The basis of the market economy is voluntary exchange.In the American economy, the exchange usually involvesmoney in return for goods and services. Why do youaccept money in exchange for goods or services? Whatgives money its value? Where do you keep your money?Answer the questions above in a brief essay.

To learn more about how our money and banking systemworks, view the Economics & You video lesson 18:Money and Banking.

Summarizing Information Study Foldable Make this foldable and use it torecord what you learn about money and banking.

Reading andWriting As you read,identify the key pointsof each section in thechapter and writethese main ideasunder the appropriatetabs of your foldable.

Step 3 When all the tabs are thesame size, crease the paper tohold the tabs in place and staplethe sheets together. Label eachtab as shown.

Step 2 Fold up the bottom edgesof the paper to form four tabs.

522Investing in the stock market is

one way people use their money. ▲

Keep theedges straight.

This makesall tabs thesame size.

Money & BankingWhat Is Money? The Federal Reserve SystemHow Banks Operate

Stapletogether along

the fold.

Gail Mooney/CORBIS

Step 1 Collect two sheets of paperand place them about 1 inch apart.

Chapter Overview Visit the CivicsToday Web site at civ.glencoe.comand click on Chapter Overviews—Chapter 24 to preview chapterinformation.

The primary purpose of the U.S. Mint is to produce an adequate supply of circulatingcurrency for the nation to conduct its trade andcommerce. The U.S. Mint is also in charge ofproducing special commemorative coins. Shown here is the first coin that ever featuredan African American—the Booker T. WashingtonMemorial half-dollar. It honors the famouseducator who was born a slave in Virginia in1856. Designed by Scott Hathaway, the sale of thiscommemorative coin raises money to pay for amemorial for Washington.

MoneyAll of us know what money looks like, and we know how to

spend it. In this chapter, we’ll look at how money makes ourlives easier and allows the economy to function more smoothly.

Money is more interesting than you might think. It servesdifferent functions, comes in several different forms, and hasvalue for reasons that are not immediately obvious.

Three Functions of MoneyMoney has three functions. First, it serves as a medium of

exchange. This means that we can trade money for goods andservices. Second, money serves as a store of value.We can holdour wealth in the form of money until we are ready to use it.

Third, money serves as a measure of value. Money is like ameasuring stick that can be used to assign value to a good orservice. When somebody says that something costs $10, weknow exactly what that means.

Types of MoneyAnything that people are willing to accept in exchange for

goods can serve as money. At various times in history, salt,animal hides, gems, and tobacco have been used as mediumsof exchange. Each of these items has certain characteristicsthat make it better or worse than others for use as money.

GUIDE TO READING

Main Idea

In addition to serving asa medium of exchange,money also functions as a store of value, ameasure of value, andpart of a broader financial system.

Key Terms

coin, currency, commer-cial bank, savings andloan association (S&L),credit union, FederalDeposit InsuranceCorporation (FDIC)

Reading Strategy

Organizing InformationAs you read, describe thefunctions of money bycompleting a graphicorganizer like the onebelow.

Read to Learn

• What are the functionsof money?

• What are the differenttypes of money?

• How does the Americanfinancial system operate?

What Is Money?SECTION

Booker T. WashingtonMemorial half-dollar

524 Chapter 24 Money and Bankingwww.commem.com

Functions of Money

Tobacco, for example, is easy to transport,but it is not durable. Gems are easy tocarry but they are not easy to split intosmall pieces to use.

The most familiar types of money todayare coins and currency. Coins are metallicforms of money such as pennies, nickels,dimes—and the Booker T.Washington half-dollar discussed in the feature that beganthis section. Currency includes both coinsand paper money.

There are other forms of money as well.Some people keep their money in the formof checking accounts, and some is kept insavings accounts.You will learn more aboutthese accounts later in the chapter.

Why Money Has ValueWe value and accept money for a simple

reason—we are absolutely sure that some-one else will accept its value as well. If wedid not have this confidence in money, wewould not accept it from someone else forpayment in the first place.

Money by itself generally has no othervalue. A $10 bill costs only a few cents

to make and hasno alternative use.Even coins containsmall amounts ofprecious metal thatare worth muchless than the valueof the coins. Thesame is true ofchecking and savings accounts—they havevalue only because we accept that they have value.

Describing What arecurrency and coins?

