McGraw-Hill/Irwin
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Chapter Twenty
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Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

Federal Reserve
• A former economics professor at Princeton.
• Former President George W.
Bush appointed him
Chairman of the Federal
Reserve in 2006.
• Almost every factor related to the economy is influenced by the choices he makes.
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Profile
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20-2

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What is
Money?
LG1
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• Money -Anything people generally accept as payment for goods and services.
• Barter -The direct trading of goods or services for other goods or services.
20-3

• Portability
• Divisibility
• Stability
• Durability
• Uniqueness
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What is
Money?
LG1
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20-4

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What is the
Money
Supply?
LG2
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• Money Supply -The amount of money the Federal
Reserve makes available for people. The money supply is referred to as:
M1 -Money that can be accessed quickly (coins, paper money, travelers’ checks, etc.).
M2 -M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.).
M3 -M2 + big deposits like institutional money market funds.
20-5

Bill
$1
$5
$10
$20
$50
$100
How Long it Lasts
21 Months
16 Months
18 Months
24 Months
55 Months
89 Months
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What is the
Money
Supply?
LG2
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Source: Federal Reserve, www.federalreserve.gov
.
20-6

1995
2001
2004
2007
Year
1956
1960
1985
Milestone
Congress set the minimum wage at $1 an hour
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What is the
Money
Supply?
LG2
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$10 million presidential campaign by candidate Richard Nixon
$100,000 bottle of wine sold at auction at Christie’s
$1 million cost for a 30-second commercial during Super Bowl XXIX
$10 movie ticket in New York
$100 million Picasso painting sold at Sotheby’s
$1 billion stadium built in London (Wembly)
Source: Conde Nast Portfolio
20-7

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The Global
Exchange of
Money
LG2
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• Falling dollar value : The amount of goods and services you can buy with a dollar decreases.
• Rising dollar value : The amount of goods and services you can buy with a dollar increases.
• What makes the dollar fall or rise is the position of the U.S. economy relative to other global economies.
20-8

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The Global
Exchange of
Money
LG2
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• Overseas demand for U.S. products rise.
• A favorable exchange rate for U.S. companies earning profits in foreign markets is provided.
• U.S. tourism increases which is good for hotels, resorts, theme parks, and retailers that serve international travelers.
20-9

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Basics About the Federal
Reserve
LG2
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1. The Board of Governors
2. The Federal Open
Market Committee
3. 12 Federal Reserve
Banks
4. 3 Advisory Councils
5. The member banks of the system
20-10

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Basics About the Federal
Reserve
LG2
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20-11

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Basics About the Federal
Reserve
LG2
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• The Fed uses three basic tools:
1. Reserve Requirement -A percentage of commercial banks’ checking and savings accounts they must keep in the bank or in non-interest-bearing deposits at the local Federal Reserve district bank.
2. Open-Market Operations -The buying and selling of government bonds.
3. Discount Rate -The interest rate the Fed charges for loans to member banks.
20-12

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Progress
Assessment
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• What’s money?
• What are the five characteristics of useful money?
• What’s the money supply, and why is it important?
• How does the Federal Reserve control the money supply?
• What are the major functions of the Federal
Reserve? What other functions does it perform?
20-13

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Basics About the Federal
Reserve
LG2
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20-14

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The History of
Banking and the
Need for the
Fed
LG3
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• A cash shortage problem in 1907 led to the creation of the Federal Reserve System.
• Under the Federal
Reserve Act of 1913, all federally chartered banks had to join the
Federal Reserve.
20-15

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The History of
Banking and the
Need for the
Fed
LG3
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Bank
Washington Mutual Bank
Continental Illinois NB&T
First Republic Bank Corp
American Savings & Loan Assn
IndyMac Bank
Year
2008
1984
1986
1988
2008
Assets
$307 Billion
$67 Billion
$49 Billion
$45 Billion
$32 Billion
20-16

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The U.S.
Banking
System
LG4
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• Commercial banks
• Savings and loan associations
• Credit unions
• Nonbanks
20-17

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Commercial
Banks
LG4
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• Commercial Bank -A profit-seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and uses those funds to make loans.
• A commercial bank has two types of customers:
1. Depositors
2. Borrowers
20-18

