10/31/2014
Medium
of Exchange
Determines
Unit
value during exchange
of account
Compares
Store
values expressed same way
of value
Retains
value
NCEE Standard 10 and 11
Ch 10 & 16
Durability
Withstand wear and tear
Portability
Easily transferred or carried
Easily divided into smaller denominations
Uniformity
Count and measure accurately
Limited
money
have value as money.
Salt
Cattle
Precious stones
Tobacco
Corn
Cotton
supply
Scarcity adds value
Controlled by the Federal Reserve
Acceptability
Objects
Divisibility
Commodity
Accepted or exchanged everywhere
Representative
money
Objects
have value because they can be
exchanged for something of value
IOU
Paper receipts in exchange for gold or silver
Silver or gold certificates issued by US gov’t
Lacks
characteristics that make
objects good sources of money
Fiat
money
By
order or decree
Legal tender
US money is valuable because gov’t says so
“This note is legal tender for all debts, public
and private”
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Different currencies – Chaos
1812-1815 Different currencies – Chaos
1791-1811 => Bank of the United States
1816-1836 => Bank of the United States
First
bank
Charter was not renewed – unconstitutional
1837 – 1863 Free Banking / “Wildcat” Era
Second
Charter
bank
was not renewed – unconstitutional
Stabilizing American Banking
Chaos – state-chartered banks
National
Banking Acts of 1863 & 1864
Power
to charter banks
Required adequate reserves
Power to issue a single national currency
Gold
Standard – 1870-1971
Paper
money and coins had a value of an
equal amount of gold and were made out
of gold.
Early Twentieth Century
Safe
No
central decision-making authority
Panic
of 1907
Checking
Savings
Result:
1913
money storage
services
Offers
Reinstatement of a central bank
– Federal Reserve System
Investments
Loans
Mortgages
Credit
1933
- Federal Deposit Insurance Corp.
Insures deposits if a bank fails
cards
cards
Electronic banking
Stored value cards
Debit
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10/31/2014
1913 Federal Reserve Act
Created “The Fed”
1935
Federal
Issues
government’s bank
currency
Reformed to current structure
Regulates
Board of Governors
7 members appointed by the President
Staggered 14 year terms
District Reserve Banks
Member Banks
12 Districts
banks
clearing for banks
Lender to banks
Check
Regulate
Open
Own the Federal Reserve
Supply
of money is determined by the
monetary policy of the central bank.
Monetary
policy determines the interest rate
Central
the US, the central bank is the Federal
Reserve Bank (FED)
demand for money is determined by the
interest rate
bank determines monetary policy
In
The
the money supply
market operations
Responsibilities
Government’s bank
Regulating banking industry
FED
When rates are high, opportunity cost of holding
onto money as an asset is high, demand is low
When rates are low, opportunity cost of holding
onto money as an asset is low, demand is high
12 Districts
Member Banks
Required
10% historically
Lower
RRR makes money more available
Increases money supply
Lowers interest rate
Higher
reserve ratio (RRR)
The percentage of the bank’s total household
deposits that must be held in reserve at the Federal
Reserve Bank.
RRR makes money less available
Raises interest rate
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Discount
rate
Interest rate charged by the FED to the banks for
short term loans to banks
Banks borrow from FED as lender of last resort
Banks MUST meet RRR and will borrow if short
Discount rate makes it less expensive to borrow from
FED, therefore will lend money and borrow from FED
Open
Most
Increase
Lower rate = increase money supply
Higher rate = decrease money supply
A lower rate makes it cheaper for households to
borrow money
Stimulates the economy
Causes inflation
Decrease
money supply = FED buys bonds
Easy money policy
market operations (OMO)
commonly used to manipulate Qs
money supply = FED sells bonds
Tight money policy
Constricts the economy
Helps reduce inflation
Interest
rate also reflects what YOU get
in the business cycle
Lag time
Timing
Inside and outside
How
much time do you give the economy
to “self-correct”?
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