The Financial SystemPeople and businesses with money to

save take it to financial institutions. Theseinstitutions do not simply put the money ina safe and leave it there. Instead, they putthe money to work by lending it to otherpeople or businesses that need funds. Thefinancial institution covers its costs—andmakes a profit—from the interest (fees) itcharges for those loans.

Money Through the course of history, people have used many different materi-als—gold, copper, beads, and even feathers—as money. What two types ofmoney are most commonly used today?

Student Web Activity Visitciv.glencoe.com and click onStudent Web Activities—Chapter 24 to learn moreabout the American finan-cial system.

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Types of Financial InstitutionsCommercial banks are financial insti-

tutions that offer full banking services toindividuals and businesses.They are proba-bly the most important part of our financialsystem because of their large areas of influ-ence. Most people have their checking andsavings accounts in commercial banks.

Savings and loan associations (S&Ls)are financial institutions that traditionallyloaned money to people buying homes.Theyalso take deposits and issue savings accountsin return. Today, S&Ls perform many of theactivities that commercial banks do.

Credit unions work on a not-for-profitbasis. They are often sponsored by largebusinesses, labor unions, or government

institutions. They are open only to mem-bers of the group that sponsors them.Credit unions give these workers a financialinstitution that has low costs.

Although these three types of institu-tions have differences, each performs a sim-ilar function. They all act to bring saversand borrowers together.They give people asafe place to deposit their money when theywant to save it and a source for borrowingwhen they need a loan.

Keeping Our Financial System SafeThe United States has one of the safest

financial systems in the world. This highdegree of safety results from two factors—regulation and insurance.

Features of U.S. Currency

526 Chapter 24 Money and Banking

Fine-line printing patterns

Microprinting

Portrait

Serial numbers

Watermark

Color-shiftingink

Low-visionfeature

C24 02C 825989

Federal Reserveindicators

Securitythread

All U.S. currency is produced by the Bureau of Engraving and Printing. Abouthalf of our paper currency is printed in Washington, D.C. The remainder isprinted at a plant in Fort Worth, Texas. What does it mean to say moneyserves as a “medium of exchange”?

Aaron Haupt

Checking for Understanding

1. Key Terms Define the followingterms and use them in sen-tences related to money and theAmerican financial system: coin,savings and loan association(S&L), credit union, currency,commercial bank.

Reviewing Main Ideas2. Explain In the American finan-

cial system, what gives moneyits value?

3. Describe Why is the Americanfinancial system one of thesafest in the world?

Critical Thinking

4. Making Generalizations Whatadvantage does a credit unionoffer its customers?

5. Organizing Information In agraphic organizer like the onebelow, describe the types ofinstitutions in the Americanfinancial system.

Analyzing Visuals

6. Infer Look at the features ofU.S. currency on page 526. Whydo you think currency is printedwith special inks and includes asecurity thread?

SECTION ASSESSMENT

First, financial institutions are closelyregulated. In fact, banking is one of themost regulated industries in the country.Most financial institutions have to report toone or more regulatory agencies on a regu-lar basis. They are required to follow rulesand accounting practices that minimizeunnecessary risk.

Despite the best efforts of regulators,some financial institutions fail. When thishappens, federal deposit insurance protectsconsumers’ deposits. The most importantinsurance agency is the Federal DepositInsurance Corporation (FDIC), a federalcorporation that insures individual accountsin financial institutions for up to $100,000.This means that if a depositor’s bank goesout of business, the person does not lose hisor her savings. The FDIC will send the per-son a check for the amount that was ondeposit at the bank—up to $100,000.

When the banking system collapsed in1934, the resulting crisis wiped out people’sentire savings. Congress passed, and Pres-ident Franklin D. Roosevelt signed, legisla-tion to protect deposits. This legislationcreated the FDIC.

Because accounts in financial institu-tions have some type of government insurance, consumers feel safer whereverthey deposit their money. As a result, they continue to make deposits—and thosedeposits give financial institutions thefunds they need to make loans that helpfuel economic growth.

Explaining What is thepurpose of the Federal Deposit InsuranceCorporation?

�BE AN ACTIVE CITIZEN�7. Compare Obtain brochures from

several banks and savings andloans. Compare their servicesand fees. If you had $1,000,which institution would youchoose? Explain your choice.

Chapter 24 Money and Banking 527

AmericanFinancial

Institutions

Susan B. Anthony was the firstwoman whose portrait was

used on U.S. money.You might think that Susan B. Anthonyor Sacagawea were the first womento be featured on money, but thatisn’t true. Martha Washingtonappeared on the one-dollar silver certificates in 1886, 1891, and again in 1896.

