Chapter 15
Money and Banking
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15–1
LEARNING OUTCOMES
After reading this chapter, you should be able to:
Define money and identify the different forms that it takes in the
nation’s money supply.
Describe the different kinds of financial institutions that compose
the U.S. financial system and explain the services they offer.
Explain how financial institutions create money and describe the
means by which they are regulated.
Discuss the functions of the Federal Reserve system and
describe the tools that it uses to control the money supply.
Identify three important ways in which the money and banking
system is changing.
Discuss some of the institutions and activities in international
banking and finance.
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15–2
What’s in It for Me?
If you want to understand where money comes
from, and how to get the most benefits from it,
then this chapter will be useful.
The chapter explains what money is, where it
comes from, how the supply of money grows,
and the kinds of services available to money
users from the financial services industry.
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15–3
What Is Money?
Money must have:
 Portability
 Divisibility
 Durability
 Stability
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15–4
The Functions of Money
Medium of Exchange
Store of Value
Measure of Worth
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The Money Supply
M1: Spendable
 Currency (paper money and coins)
 Checks
 Checking accounts—demand deposits in banks
M2: M1 + Convertible Money
 Time deposits
 Money market mutual funds
 Savings accounts
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The Money Supply (cont’d)
M-3: M2 + Less Liquid Deposits
 Large time deposits and sizable money market
funds by large institutions
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Credit Cards: Plastic Money?
Credit cards are not “money” and are not
included in M-1, M-2, or M-3 when measuring
the nation’s money supply.
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15–8
The U.S. Financial System
Financial Institutions
 Commercial Banks

Companies that accept deposits that they
use to make loans, earn profits, pay interest
to depositors, and pay dividends to owners
 Savings and Loan Associations (S&Ls)

Accept deposits, make loans, and are
owned by investors
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15–9
The U.S. Financial System (cont’d)
Financial Institutions
 Mutual Savings Banks

All depositors are owners of the bank, so all profits are
divided proportionately among depositors via dividends
 Credit Unions

A nonprofit, cooperative financial institution owned and run
by its members; promotes thrift
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15–10
The U.S. Financial System (cont’d)
Non-Deposit Institutions
 Unlike commercial banks, inflowing funds are
intended for purposes other than earning interest for
depositors
Pension funds
 Insurance companies
 Finance companies
 Securities investment dealers

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Special Financial Services
Individual Retirement
Accounts (IRAS)
Financial Advice and
Brokerage Services
Trust Services
Electronic Funds
Transfer (EFT)
International Services
 Currency exchange
 Letters of credit
Automated Teller
Machines (ATMs)
 Banker’s acceptance
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15–12
Regulation of the Banking System
Federal Deposit Insurance Corporation (FDIC)
 Preserves confidence in the financial system by
supervising banks and insuring deposits in banks
and thrift institutions
 Commercial banks pay fees for membership in
the FDIC
 The FDIC guarantees the safety of all deposits of
every account owner up to the current maximum of
$100,000
 The FDIC maintains the right to examine the
activities and accounts of all member banks
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15–13
The Federal Reserve System
The Fed: The Nation’s Central Bank
 Structure

Board of governors

Reserve banks

Open Market Committee

Member banks

Other depository institutions
 Functions

Banking for the government

Banking for banks

Controlling the money supply
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15–14
Controlling the Money Supply
Monetary Policy
 The Fed manages the nation’s economic growth by
managing money supply and interest rates
Tools of the Fed
 Reserve requirements
 Discount rate controls
 Open market operations
 Selective credit controls
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15–15
The Changing Money
and Banking System
Anti-Terrorism Regulations
 Bank Secrecy Act (BSA)
 USA Patriot Act

Customer Identification Program (CIP)
Interstate Banking
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15–16
The Impact of Electronic Technologies
Check 21
 Allows banks to present a substitute check for
payment instead of the original check
Blink Credit Cards
 A “contactless” payment system
Debit Cards
 Allow the transfer of money between accounts
 Used with point-of-sale (POS) terminals
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15–17
The Impact of Electronic Technologies
(cont’d)
Smart Cards
 Credit-card-size plastic cards with an embedded
computer chip that can be programmed with
“electronic money”
E-Cash
 Money that moves via digital transmissions on the
Internet, outside the established network of banks,
checks, and paper currency overseen by the Fed
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International Banking and Finance
World Bank
 Provides a limited scope of financial services
International Monetary Fund (IMF)
 Promotes the stability of exchange rates
 Provides temporary, short-term loans to member
countries
 Encourages members to cooperate on international
monetary issues
 Encourages development of a system for
international payments
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