List the Three Creators of Money

8/6/2019 List the Three Creators of Money

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Pump Primer

List the three creators of money in

the U.S.


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Unit IV: Economics of the Financial Market

ECONOMICS for Christian Schools

By Alan J. Carper

Bob Jones University Press. 1998


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Central Banking

Chpt. 11


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Objectives: List the three creators of money in the U.S.

Explain why the Federal Reserve System was organized

Describe the supervisory bodies of the Federal Reserve

Explain the necessity of the Federal Reserve

List and describe the functions of the Federal Reserve

Describe the effects that change the discount rate Describe the effects of the open market operations has upon the

money supply

Identify two reasons that the Fed attempts to control the supply ofmoney

Explain the dangers of the Fed's actions to control the moneysupply


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BIBLICAL INTEGRATION

Wisdom and understandingare to bemore valuable than money.

"How much better is it to get wisdom thangold! and to get understanding rather to

be chosen than silver! Prov. 16:16


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Central Banking

FDIC

Federal Reserve System

Federal Reserve Bank

FOMC


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Central Banking

What is a central bank?

Apublic authority that providesbanking services to banks and regulates

financial institutions and markets.

(Who Is the FDIC?)


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Central Banking

Why should you keep your money inabank?

Safety Convenience Cost

Security

FinancialFuture(Who Is the FDIC?)


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Central Banking

Choosing An Account1. Decide what type ofaccount suits your

needs the best.

1. Checking1. Student/College2. Interest baring

2. Savings1. Student/College

2. Money Market

(Who Is the FDIC?)


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Central Banking

Choosing A Bank?

Services

Fees

Convenient

Insured (FDIC)

(Who Is the FDIC?)


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Independent Agency

Created: 1933

Started: January 1, 1934

Main Office: Washington, D.C. Preserves and Promotes Public

Confidence

Insuringaccounts up to $250,000

(thru 12/31/2013; 1/1/2014 returns to $100,000) Banks

Thrift Institutions (Who Is the FDIC?)


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Does not insure:

Securities

Mutual funds

Stocks, orany other types of investmentsthat the bank or thrift institutions may offer.

(Who Is the FDIC?)


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Banks are chartered by:

States (and/or)

Federal Government

State chartered banks still have thechoice of joining the Federal ReserveSystem.

(Who Is the FDIC?)


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Managed by afive memberBoard ofDirectors

Appointed by the President

Confirmed by the Senate

No more than three from the same politicalparty

(Who Is the FDIC?)


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FDIC Board of Directors

Sheila Blair, Chairman

Martin Gruenberg, Vice ChairmanThomas Curry, Director

John Dugan, Comptroller of the CurrencyJohn Bowman, Director of the Office of Thrift

Supervision(Board of Director)


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Reserve Banking System

The money loaned out by real banks doesnot sit in bank accountsit gets spent almostimmediately by the borrowers.

Only a small fraction of the amount deposited

in banks are kept on reserve, either inelectronic accounts at the Federal Reserve orin vault cash.

The result is that not everyone canget their

money out of the bank in cash on the sameday. (Hill)


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Required Reserves

The Federal Reserve requires mostbanks to hold a portion, up to 10percent, of their deposits in reserve.These are called required reserves.

Present rates: $0 to $10.7 million = 0%

More than $10.7 million to $55.2 million = 3% More than $55.2 million = 10%

(Hill)


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The discount rate is the interest rate atwhich the Fed stands ready to lend tocommercial banks.

A change in the discount rate begins with

a proposal to the FOMC by at least one ofthe 12 Federal Reserve banks.

If the FOMC agrees that a change isrequired, it proposes the change to Board of

Governors for its approval.

Discount Rate

(Bade 665)


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Open Market Operations

Anopen market operation is the purchase orsale ofgovernment securitiesU.S. Treasury billsand bondsby the New York Fed in the openmarket.

When the New York Fed conducts an open marketoperation, the New York Fed does nottransact withthe federalgovernment.

(Bade 666)


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Monetary Base

The monetary base is the sum of coins,Federal Reserve bills, and banks reservesat the Fed.

The monetary base is so called because itacts like a base that supports the nationsmoney.

The larger the monetary base, the greateris the quantity of money that it can

support.

(Bade 666)


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How the Feds Policy Tools Work

By selling securities in the open market,the Fed can decrease the monetary base.

All these actions lead to an increase in theinterest rate.