Citizenship

Why Learn This Skill?The world is divided into 24 different timezones. Six of them divide the United States.Communicating or traveling between themrequires making time adjustments.

Learning the SkillTo read a time zone map, follow these steps:• Trace the vertical sections dividing the map.

Each section represents a time zone.• Observe the east-west progression of the

zones across the map. The starting point is0° longitude.

• Read the labels showing the time in differ-ent zones.

• Subtract or add hours among zones todetermine time differences.

Practicing the SkillRead the map above; then answer the follow-ing questions.

Which time zone is located farther west,the central or mountain time zone?When it is 3 P.M. in Los Angeles, whattime is it in New York City?

2

1

528 Chapter 24 Money and Banking

Practice key skills with Glencoe’sSkillbuilder Interactive WorkbookCD-ROM, Level 1.

Reading a Time Zone Map

120°W150°W

30°N

60°N

90°W 60°W

N

S

EW

1,000 kilometers0Mercator projection

1,000 miles0

Inte

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ate

Line

Hawaii-Aleutian

Time

AlaskaTime

PacificTime

MountainTime

CentralTime

EasternTime

AtlanticTime

New-foundland

Time

1:00 P.M.

2:00 P.M. 3:00 P.M. 4:00 P.M. 5:00 P.M. 6:00 P.M. 7:00 P.M.

7:30 P.M.

12:00 P.M.

Chicago

Los Angeles

New YorkCity

Washington, D.C.

A banker in Chicago needs to attend a meet-ing in Washington, D.C., starting at 1 P.M.The total travel time is three hours. Whattime must the Chicago banker leave?

Applying the Skill

U.S. Time Zones

GUIDE TO READING

Main Idea

As our nation’s centralbank, the FederalReserve is a regulatoryagency; it serves as thegovernment’s bank. Itcontrols monetary policyin the United States.

Key Terms

central bank, FederalOpen Market Committee(FOMC), monetary policy, discount rate,reserve, open marketoperations

Reading Strategy

Categorizing InformationAs you read, describe in agraphic organizer like theone below the variousroles played by theFederal Reserve in theeconomy of the UnitedStates.

Read to Learn

• How is the FederalReserve System organized?

• What role does theFederal Reserve play in the economy?

The FederalReserve System

SECTION

The Federal Reserve cannot put adollar in anyone’s pocket, provide jobs for verymany people, or buy more than a tiny numberof goods and services that the nation produces.But the Federal Reserve can have an enormousimpact on how you spend, invest, or borrowmoney. This November 2001 news article fromCNN/Money describes one of the governmentbank’s actions: “The Federal Reserve cut interestrates by a half-percentage point Tuesday, itstenth cut of the year . . . , in an effort to keepAmerican consumers spending and boost theeconomy. . . . [T]he central bank’s goal is . . . tolet consumers and U.S. stock markets know it’sdoing everything it can to keep the world’s largesteconomy from slowing down too much.”

Structure and OrganizationThe Federal Reserve System, known as the Fed, is the

central bank of the United States. When people or corpora-tions need money, they borrow from a bank.When banks needmoney, they borrow from the Fed.The Federal Reserve Systemis a banker’s bank.

The United States is divided into 12 Federal Reserve dis-tricts. Each district has one main Federal Reserve Bank. Inaddition, most Federal Reserve Banks have branch bankswithin their districts.

Thousands of banks in the United States are members ofthe Federal Reserve System. Federally chartered commercialbanks called national banks are required to be members of theFed. State-chartered banks may also become members.Member banks are owners of the Fed because they buy stockin the Fed and earn dividends from it.

Board of GovernorsWhen the Fed was established in 1913, the government did

not have enough money to set up a new central bank. To raisethat money, it required the largest banks to buy stock in the

The decisions ofthe Federal

Reserve Boardaffect the nation’s

money supply.

Chapter 24 Money and Banking 529Rob Crandall/Stock Boston

The FederalReserve

530 Chapter 24 Money and Banking

Fed.To prevent these banks from having toogreat an influence over the Fed, the lawrequired that the president appoint and theSenate ratify the seven members who makeup the Board of Governors. The presidentselects one of the board members to chair theBoard of Governors for a four-year term.

