copyright ©2003 prentice hall, inc. 14 - 1 chapter 14 understanding money and banking
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Copyright ©2003 Prentice Hall, Inc.Copyright ©2003 Prentice Hall, Inc. 14 - 14 - 11
Chapter 14Chapter 14
Understanding Money and Banking
Understanding Money and Banking
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“A banker is a fellow who lends you his umbrella when the sun is shining, and wants it back the minute it begins
to rain.”~ Mark Twain
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Key Topics
Money and its forms in the U.S.
U.S. financial institutions
How banks create money and how they are regulated
The Federal Reserve system
Changes in the financial industry
International banking and finance
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$$$ Money $$$
Anything generally accepted as a means of paying for goods and services
Symbol
Economy, productivity, GDP
NOT precious metal
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Characteristics of a Good Money System
Divisible
Portable
Durable
Hard to Counterfeit
Stable in Value
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WA SHINGTON, D.C.
THIS NO TE IS LEGAL TENDE R
FOR ALL DEBTS, PUBLIC AND P RIVATE
SERIES
19 85
H 293
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Life Span of Currency
0 2 4 6 8 10
One Dollar Bill
Five Dollar Bill
Ten Dollar Bill
Twenty Dollar Bill
Fifty Dollar Bill
Hundred Dollar Bill
YearsSource: Bureau of Engraving and Source: Bureau of Engraving and PrintingPrinting
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The Functions of Money
Medium of Exchange
Store of Value
Unit of Account
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The Cost of Producing U.S. Coins
Golden Dollar 10.03 cents
Half Dollar 9.93 cents
Quarter 4.29 cents
Dime 1.88 cents
Nickel 3.13 cents
Penny .81 cents
Source: http://www.usmint.gov/faqs/circulating_coinsSource: http://www.usmint.gov/faqs/circulating_coins
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Amount of $ in Circulation per Person
$34$53
$37$59
$177
$571
$1,961
$0$200$400$600$800
$1,000$1,200$1,400$1,600$1,800$2,000
1910 1920 1930 1940 1960 1980 2000
Source: Source: New Designs for Your MoneyNew Designs for Your Money, U.S. Dept. of , U.S. Dept. of TreasuryTreasury
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The Money Supply
M1: SpendableCurrency
Demand deposits
M2: Spendable plus Convertible Time deposits
Money market mutual funds
Savings deposit
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The Money Supply
CurrencCurrencyy
DemanDemand d
DepositDepositss
== TotalTotalM1M1
++Time Time
Deposits & Deposits & Money Money Market Market Accts.Accts.
Total Total M2 *SA M2 *SA
*SA = Seasonally Adjusted*SA = Seasonally Adjusted
++ ==
The Total Money Supply
Copyright ©2003 Prentice Hall, Inc.Copyright ©2003 Prentice Hall, Inc. 14 - 14 - 131319641964 19691969 19741974 19841984 19841984 19891989 19941994 20012001
5.45.4
5.05.0
4.44.4
4.04.0
3.43.4
3.03.0
2.42.4
2.02.0
1.41.4
1.01.0
00
0.40.4
Mo
ne
y S
upp
ly (
trill
ion
s)M
on
ey
Sup
ply
(tr
illio
ns)
Money Supply Growth
M-1M-1
M-2M-2
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Credit CardsA Major Financial Force
Credit cards accounted for almost half of all transactions for the year 2000
Credit cards are a large and growing business
Convenient for Convenient for usersusers
Convenient for Convenient for usersusers
Highly profitable Highly profitable for issuersfor issuers
Highly profitable Highly profitable for issuersfor issuers
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U.S. Financial Institutions
Commercial BanksCommercial Banks
Diversification and mergersDiversification and mergers
Commercial interest ratesCommercial interest rates
Savings and Loan AssociationsSavings and Loan Associations
Mutual Savings BanksMutual Savings Banks
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U.S. Financial Institutions
Credit UnionsCredit Unions
Non-Deposit InstitutionsNon-Deposit Institutions
Pension fundsPension funds
Insurance companiesInsurance companies
Finance companiesFinance companies
Securities investment dealersSecurities investment dealers
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Special Financial Services
Individual Retirement Accounts (IRAS)
Trust Services
International Services
Currency exchange
Letters of credit
Banker’s acceptance
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Special Financial Services
Financial advice and brokerage services
Automated teller machines
Electronic funds transfer
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Banks As Creators of Money
$100.00 $10.00 $90.00 $190.00
90.00 9.00 81.00 271.00
81.00 8.10 72.90 343.00
72.90 7.29 65.61 409.51
65.61 6.56 59.05 468.56
DepositMoney held in
Reserve by BankMoney to Lend
Total Supply
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The Federal Reserve System
StructureStructure
Board of Board of governorsgovernors
Reserve banksReserve banks
Member banksMember banks
FunctionsFunctions
Banking for the Banking for the governmentgovernment