(Bade 667)


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How the Feds Policy Tools Work

By decreasing the required reserve ratio, theFed can permit the banks to hold a smallerquantity of monetary base.

By lowering the discount rate, the Fed can

make it less costly for the banks to borrow. By buying securities in the open market, the

Fed can increase the monetary base.

All these actionlead to a decrease in theinterest rate.

(Bade 667)


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The Structure of the Federal Reserve

The key elements in the structure of theFederal Reserve are

The Chairman of the Board of Governors

The Board of Governors

The Regional Federal Reserve Banks

The Federal Open Market Committee

(Bade 663)


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Three Creators of Money

1. United States Treasury

2. Financial Institutions

3. Federal Reserve System

(Carper141)


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U. S. Treasury: (Division of the

Treasury Department)

Mints and sells coins to the FederalReserve Banks

Creates the coins for only a fraction of theirface value! (Carter, 147)


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Financial Institution

Creates money by lending outcustomers deposits to others.

(Carter, 147)


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Feder al Reserve Bank

Under Supervision of the Board of

Governors Located in Washington, D.C.

Appointed by the president andconfirmed by the Senate

Serve 14 yrs. terms

(www.federalreserve.gov)


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Federal Reserve System: (Fed)

Provides Resilient National Currency

Nations Financial Agent

Regulating Private Banking System

National Check-Clearing Mechanism

Banking Institution for the Nations Banks

(Carter, 147)


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Operate the nations payments

system:

The 12 Federal Reserve Banks provide: banking services to depository institutions;

they maintain reserve and clearingaccounts toprovide various payment services, includingcollecting checks, electronically transferringfunds, and storing, distributing, receiving, andprocessing currency and coin.

For the federalgovernment:

the Reserve Banks maintain the Treasury

Departments transactionaccount, pay Treasury checks,

process electronic payments,

issue, transfer, and redeem U.S. governmentsecurities.

(Hill)


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Federal Reserve Bank

Income

Interest earned ongov. securities Priced services to depository institutions

NOT OPERATED FOR PROFIT!

End of fiscal year money is turned overto the U.S. Treasury Department.

(Federal Reserve Board)


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The Federal Open Market

Committee [FOMC]

The Feds chief body for monetarypolicymaking.

The FOMCs decisions ultimately affectinterest rates.

The FOMC meets in Washington,usually eight times a year.

(Emery)


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The Board of Governors meets regularly, typically every

other Monday. The public is invited to attend meetings that

are open under the Government in the Sunshine Act.

(Meet twice a month pursuant to title 5, section 552b,of the U.S.

Code)(Federal Reserve Board)


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There are 12 Federal Reserve banks, one for eachof 12 Federal Reserve districts.

Each Federal Reserve Bank has nine board of

directors, three of whom are appointed by theBoard of Governors and six of whom are electedby the commercial banks in the Federal Reservedistrict.

The Federal Reserve Bank of New Yorkimplements some of the Feds most importantpolicy decisions

(Bade 664)


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Each Federal

Reserve district

has its own

Federal

Reserve Bank.

The Board of Governors of the Federal Reserve System is

located in Washington, D.C.

(Bade 664)


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Recap!

FDIC:

Five member Board of

Directors

Federal Reserve Bank:

Seven member Board ofGovernors

Twelve Districts: (each)

Nine memberBoard of

DirectorsFOMC:

Twelve member committee:

Fed Board of Governors (seven members)

President of the Federal Reserve Bank of N.Y.

Four other Federal Reserve Presidents (servinga one-year term)


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Bank Failure

When many depositors run into a bankat the same time to get their money out,we call that abank run.

Whena bank run that begins at onebank spreads to other banks andcauses people to generally distrust

banks, we call that abank panic.

(Hill)


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Bank Failure

Throughout history, there have beenepisodes where too many people triedto take their money out of their banks atthe same time. During such episodes,banks usually ran out of cash andtherefore couldnt honor withdrawalrequests, and many banks went

bankrupt. Whena bank goes bankrupt,its called abank failure.

(Hill)


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Great Depression InA Monetary History of the United States, 1867-1960

(1963), Milton Friedmanand Anna Schwartz attributedmuch of the depression's severity to four banking crises,or panics. They argued that the crisis oflate 1930 andearly 1931, in particular, converted a mild recession into amajor depressionas "a contagion of fear" initiated by crop

failures swept the country.