Board members and the chairperson areindependent of the president. Even Con-gress exercises little control or influenceover the board, because the board does notdepend on Congress for an annual appro-priation for operating expenses. This allowsthe Board of Governors to make economicdecisions independent of political pressure.

Advisory CouncilsTo keep informed of developments in

the economy, the Fed has several advisorycouncils. One council reports on the general

condition of the economy in each district.Another reports on financial institutions. Athird reports on issues related to consumerloans. Officials of the district banks serveon these councils.

The major policy-making group withinthe Fed is the Federal Open MarketCommittee (FOMC). The FOMC makesthe decisions that affect the economy as awhole by manipulating the money supply.The FOMC has 12 members. Seven arepermanent members of the Board. Theother five come from the district banks, andtheir memberships are rotated.

Describing How is the Fedorganized?

Structure of the Federal Reserve System

The Federal Reserve System, including its 12 districtbanks, is our nation’s central bank. Who owns the Fed?

Federal Reserve Seal

BOARD OF GOVERNORSPARTICIPATES ADVISES7 members appointed by

the president andconfirmed by Congressto serve 14-year terms

FEDERAL OPENMARKET COMMITTEE

7 Board members5 District bank presidents

New York City

PhiladelphiaBosto

n

Cleveland

RichmondAtlanta

Chicago

St. Louis

Minneapolis

Kansas City

Dallas

San Francisco

FEDERAL ADVISORYCOMMITTEES

12 District Banks

Louis Psihoyos/Matrix

Chapter 24 Money and Banking 531

Functions of the FedThe Fed has two main regulatory func-

tions: it deals with banking regulation andconsumer credit.

The Fed oversees many large commer-cial banks. If two national banks wish tomerge, the Fed will decide whether theaction will lessen competition. If so, theFed could block the merger. It also regu-lates connections between American andforeign banking. It oversees the interna-tional business of both American banks andforeign banks that operate in this country.

The Fed enforces many laws that dealwith consumer borrowing. For example,laws require that lenders spell out thedetails of a loan before a consumer borrowsmoney.The Fed specifies what informationlenders must provide.

Acting as the Government’s BankThe Fed also acts as the government’s

bank in three ways. First, it holds the gov-ernment’s money. Government revenuesare deposited in the Fed.When the govern-ment buys goods, it does so by drawing onthese accounts.

Second, the Fed sells U.S. governmentbonds and Treasury bills, which the govern-ment uses to borrow money. When some-one wants to buy a $10,000 Treasury bill,he or she does so at a Fed district bank.When the bill reaches maturity, he or shesimply goes back to a district bank andexchanges the bill for a check drawn fromthe government’s account.

Third, the Fed issues the nation’s cur-rency, including paper money and coins.Thismoney is produced by government agencies,but the Fed controls its circulation. Whencoins and currency become damaged, bankssend them to the Fed for replacement.

Identifying Whatorganization regulates foreign banks that do business in the United States?

Conducting Monetary PolicyOne of the Fed’s major responsibilities is

to conduct monetary policy. Monetary pol-icy involves controlling the supply of moneyand the cost of borrowing money—credit—according to the needs of the economy. TheFed can increase the supply of money ordecrease the supply.

AP/Wide World Photos

Alan Greenspan (1926– )Alan Greenspan, chairman ofthe Federal Reserve Board,knows how to spot a reces-sion. The son of a stockbrokerand a retail worker, the cau-tious economist lived throughthe Great Depression as achild. President Gerald Fordappointed him as an economicadviser when the economyplunged in the 1970s. Then, just three monthsafter Greenspan was named chairman of theFederal Reserve Board in 1987, stock pricescrashed. Since then, four presidents—RonaldReagan, George H.W. Bush, Bill Clinton, andGeorge W. Bush—have relied on Greenspan tobalance the economy somewhere betweenboom and bust.

Many Americans consider Greenspan sec-ond only to the president in terms of power.Consumers and investors wait to see what he will do with interest rates—raise them orlower them. What many don’t know is thatGreenspan loves musical notes almost asmuch as banknotes. He studied at the JuilliardSchool of Music and traveled for a year as aclarinet and saxophone player with a swingband. Today Greenspan has a fan club—butit’s for his ability to handle economic rhythmsrather than musical rhythms.

