Copyright ©2003 Prentice Hall, Inc. 14 - 1 Chapter 14 Understanding Money and Banking.

Copyright ©2003 Prentice Hall, Inc.Copyright ©2003 Prentice Hall, Inc. 14 - 14 - 11

Chapter 14Chapter 14

Understanding Money and Banking

Understanding Money and Banking


“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


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


$$$ Money $$$

Anything generally accepted as a means of paying for goods and services

Symbol

Economy, productivity, GDP

NOT precious metal


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


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


The Functions of Money

Medium of Exchange

Store of Value

Unit of Account


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


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


The Money Supply

M1: SpendableCurrency

Demand deposits

M2: Spendable plus Convertible Time deposits

Money market mutual funds

Savings deposit


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


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


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


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


Special Financial Services

Individual Retirement Accounts (IRAS)

Trust Services

International Services

Currency exchange

Letters of credit

Banker’s acceptance


Special Financial Services

Financial advice and brokerage services

Automated teller machines

Electronic funds transfer


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


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


Reserve requirements

Discount rate controls

Open market operations

Selective credit controls

Controlling the Money SupplyThe Tools of the Fed


The Changing Money and Banking System

Interstate BankingDeregulationDeregulation


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


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


U.S. Prime InterestRate On January 1st

02468

1012141618

1930

1940

1950

1960

1970

1980

1990

2000

Source: Money-Rates.com


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


Prime Ratehttp://www.ny.frb.org/pihome/statistics/dlyra

tes/


U.S. Prime Interest and Federal Discount Rates

02468

1012141618

Prime InterestRate

FederalDiscount Rate

Source: Money-Rates.comSource: Money-Rates.com


Regulation of Financial Institutions

Regulatory Relationships

Federal Reserve Board

FDIC

SAIF(FSLIC)

NCUA


Electronic Technologies A Dramatic Change

Debit CardsDebit CardsDebit CardsDebit Cards

Smart CardsSmart CardsSmart CardsSmart Cards

E-cashE-cashE-cashE-cash


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


Electronic Banking Trends in the U.S.

Internet

Electronic Funds Transfers (EFTs)

Check Conversion

Debit Card

Smart Card


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


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


International Banking

Eurodollar & Currency Exchange

Letter of Credit

Banker’s Acceptance

World Bank

IMF


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


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


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

Copyright ©2003 Prentice Hall, Inc. 14 - 1 Chapter 14 Understanding Money and Banking.

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Transcript of Copyright ©2003 Prentice Hall, Inc. 14 - 1 Chapter 14 Understanding Money and Banking.