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How should you spend, save, and invest your money?
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Economists define money as anything that is generally
accepted as a means of payment
Money has three basic functions:
o Medium of exchange
• Easier than a barter
• Legal tender
o Standard of value
• Measure and compare the value of all kinds of goods and services
using one scale.
o Store of value
• Holds value over time
• Purchasing power
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Acceptability
Scarcity
o Needs to be scarce to be valued by buyers and sellers
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Portability
Durability
Divisibility
o Must be easy to divide into small amounts
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Uniformity
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Commodity money
o Gold, silver, salt, cattle, shells, beads, furs, tobacco, etc.
o A commodity, a good that has value in trade, becomes commodity
money when it is used as a means of exchange.
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Banks
o Receive deposits, make loans
o Issue banknotes
• Commodity-backed money
• Forerunner to modern printed money
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Fiat money
o Printed by the government
o Not backed by gold, silver, or any other commodity
o Money backed “on the full faith and credit of the US government
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The central bank of the United States
o Created December 23, 1913 in response to a series of financial
panics
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What does the Fed do?
o Supplies the economy with cash
• Elastic currency
• Supply of currency that expands and contracts with the needs of business.
o Holds reserves for depository institution
• Requires banks to hold a percentage of its deposits in reserve
o Banker to the federal government
o Processes checks and electronic transfers of funds
o Supervises and regulates banking institutions
o Regulates the money supply
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Manages the banking system
o Controls the nation’s money supply
• Issues Federal Reserve notes
• Aim to provide liquidity– consumers and businesses have money
o Seven member Board of Governors oversees the Federal Reserve
System
o Twelve regional Federal Reserve Banks
o Federal Open Market Committee (FOMC)
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Board of Governors
President of the Federal Reserve Bank of New York
Presidents of four other Federal Reserve Banks on a rotating basis
Fed Chairman
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Monetary decisions are made by the Federal Open Market
Committee (FOMC)
o To stimulate the economy, lower the cost of borrowing
• Discount rate
• The interest rate that commercial banks can borrow funds directly from the Fed.
• Stigma- borrowing from the Fed means that the bank can’t raise the funds it
needs privately
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“Thus, turning to the Fed for a loan is similar to borrowing from your parents after the
age of about twenty-five: you will get the money, but it’s better to look somewhere else
first.” Charles Wheelen
• Generally, banks borrow from other banks, not the Fed.
o Increase the money supply:
• Fed buys government bonds from banks, allowing them to put more money
into the economy.
• Lowers interest rates
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The cost to borrow money
Companies can borrow more money at lower rates, which promotes spending,
stimulates the economy, and creates jobs.
Can cause inflation, affecting the purchasing power of money.
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The opposite is done to decrease money supply:
o Fed sells government bonds to banks, decreasing the amount of
money circulating in the economy.
• Raises interest rates
• Cost to borrow money increases, spending slows.
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Why decrease the money supply?
o To control inflation
• “The most instructive way to think about inflation is not that prices are
going up, but rather that the purchasing power of the dollar is going
down.” – Charles Wheelen
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The Fed is in charge of:
o Facilitating the rate of economic growth that is neither too fast or
too slow. However…
• No one knows the “speed,” or growth, of the economy
• The tools the Fed has to fix the economy do not immediately solve the
problem
• Congress and the president might be making decisions about fiscal
policy that affect the monetary policy of the Fed.
• And world events out of our control affects the Fed.
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Article I, Section 8 of the US Constitution
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence
and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
To borrow money on the credit of the United States;
To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;
To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;
To establish Post Offices and Post Roads;
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their
respective Writings and Discoveries;
To constitute Tribunals inferior to the supreme Court;
To define and punish Piracies and Felonies committed on the high Seas, and Offenses against the Law of Nations;
To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;
To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;
To provide and maintain a Navy;
To make Rules for the Government and Regulation of the land and naval Forces;
To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;
To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the
United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the
discipline prescribed by Congress;
To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular
States, and the acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all
Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals,
dock-Yards, and other needful Buildings; And
To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this
Constitution in the Government of the United States, or in any Department or Officer thereof.
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Precedent: A decision that can be used as a guide for
future situations involving similar facts and issues.
Expressed Powers: Powers granted to Congress specifically
in Article I, Section 8 of the Constitution
Necessary and proper (elastic) clause: Allows Congress “to
make all Laws which shall be necessary and proper for
carrying into Execution the foregoing Powers, and all the
Powers vested by this Constitution in the Government of the
United States, or in any Department of Officer thereof”
Implied Powers: Powers of Congress not stated specifically,
but based on expressed powers.
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We admit, as all must admit, that the powers of the
Government are limited, and that its limits are not to be
transcended. But we think the sound construction of the
Constitution must allow to the national legislature that
discretion with respect to the means by which the powers it
confers are to be carried into texectuion which will enable
that body to perform the high duties assigned to it in the
manner most beneficial to the people. Let the end be
legitimate, let it be within the scope of the Constitution, and
all means which are appropriate, which are plainly adapted
to that end, which are not prohibited, but consist with the
letter and spirit of the Constitution, are Constitutional.
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To lay and collect taxes
o To punish tax evaders
o To use tax revenues to fund public schools, health, and housing
programs
o To require states to meet certain conditions to qualify for federal
funding.
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To establish naturalization laws
o To regulate and limit immigration
o To establish the US Border Patrol
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To raise and army and navy
o To draft Americans into the military
o To establish military colleges
o To create the US Air Force as a separate branch of military
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To regulate commerce (business)
o To regulate banking
o To establish minimum wage
o To ban discrimination in workplaces and public facilities
o To pass laws protecting the disabled
o To regulate air travel
o To build the interstate highway system
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To establish post offices
o To prohibit mail fraud and obstruction of the mail
o To bar the shipping of certain items through the mail
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Lehman Brothers, Goldman Sachs, Morgan Stanley, and
Merrill Lynch
o Major Wall Street firms that do business in investment banking and
management
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TARP money
o Stimulus money
o Taxpayer money