532 Chapter 24 Money and Banking

Changing the Supply of MoneyThe supply and demand diagrams on

this page show how monetary policy works.Because the amount of money is fixed at anygiven time, the money supply is shown as avertical line. In the diagrams, the point wheresupply of money and demand for moneymeet sets the interest rate—the rate that peo-ple and businesses must pay to borrowmoney.The Fed can change interest rates bychanging the money supply. So, if the Fedwants a lower interest rate, it must expand themoney supply by moving the supply curve tothe right.This is shown in Panel A. If the Fedwants to raise the interest rate, it has to con-tract the money supply by shifting the supplycurve to the left (see Panel B).

The Fed uses several tools to manipu-late the money supply. First, the Fed canraise or lower the discount rate. The discount rate is the rate the Fed chargesmember banks for loans. If the Fed wantsto stimulate the economy, it lowers the

discount rate. Low discount rates encour-age banks to borrow money from the Fedto make loans to their customers. If the Fedwants to slow down the economy’s rate ofgrowth, it raises the discount rate to dis-courage borrowing. This contracts themoney supply and raises interest rates.High discount rates mean banks will bor-row less money from the Fed.

Second, the Fed may raise or lower thereserve requirement for member banks.Member banks must keep a certain per-centage of their money in Federal ReserveBanks as a reserve against their deposits. Ifthe Fed raises the reserve requirement,banks must leave more money with the Fed,and they have less money to lend.When theFed lowers the reserve requirement, mem-ber banks have more money to lend.

Third, the Fed can change the moneysupply through open market operations.These are the purchase or sale of U.S. gov-ernment bonds and Treasury bills. Buying

Monetary Policy and Interest Rates

Buying and selling bonds affects the money sup-ply and, then, interest rates. What happens tointerest rates when the money supply contracts?

Demand forMoney

New MoneySupply

Expansion of Money Supply

Contraction of Money Supply

INTE

RES

T R

ATE

INTE

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ATE

7%

6%

QUANTITY OF MONEY QUANTITY OF MONEY

Demand forMoney

New MoneySupply

8%

7%

(B) EFFECT OF SELLING BONDS(A) EFFECT OF BUYING BONDS

Checking for Understanding

1. Key Terms Define the followingterms and use them in sen-tences related to the FederalReserve: central bank, discountrate, monetary policy, open mar-ket operations, Federal OpenMarket Committee (FOMC).

Reviewing Main Ideas2. Identify What is the Federal

Reserve System?3. Describe What is the function

of the Federal Open MarketCommittee (FOMC)?

Critical Thinking

4. Drawing Conclusions Whatwould Fed officials likely do ifprices rise too quickly?

5. Cause and Effect In a graphicorganizer like the one below,explain the effects of the following causes.

Analyzing Visuals

6. Interpret Study the two graphson page 532. What happens tointerest rates when the moneysupply expands?

SECTION ASSESSMENT

bonds from investors puts more cash ininvestors’ hands, increasing the money sup-ply.This shifts the supply curve of money tothe right, which lowers interest rates. Con-sumers and businesses borrow more money,which increases consumer demand andbusiness production. As a result, the econ-omy grows. If the Fed decides that interestrates are too low, the Fed can sell bonds.

Why Is Monetary Policy Effective?Monetary policy can be implemented

efficiently. Decisions made by politiciansoften take a long time because the views ofmany different people have to be taken into

account. The Fed, however, can movequickly. The Fed can also fine-tune its pol-icy. Fed officials can watch the results ofselling bonds or raising the discount rate. Ifthe desired result has not occurred, theycan act again, selling even more bonds orraising the discount rate slightly higher.

Interest rates influence business invest-ment and consumer spending. The Fed canaffect these activities by manipulating interestrates. Finally, Fed officials are largely free ofthe constraints faced by politicians.

Describing What happenswhen the Fed raises the reserve requirement?

�BE AN ACTIVE CITIZEN�7. Compare Contact three banks in

your community. Find out whatinterest rate they are chargingon loans for a three-year loan ona new car. Compare this to thecurrent Fed discount rate. Whichis higher or lower?

Chapter 24 Money and Banking 533

Causes EffectsFOMC buys U.S.government bonds

Fed sells bonds

Analyzing Visuals When toomuch money enters the econ-omy too quickly, spendingincreases—and inflation results.To help prevent this situationfrom occurring, the FederalReserve can order banks toincrease the amount of fundsthey keep in reserve, thereby“tightening” the money supply.What visual clues does the car-toonist use to convey the con-cept of the Federal Reserve“tightening” the money supply?

