Economics ch 14

Federal Reserve System
privately owned, publicly controlled central bank of the United States
Federal Reserve Notes
paper currency issued by the Fed in use today
Barter economy
moneyless economy that relies on trade or barter
commodity money
money that has an alternative use as an economic good
representative money
a claim on a commodity, gold or silver certificates
fiat money
money by government decree
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money in the form of gold or silver coins
characteristics of money
Money must be portable and easily transferred from one person to another to make the exchange of money for products easier
Money must be reasonably durable so it does not deteriorate when it is handled
Money should be easily divisible into smaller units so that people can use only as much as they need for a transaction
It must be available to serve as money but only in limited supply
functions of money
anything portable, durable, divisible, and limited in supply. Money is a medium of exchange: something accepted by all parties as payment for goods and services, a measure of value: function of money that allows it to serve as a common way to express value, and serves as a store of value: a function of money that allows people to preserve value for future use.
Demand deposit accounts
account from which funds can be removed by writing a check and without having to gain prior approval from the depository institution
component of the money supply relating to money’s role as a medium of exchange
component of the money supply relating to money’s role as a store of value
early money was coins and paper currency backed by gold and silver while today it is some paper currency but mostly electronic bookkeeping entries not backed by gold or silver. First banking was virtually unregulated and led to abuses that led to the need for a gov. Rev War, 250 million Continental dollars were printed. By the end of the war the currency was worthless because people didn’t trust the gov to issue anything except coins. Banking became popular after the Revolution because the new Constitution allowed private banks to issue paper currency. The banks tried to make the money backed by gold and silver but tended to print more than they could promise to be backed. The main problem was that each bank issued its currency in different sizes, colors, and denominations which meant that hundreds of different notes could be in circulation in any given city. Banks were tempted to issue too many notes because they could print it whenever they wanted. Counterfeiting was a big problem with different notes and people copying other notes or making up new ones. Too many currencies produced by too many banks led to many merchants not allowing people to buy things with certain notes. During the Civil War, Congress decided to print paper currency in 1861 that was declared legal tender that was not backed; these were called greenbacks. National banks issued a national currency backed by bonds that were bought from the federal gov. In 1865, the federal gov forced state banks to become part of the National Banking System by placing a 10 percent tax on all privately issued bank notes. This left only the greenbacks. Gold certificates were issued by the gov, this was currency backed by gold placed on deposits with the US Treasury. In 1878 the gov introduced silver certificates that replaced the bulky silver dollar coins.
first printed currency
greenbacks or legal tender the fiat currency that must be accepted in payments for debt. The back of the notes were printed with green ink.
national banking acts
enacted by Congress in 1863, it created a National Banking System made of national banks. A national bank is a privately owned bank that receives its operating charter from the federal government. The banks issued their own notes called national currency that were backed with bonds that the banks bought from the federal gov
reasons the Fed is needed
The National Banking System that was designed primarily to help the federal gov finance the Civil War, was having difficulty providing enough currency for the growing nation. Checking accounts were becoming more popular, and the banking system was not designed to deal with this new method of payment. Even minor recessions were causing major problems for banks and other lending institutions
The Federal Reserve System
came in 1913 by the central bank that can lend to other banks in times of need. Member access allowed the Fed organized corporation to have any banks that joined to purchase shares of stock in the system. Private banks own the Fed. The Fed issued its own currency called the Federal Reserve notes that replaced all other types of federal currency.