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Services
Provided by
Commercial
Banks
LG4
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• Demand Deposit -The technical name for a checking account; money is available on demand from the depositor.
• Time Deposit -A savings account; a bank can require a prior notice before you make a withdrawal.
• Certificate of Deposit -A savings account that earns interest, to be delivered on the certificate’s maturity date.
20-19

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WHAT to TELL the TELLER
Making Ethical Decisions
• The bank teller mistakenly gives you $320 instead of the $300 you asked for.
• You bring the error to her attention, but she disagrees she miscounted the money.
• You wonder whether to just keep the extra $20 even though you know her accounts will not balance at the end of the day.
• What are your alternatives? What do you do?
20-20
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Savings and
Loan
Associations
LG4
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• Savings and Loan Associations (S&Ls) -A financial institution that accepts both savings and checking deposits and provides home mortgage loans.
• Often known as thrift institutions because their original purpose was to promote customer thrift and home ownership.
20-21

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Credit
Unions
LG4
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• Credit Unions -Nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members.
• As nonprofits, credit unions enjoy an exemption from federal income taxes.
20-22

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Other
Financial
Institutions
LG4
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• Nonbanks -Financial institutions that accept no deposits, but offer many of the services provided by regular banks. Nonbanks include:
Life insurance companies
Pension funds
Brokerage firms
Commercial finance companies
Corporate financial services
20-23

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Other
Financial
Institutions
LG4
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• Free identity theft protection
• Free credit score monitoring
• Personal financial management
• Instant messaging service
• Bank’s blog
Source: www.comscore.com
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20-24

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Progress
Assessment
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• Why did the U.S. need a Federal Reserve Bank?
• What’s the difference between a bank, a savings and loan association, and a credit union?
• What’s a consumer finance company?
20-25

Spotlight on Small Business
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• The tightening of loan money led small businesses to seek alternative sources of funds.
• Angel investors can be a source of funds for some firms, especially high-growth firms in technology or biotech.
• Peer-to-peer lending is an alternative source of capital.
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20-26

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Protecting
Your Funds
LG5
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• The Federal Deposit Insurance Corporation
(FDIC) -An independent agency of the U.S. government that insures bank deposits up to
$100,000 ($250,000 until December 2013).
• The Savings Association Insurance Fund
(SAIF) -Insures holders of accounts in savings and loan associations.
• The National Credit Union Administration
(NCUA) -Provides up to $100,000 coverage per individual depositor per institution.
20-27

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The BANKING CRISIS
GOES GLOBAL
Reaching Beyond Our Borders
• The banking crisis of 20082009 wasn’t limited to the U.S., even high growth nations felt the pinch.
• The International Monetary Fund (IMF) has received requests from countries like Pakistan,
Ukraine, Hungary, Turkey, and Bahrain.
• Many nations are wondering where future funds will come from.
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20-28

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Using Technology to Make Banking
More Efficient
LG6
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• Electronic Funds Transfer System -Messages about a transaction are sent from one computer to another so firms can transfer funds quickly and more economically.
• Debit Card -Serves the same function as a check; it withdrawals funds from a checking account.
20-29

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Using Technology to Make Banking
More Efficient
LG6
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• Smart Card -A combination of a credit card, debit card, phone card, driver’s license, and more.
20-30

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International
Banking and
Banking Services
LG7
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• Letter of Credit -A promise by the bank to pay the seller a given amount if certain conditions are met.
• Banker’s Acceptance --
A promise the bank will pay some specified amount at a particular time.
• Money exchange allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros).
20-31

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International
Banking and
Banking Services
LG7
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• World Bank -Lends most of its money to lessdeveloped nations to improve their productivity and help raise standards of living and quality of life.
• International Monetary Fund (IMF) -Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. About
185 countries are a part of the IMF.
20-32

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Progress
Assessment
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• What are some of the causes for the banking crisis of 2008-2009?
• What’s the role of the FDIC?
• How does a debit card differ from a credit card?
• What’s the World Bank and what does it do?
• What’s the IMF and what does it do?
20-33