Thaves/The Cincinnati Post

GUIDE TO READING

Main Idea

After people deposit theirmoney in a savings orchecking account, banksmake a profit by lendingsome of those deposits toother consumers.

Key Terms

checking account,savings account,certificate of deposit(CD)

Reading Strategy

Organizing InformationAs you read, complete agraphic organizer like theone below to show themain activities of banks.

Read to Learn

• How are banks started?• How do banks operate

and make money?

How BanksOperate

SECTION

A student takespart in banking.

534 Chapter 24 Money and BankingLaura Dwight/CORBIS

Activities of Banks

“Washington Elementary School is working with the Norcobranch of the Arrowhead Credit Union on a program to get childrenused to saving money. Once a month, on Savings Day,a credit union employee visits the school to collect deposits from students adding to their savings accounts. . . . The accounts have no monthly fee and can be opened with a minimum of $1. Parents or guardians must sign an application for their child to participate. . . . Fifth-grader Sebastian Ruiz has been making deposits for months. . . .He says he has a special reason for adding more money each month. ‘I’ve been saving up to buy my moma birthday present,’ he said.”—Nicole Buzzard, Riverside, California,

Press-Enterprise, January 29, 2002

Banking Services The students at Washington Elementary School are learn-

ing a valuable lesson. If they save their money, small amountscan grow larger—large enough to allow them to buy somethingspecial. Millions of Americans put their money in financialinstitutions, just like these students are doing. In this sectionyou’ll find out what banks and other financial institutions dowith that money.

Banks are started by investors. They pool financial invest-ments, money, property, and even certificates of deposit toprovide banking services to people in their community. If 10investors each put up $10,000, the new bank would have$100,000 in funds.

Some of this money, of course, would be needed to coverexpenses, such as rent, furniture and supplies, and salaries forworkers. A large portion, though, would be available to lend toconsumers or businesses.

A bank that simply relied on the funds raised by its initialinvestors would not grow. It would have only a limited amountof money available for loans. Banks need to attract depositorsin order to survive.

Accepting DepositsBanks hope to attract customers

who make deposits. They offer checkingaccounts, which allow customers to writechecks or use check cards. Checks can beused to pay bills or to transfer money fromone person to another quickly and efficiently.

People typically do not keep money in checking accounts for very long. Theydeposit the money and then use the funds tomeet their regular expenses—buying food,paying for telephone service, and so on.

Sometimes people have some moneythat they can leave untouched for longerperiods of time. They put these funds in adifferent kind of account. With savingsaccounts, banks pay interest to customersbased on how much money they havedeposited. Because the bank pays interest,the money in a savings account actuallygrows larger the longer it is left in the bank.

Banks also offer certificates of deposit(CDs). With these products, customersloan a certain sum to the bank for a specificperiod of time. In return, the bank paysinterest during that time period. When thetime period ends, the customers can turn in their certificates and regain control oftheir money. They cannot withdraw theirmoney any sooner unless they pay a sub-stantial penalty.

People who buy CDs lose control oftheir money for some time. On the otherhand, banks tend to pay higher rates forCDs than for savings accounts.

Making LoansOne of the principal activities of banks

is to lend money to businesses and con-sumers. Loans can actually increase thesupply of money.

Suppose that Maria deposits $1,000 inthe bank. The bank can use some of thatmoney to make loans to other customers.Those people then deposit the money theyhave borrowed, and that money, too, can beloaned to new customers. In that way, theamount of money in circulation continuesto grow.

Describing What is achecking account?

Changes in the

Banking IndustryThe history of central banking in the

United States does not begin with theFederal Reserve. The Bank of the UnitedStates received its charter in 1791 from theCongress and was signed by PresidentWashington. Like state banks, the Bank was

Obtaining Loans Con-sumers often need a loanfrom a financial institutionto make an expensivepurchase. From whatsources do financial insti-tutions obtain funds tomake loans?

Bob Daemmrich/Stock Boston

536 Chapter 24 Money and Banking

privately owned and operated.The Bank ofthe United States, however, was muchlarger than any of the state banks and had afederal, rather than a state, charter. TheBank acted much like the currentDepartment of the Treasury in that it col-lected fees and made payments on behalf ofthe federal government. The charter of theBank was allowed to lapse in 1811, in partbecause state banks opposed the Bank.