Staggering numbers of bank failures occurred during the 1930s and the Depression. At the depression start, about 25,500 banks existed that didn’t deposit insurance for the customers. Bank runs occurred where depositors withdrew their funds from a bank before it failed. By 1934 more than 10,000 banks had closed or merged to make stronger banks
the Banking Act of 1933 was passed to strengthen the banking industry and created the Federal Deposit Insurance Corporation (FDIC) that initially insured customer deposits to a maximum of $2,500 in the event of a bank failure
Fractional reserve system
system requiring financial institutions to set aside a fraction of their deposits n the form of reserves
money multiplier
the fractional reserve banking allows the DDAs to grow several times larger than the total amount of reserves, or by 1/(Reserve Requirement)
Head of the Fed
Chairman, important position of the Fed Chair that has immense influence over the economy. Newest chairman is Ben Bernanke who has an unusual degree of independence. Must be concerned about economic instability, recession, and inflation.
made of a member back that is a commercial bank that is part of the Fed
Board of Governors, seven-member. Each member is appointed by the president of the US and approved by the Senate to serve a 14-year term of office staggered so that one appointment happens every 2 years. People appointed will care to govern the Fed in the public interest. Sets general policies for its member banks to follow and regulates certain aspects of state-chartered member banks’ operations. It reports annually to Congress and puts out a monthly bulletin that covers national and international monetary matters.
District Bank
12 independent and equally powerful banks where each reserve bank was responsible for a district and some Federal Reserve notes that still have the district bank’s name in the seal to the left of the portrait. Advanced technology has reduced the need for regional structure so the new seal on our currency does not incorporate any mention of district names. Today the 12 Fed Reserve district banks are located to be near the institutions they serve. The district banks accept deposits from and make loans to privately owned banks and thrift institutions.
Federal Open Market Committee makes decisions about the level of interest rates. Has 12 voting members: 7 from the BOG, the president of the New York district Fed, and four district Federal Reserve bank presidents who serve one-year rotating terms. Meets 8 times a year to evaluate factors such as trends in construction, wages, prices, employment, production, and consumer spending. All decisions are announced almost immediately when discussing impact on cost and availability of credit. It is the Fed’s primary monetary policy-making body.
Monetary Policy
changes in the money supply in order to affect the availability and cost of credit. Actions by the Federal Reserve System to expand or contract the money supply in order to affect the cost and availability of credit.
easy money policy
the Fed expands the money supply, causing interest rates to fall. Monetary policy that results in lower interest rates and greater access to credit
tight money policy
the Fed restricts the size of the money supply. Monetary policy that results in higher interest rates and restricted access to credit
tool, reserve requirement. The Fed can change the requirement for all checking, time, and savings accounts within Congress set limits. The Fed is reluctant to use this because other monetary policy tools work better but this can be powerful if the Fed uses it.
Open market operations
tool, the buying and selling of gov securities in financial markets. This method is the Fed’s most popular tool and allows the Fed to influence short-term interest rates. The Fed can buy a bond from an investor and pay for it with a check drawn on itself or an equivalent amount of cash. The result is that whenever the Fed buys gov securities, excess reserves are created and the money supply expands. Whenever the Fed sells gov securities, excess reserves contract and the money supply contracts.
Discount rate
tool, interest rate that the Fed charges on loans to financial institutions
prime rate
the lowest rate of interest commercial banks charge their best customers
goal (what monetary policy promotes)
price stability, full employment, and economic growth.
money supply
The currency and coins must be minted and stored until member banks need additional coins or currency. The Fed disposes of mutilated or unusable coins or currency and replaces it.
payment system
Involves money supply, electronic transfer of funds between busses, state and local governments, financial institutions, and foreign central banks. Clearinghouses process the billions of checks warted each year. The Fed ensures the agencies operate smoothly. Online banking is an innovation in the banking system because people can open an account anywhere in the country using the Internet which the Fed had to design new procedures to prevent abuses
The Fed makes guidelines that govern banking behavior and are responsible for monitoring, inspecting, and examining various banking agencies
legislation (Regulation Z)
The Fed implements consumer legislation including the federal Truth in Lending Act requiring sellers to make complete and accurate disclosures to people who buy on credit. Under Reg Z the Fed has the authority to extend truth-in-lending disclosures to millions of individuals who borrow from retail stores, automobile dealers, banks, and lending institutions
Govt’s bank
Fed function is the range of financial services it provides to the federal gov and its agencies. It conducts nationwide auctions of Treasury securities and issues, services, and redeems these securities on behalf of the Treasury. The Fed maintains accounts for the gov.

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