monetary changes

48 Structure of the Fed (cont.) Three committees advise the Board of Governors. The Federal Advisory Council advises on matters concerning overall health of economy. The Consumer Advisory Council advises on consumer credit laws.

49 Structure of the Fed (cont.) Three committees advise the Board of Governors. Thrift Institutions Advisory Council advises on matters pertaining to Savings and Loan industry.

50 Conducting Monetary Policy Monetary policy involves expanding and contracting the money supply to change the level of interest rates.

51 Conducting Monetary Policy (cont.) The Fed is responsible for monetary policy. More money is demanded when the interest rate is low. Easy money policy The Fed restricts the size of the money supply in a tight money policy.

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53 Conducting Monetary Policy (cont.) Fed uses three major tools to conduct monetary policy: Reserve requirement Open market operations Discount rate Prime rate

54 Monetary Policy The Federal Reserve System has three main policy tools at its disposal. It uses these tools to affect the money supply and interest rates.

55 The Fed does not often use the Reserve Requirement as a tool. It is not easy for banks to increase their reserves on short notice.

56 The Discount Interest rate is what the Fed charges banks that want to borrow money. Lowering the rate makes it cheaper for banks to borrow extra money to make loans. Lower rates should encourage business while higher rates can be used to slow a economy.

57 Conducting Monetary Policy (cont.) Impact of monetary policy Impact is complex Length of time for impact is unknown. Money supply also affects general price level quantity theory of money.

58 Fans of Fed Quantitative Easing Gain a Strong Friend Quantitative Easing As part of its current Open Market policy the Fed has been buying back U.S. Treasury bonds for the past three years. The effect is to put more money into the economy that must be invested in new areas. The result has been a large increase in stock prices and a recovery of the home mortgage market.

59 Other Fed Responsibilities As the nation s central bank, the Fed is responsible for most aspects of banking and the payments system.

60 Other Fed Responsibilities (cont.) Additional Fed responsibilities Maintaining the money supply Currency notes printed by the U.S. Bureau of Engraving and Printing Coins produced by the Bureau of the Mint

61 Other Fed Responsibilities (cont.) Additional Fed responsibilities Maintaining the payments system Electronic transfer of funds via clearinghouses Internet banking

62 Other Fed Responsibilities (cont.) Additional Fed responsibilities Regulating and supervising banks Establishes and monitors guidelines governing banking behavior including bank holding companies

63 Other Fed Responsibilities (cont.) Additional Fed responsibilities Preparing consumer legislation Implements consumer legislation such as federal Truth in Lending Act Regulation Z- enforces the truth in lending laws for all consumers who use credit. Serving as the federal government s bank