The Second Bank of the U.S. was char-tered in 1816 with the same powers as theFirst Bank. After the lapse of the SecondBank’s charter, the only banks in the nationwere those chartered by the states.The fed-eral government neither chartered banksnor regulated the state banks.

State banks issued their own currencyby printing their notes at local printingshops. People who wanted loans borrowedthese notes and paid them back with inter-est. Because the federal government did notprint paper currency until the Civil War,most of the money supply was paper cur-rency that privately owned, state-charteredbanks issued.

The National Banking ActIn 1863, Congress passed the National

Banking Act. This act created the systemknown as dual banking, in which bankscould have either a state or federal charter.The federally chartered private banks issuednational banknotes, or national currency,which were uniform in appearance andbacked by U.S. government bonds.

The Federal ReserveThe National Banking Act corrected

some of the weaknesses of the pre-Civil Warbanking system. Bank crises, however, didnot disappear. Panics occurred in 1873,1884, 1893, and 1907. The Panic of 1907resulted in the passage of the FederalReserve Act of 1913.

The Federal Reserve serves as thenation’s central bank with power to regulatereserves in national banks, make loans tomember banks, and control the growth ofthe money supply. In 1914 the systembegan issuing paper money called FederalReserve notes. These notes soon becamethe major form of currency in circulation.

The Great Depression The Great Depression of the 1930s

dealt a severe blow to the banking industry.Stocks and other investments owned bybanks lost much of their value. Bankruptbusinesses and individuals were unable torepay their loans.

A financial panic forced thousands ofbanks to collapse. The number of commer-cial banks declined from 26,000 in 1928 toabout 14,000 in 1933. When Franklin D.Roosevelt became president, he declared a“bank holiday,” closing all banks. Eachbank was allowed to reopen only after itproved it was financially sound. Congresspassed the Glass-Steagall Banking Act,establishing the Federal Deposit InsuranceCorporation (FDIC). The new agency

AP/Wide World Photos

Financial Services Financial institutions pro-vide a variety of products and services to satisfyconsumers’ needs. What are certificates ofdeposit?

Checking for Understanding

1. Key Terms Define the followingterms and use them in sen-tences related to the bankingindustry: checking account,savings account, certificate of deposit (CD).

Reviewing Main Ideas2. Describe What advantage do

savings accounts have overcertificates of deposit?

3. Explain Why must banks keep a reserve?

Critical Thinking

4. Evaluating Information If yourgoal was to get the highest inter-est rate for your savings, whatkind of account would be best?

5. Understanding Cause and EffectIn a graphic organizer like theone below, show how banksmake money.

Analyzing Visuals

6. Explain Study the photographthat appears on page 535. Writea paragraph explaining what ishappening in the picture.

SECTION ASSESSMENT

helped restore public confidence in banksby insuring funds of individual depositorsin case of a bank failure.

The Savings and Loan Crisis Because of the many banking failures

during the Great Depression, financial institutions had been closely regulated by the federal government. By the late1970s almost all financial institutions werebegging for relief from federal regulations.Congress began the process of deregula-tion—relaxing restrictions on their activities.

In 1982 Congress decided to allow theS&Ls to make higher-risk loans and invest-ments. When these investments went bad,hundreds of S&Ls failed in the late 1980sand early 1990s. The federal governmentinsured the assets of most savings and loandepositors; and as the banks failed, it founditself saddled with large debts.The full costof bailing out these institutions cost taxpay-ers an estimated $200 billion. The FDICtook over regulation of the S&L industry.

The Gramm-Leach-Bliley ActThe Gramm-Leach-Bliley Act, passed

in 1999, permits bank holding companiesgreater freedom to engage in a full range

of financial services, including banking,insurance, and securities. Some analystsbelieve that the act will lead to the forma-tion of “universal banks” that offer a fullrange of financial services. Critics of thelaw warn that the act may in due courseweaken competition for financial servicesin the United States. Others caution thatthe act will lead to more sharing ofcustomer information among the affili-ated companies, therefore damaging pro-tection of privacy.

Explaining Why diddeposit insurance develop in the 1930s?

�BE AN ACTIVE CITIZEN�7. Compare Obtain brochures from

at least three banks that explainthe banks’ services to customers.How are they alike? How are theydifferent?

