Money_ Banking_ and Monetary Policy by malj


									Money and Banking

     Chapter 12
Chapter Overview

 What are the functions and components of the US money

 What really backs the US money supply?

 What is the Federal Reserve System and how does it relate to
  the American banking system?

 What is the role of the Federal Reserve System, and what are
  its functions?
12.1 The Functions of Money
 Barter was the original means of facilitating trade between
  individuals but when it became too difficult we developed….

 Money is a social invention: we created it to make our lives
  easier and better

 In order to have something serve as money it must meet
  specific criteria:
   Serve as a “Medium of Exchange”
   Provide a “Unit of Account”
   Promote a “Store of Value”
12.2 Components of the Money Supply
 M1 = Currency (coins and paper) and checkable deposits
   US Currency is paper money called “Federal Reserve Notes”
   Legal tender
   Fiat
   Coins are minted by the US Mint in coordination with the Federal
    Reserve System and the US Treasury
   Checkable deposits = checks issued by Commercial banks, Thrifts,
    and Credit Unions

 M2 = M1 + “near monies” (saving deposits, money market
       accounts, money market mutual funds, CD’s less than

 MZM = Money zero maturity
12.3 What Backs the Money Supply?
 The US money supply is backed by the government’s ability
  to maintain a stable currency
 Paper money in circulation is the debt of the Fed Res Banks
 Checkable deposits are the debt of the commercial banks, et
 The value of money is determined by:
   Its acceptability
   “Legal Tender”
   Relative Scarcity
 Money and Prices
   $V=1/P              lower prices>purch.power
Federal Reserve and the Banking
 As a result of the Panic of 1907 Congress commissioned the
  National Monetary Commission to study the problem. The
  result was the Federal Reserve Act of 1913 (Dec. 24th)
 Pyramid structure of the Fed Res System:

              Board of Governors (7)
              District Fed Res Bk Boards and Presidents (12)
               Member Banks
                 U.S. Taxpayers
Board of Governors for the FRS
 The Board of Governors are appointed by the U.S.
   They are approved by the U.S. Senate
   They serve 14 yrs term (staggered appointments)
   One of the Governors is appointed by the U.S. President to
    serve as the Chairman (4 year term)
   Chairman must be approved by the U.S. Senate
   Chairman may be reappointed and reapproved multiple times
   The Board of Governors are located in Washington D.C.
12 District Federal Reserve Banks
12 District Federal Reserve Banks
 Each District has its own District Board of Directors
 Each District Board has 9 members
   3 Class A Directors represent commercial banks that are members of
      the FRS
     3 Class B Directors selected by commercial banks
     3 Class C Directors appointed by the Board of Governors
     No Class B or Class C director may be an officer or employee of a
      bank or bank holding company
     All Directors nominate a President and Vice President for the District
      Board, subject to approval by the Fed Broad of Governors
     Each District has at least 1 branch bank except for Philadelphia and
      Boston (the 6th District has the most branches with 5, one is Miami)
Federal Reserve System
 Issues currency – this does not mean it prints money only that it
    issues it through its 12 District banks. The Fed works in
    coordination with the US Treasury and the US Mint to determine
    the “volume” of the money supply
   Serves as a “Bankers Bank” – The Fed lends money to banks and
   Provides a check clearing service – The Fed does less of this every
    year due to electronic banking
   Fiscal agent – The Fed acts as a fiscal agent for the federal gov’t
   Supervises banks
   Controls the money supply
   Formulates Monetary Policy
Monetary Policy Tools

 Discount Rate – the rate charged to member banks for use of
  their money from their Federal Reserve accounts

 Required Reserve – the amount (%) of each deposit made
  into a member bank which must be sent to their District
  Federal Reserve account

 Federal Open Market Committee (FOMC)
 The Federal Open Market Committee must have an agenda
  every 6 weeks (but is not required to meet unless it deems it
 The FOMC meets in Washington D.C. at the Board of
 7 Board of Governors + the NY Fed District President + 4
  other District Presidents (on an annual rotating basis)
  comprise the FOMC (total of 12 voting members)
 They determine whether or not to raise, lower, or retain the
  current interest rate on the Federal Funds
Monetary Tools during a recession

 Lower the Discount Rate

 Lower the Reserve Requirement

 Buy Government Securities
Monetary Policy during inflation

 Raise the Discount Rate

 Raise the Reserve Requirement

 Sell Government Securities

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