Friedmanand Schwartz reported the significant increasein the failure rate (761 banks during November 1930 toJanuary 1931, compared with 744 during the first ten

months of 1930), led by New York City's Bank of theUnited States, then the largest failure in Americanhistory.

(Friedman 308-311)


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Great Depression

They found the Federal Reserve guiltyofneglect for failing to deal with thesepanics, a failure that was particularly

culpable because correct, "lender-of-last resort," actions would simply haverequired "the policies outlined by the

System itself in the 1920s, or for thatmatter by Bagehot in 1873"

(Friedman 407)


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Output

This economic variable is a keyindicatorand serves as agauge of theeconomys ability to provide productsand services to people. Over the long

run, the standard ofliving rises whenthis indicatorgrows faster than thepopulation. One of the goals of theFederal Reserves monetary policy is to

achieve maximum sustainable growth ofthis economic variable.

(Hill)


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Establish and implement monetary

policy:

Using the tools of monetary policy, theFederal Reserve canaffect the volumeof money and credit available in the

economy and the price of creditinterest rates. In this way, the FederalReserve can influence the generallevel

of prices, employment, and output.

(Emery)


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Monetary Policy By making credit conditions tighter or

easier, monetary policy can help

dampen inflationary and recessionary

pressures that have historically led toeconomic booms and busts. Although

monetary policy cannot prevent

business cycles from occurring, it canhelp make them less severe.

(Emery)


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Changes to the Money Supply

The Fed tracks trends in many areas ofeconomic activity using economic

indicators to see if there are signals

pointing to recession or inflation, orwhether the risks of recession and

inflation are balanced.

(Emery)


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Over-stimulating the Market

Lowering the federal funds rate willlikely cause other short-term interestrates to falland will help stimulate

investment and the economy in theshort run. This effect would be helpful ifthe economy were slowing but would be

harmful if it caused inflationarypressures to build.

(Emery)


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Over-tightening

Raising the federal funds rate will slowinvestment in the economy in the shortrun. Raising the federal funds ratewould be appropriate if the economyshowed signs of overheatingandinflationary pressures were building.

However, if the economy were already

slowing, a higher federal funds ratewould tend to weaken it.

(Emery)


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Inflation This condition occurs when there is an increase in

the average level of prices of the products andservices we buy.

Significant changes in the price level distort economicincentives because those changes alter thepurchasing power of money.

A 5 percent annual rate of increase in prices meansthat the income you earn this year will buy 5 percentless next year.

One of the goals of the Federal Reserves monetarypolicy is to achieve price stabilitythat is, no overall

tendency for the prices ofgoods and services togenerally rise or fall.

(Hill)


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Effects of Interest Rates Higher interest rates mean that credit is

more expensive. When credit is moreexpensive, businesses are less likely to investin additional capital needed to expand outputand consumers are less likely to purchasehomes and large items that require them to

borrow. When interest rates are low, credit is less

expensive and businesses are more likely toinvest in additional capital and expand output.Likewise, consumers are more likely to buyhomes and other large items.

(Hill)


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FOMC

Committee of Twelve: Fed Board of Governors (seven members)

President of the Federal Reserve Bank ofN.Y.

Four other Federal Reserve Presidents(servinga one-year term)

Regardless of their voting status, all Reserve

Bank presidents contribute to the FOMCsdiscussions and deliberations.(Federal Reserve Board)


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Works CitedBoard of Directors & Senior Executives FDIC.gov 3 Jan 2006. 14 Mar 2006

Blade, Robin, and Michael Parkin. Foundations of Economics: Instructors

Manual. 2nd ed. Boston: Pearson Education, Inc., 2007.Carper, Alan. Economics for Christian Schools.Greenville: Bob Jones Uniersity

Press, 1998.

Emery, Barbara. Monetary Policy. Federal Reserve Bank of Philadelphia. 18Feb 2009Federal Reserve Board. Federalreserve.gov. 1 March 2006. 14 March 2006.

Friedman, Milton and Anna Schwartz .A Monetary History of the UnitedStates, 1867-1960.PrincetonUniversity Press; 1963.

Hill,Andrew T. What Does the Fred Do? Federal Reserve Bank of

Philadelphia.1

8 Feb 2009

.

Who is the FDIC?. FDIC.gov. 28 Jul 2003. 11 March 2005.

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List the Three Creators of Money