Chapter 24 Money and Banking 537

Debit CardsDebit cards look like credit cards, but theywork a lot differently. Instead of purchasinggoods on credit, the debit card transfers moneydirectly from the cardholder’s bank account tothe seller’s account. Debit cards work on theprinciple of “buy now, pay now.” Talk withseveral people who have both a debit card anda credit card. Ask them to discuss the prosand cons of each type of card. Present yourfindings in the form of a chart.

What Banks Do: Result:

Profits

Reviewing Key TermsWrite the key term that best matches eachdefinition below.

1. the policy that involves changing the rate ofgrowth of the supply of money in circulation

2. a bank whose main functions are to acceptdeposits and lend money

3. a certain percentage of deposits that bankshave to set aside as cash in their own vaultsor as deposits in their Federal Reserve dis-trict bank

4. paper money issued by the Federal Reserve

5. the most powerful agency of the FederalReserve System

6. financial institutions that traditionally loanedmoney to people buying houses

7. a federal corporation that insures individualaccounts in financial institutions up to$100,000

8. a bank that can lend money to other banks intimes of need

9. the interest rate the Federal Reserve chargeson its loans

10. an account in which customers receive inter-est based on how much money they havedeposited

Reviewing Main Ideas 11. Name two forms of money in addition to

currency and coin.

12. What is the purpose of the Federal DepositInsurance Corporation (FDIC)?

13. Who controls the Federal Reserve System?

14. What are the two main regulatory functionsof the Fed?

15. What kind of account requires the deposit to remain in the bank for a certain period of time?

16. In what kind of account do savers have themost control over their money?

Section 1

• Money is a part ofthe broad financialsystem, and itserves threefunctions. It is amedium of exchange,a store of value, anda measure of value.

Section 3

• Banks provideservices toconsumers, such as savings andchecking accounts,and they make aprofit by lendingmoney to consumers.

Using Your Foldables Study OrganizerUse your completed foldable to create a 10-question quiz. Prepare an answerkey on a separate sheet of paper. Tradequizzes with a classmate and then gradeeach other’s answers.

538(t)Russell D. Curtis/Photo Researchers, (c)Mark Burnett/Stock Boston, (b)AP/Wide World Photos

Section 2

• The Federal Reservewields a great dealof power in oureconomy. It servesas the nation’scentral bank, itcontrols monetarypolicy, and itregulates com-mercial banks.

Critical Thinking17. Drawing Conclusions If you read in the

newspaper that the Federal Reserve hadjust lowered the discount rate, what mightyou conclude about the economy?

18. Organizing Information In a graphicorganizer like the one below, explain thereasons for the Federal Reserve’s effective-ness in using monetary policy.

Practicing Skills 19. Reading a Time Zone Map Study the map

on page 528. It takes two hours to fly fromDenver, Colorado, in the mountain timezone to Chicago, Illinois, in the central timezone. If you leave Denver at 2 A.M. Friday,what time will it be in Chicago when youarrive?

Analyzing Visuals20. Look at the graphs on page 532. What effect

does selling bonds have on interest rates?

Economics Activity21. For two days, keep track of any time you use

money, see money used, or see dollar val-ues written out somewhere. Try to determinein each instance which of the functions themoney is serving.

22. During the 1930s, the United States under-went a tragic economic depression. Work ingroups to research the following aspects ofdaily life.

• What happened to income and prices?• What happened to savings accounts?• What happened to the availability of jobs?

Each member of your group should researchone of the three questions. Then summarizethe group’s notes to develop a presentationthat describes what actually happenedduring the Great Depression.

Technology Activity23. On the Internet, go to the Federal Reserve

education Web site at www.federalreserveeducation.org/. From the “Choose aCategory” drop-down menu, select“Resources and Research.” Then click on“Economic Literacy Project.” On the rightside of the Web page under “Test Yourself,”click on “Mpls. Fed’s economic literacyquiz.” Take the quiz and see how you do.What did you learn about the economy bytaking the test?

Self-Check Quiz Visit the Civics Today Web site atciv.glencoe.com and click on Self-Check Quizzes—Chapter 24 to prepare for the chapter test.

Standardized Test Practice

Directions: Choose the bestanswer to the following question.

If the reserve requirement is 5 percent,how much of a $100 deposit may a banklend?F $5G $95H $100J $50

Test-Taking TipRemember that a reserve requirement isthe percentage of a deposit that a bankmust put aside and not use for loans.

Chapter 24 Money and Banking 539

Reasons for Effectivenessof the Fed’s Monetary Policy