Banking for banksBanking for banks
Controlling the Controlling the money supplymoney supply
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Reserve requirements
Discount rate controls
Open market operations
Selective credit controls
Controlling the Money SupplyThe Tools of the Fed
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The Changing Money and Banking System
Interstate BankingDeregulationDeregulation
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Tools for Influencing the Money Supply
Reserve Requirement:
Percentage of a bank's deposit that must be set aside an on which banks may not earn interest
Discount Rate:
Interest rate the Federal Reserve charges on loans to commercial banks
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Tools for Influencing the Money Supply
Prime Interest Rate (Prime):
Lowest interest rate banks offer on short‑term loans to preferred borrowers
Open-Market Operations:
Federal Reserve’s purchase or sale of government bonds on the open market
Selective Credit Controls:
Federal Reserve's power to set credit terms on various types of loans
Influencing the Money Supply
Reserve Requirements
Discount Rate
Open-Market Operations
Selective Credit Controls
To INCREASE money supply
To DECREASE money supply
Decrease
Lower
Buy
Fewer
Increase
Raise
Sell
More
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U.S. Prime InterestRate On January 1st
02468
1012141618
1930
1940
1950
1960
1970
1980
1990
2000
Source: Money-Rates.com
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Federal Funds Rate Averages of Daily Figures Percent Source: H.15 Release -- Federal Reserve Board of Governors
DATE : FED FUNDS
2000.10 6.51
2000.11 6.51
2000.12 6.40
2001.01 5.98
2001.02 5.49
2001.03 5.31
2001.04 4.80
2001.05 4.21
2001.06 3.97
2001.07 3.77
2001.08 3.65
2001.09 3.07
2001.10 2.49
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Prime Ratehttp://www.ny.frb.org/pihome/statistics/dlyra
tes/
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U.S. Prime Interest and Federal Discount Rates
02468
1012141618
Prime InterestRate
FederalDiscount Rate
Source: Money-Rates.comSource: Money-Rates.com
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Regulation of Financial Institutions
Regulatory Relationships
Federal Reserve Board
FDIC
SAIF(FSLIC)
NCUA
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Electronic Technologies A Dramatic Change
Debit CardsDebit CardsDebit CardsDebit Cards
Smart CardsSmart CardsSmart CardsSmart Cards
E-cashE-cashE-cashE-cash
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Banking Transaction CostsBanking Transaction Costs
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20$1.07
$0.29 $0.27
$0.04
Live Teller Debit Card ATM Internet
Motivation for Electronic Banking
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Electronic Banking Trends in the U.S.
Internet
Electronic Funds Transfers (EFTs)
Check Conversion
Debit Card
Smart Card
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Credit, Debit, & Smart Cards
Credit Cards:
Plastic cards that allow the user to buy now and repay the loaned amount at a future date, plus accrued interest on any balance
Debit Cards:
Plastic cards that function like checks—banks withdraw funds from user’s demand‑deposit account and transfer it to retailers’ accounts
Smart Cards:
Plastic cards with embedded computer chips that “store” money electronically as well as information that can be used for purchases
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Electronic & Internet Banking
Automated Teller Machines (ATMs):
Electronic terminals that permit people to perform basic banking transactions 24 hours a day without human tellers
Electronic Funds Transfer Systems (EFTS or EFTs): Computerized systems for completing financial transactions
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International Banking
Eurodollar & Currency Exchange
Letter of Credit
Banker’s Acceptance
World Bank
IMF
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Bolstering International Trade
International Monetary Fund (IMF)International Monetary Fund (IMF)Stable exchange rates
Temporary short-term loans
Cooperation on global monetary issues
International payments system
World BankWorld BankProvides a limited scope of financial servicesProvides a limited scope of financial services
World BankWorld BankProvides a limited scope of financial servicesProvides a limited scope of financial services
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The International Payments Process
Olive Exchange(Greece to U.S.)
Equipment Exchange(U.S. to Greece.)
U.S. Importer U.S. ExporterU.S. Bank
Greek Exporter Greek ImporterGreek Bank
1
23
4 5
6 7
8
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Chapter Review
Define money and its forms in the U.S.
Describe U.S. financial institutions
Explain how banks create money and how they are regulated
Discuss the functions and tools of the Federal Reserve system
Identify how the financial industry is changing
Understand international banking and finance
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