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Chapter Menu
Chapter Introduction
Section 1: The Evolution, Functions, and Characteristics of Money
Section 2: The Development of Modern Banking
Section 3: The Federal Reserve System and Monetary Policy
Visual Summary
Chapter Intro 1
Congratulations, you have just been hired by the federal government to completely redesign our money. Before getting started on your design, think about how we use money. Working with a partner, create a design for the new bills and coins. Share your finished product with the class and explain why your money will serve the same purpose(s) as our existing money. Read Chapter 14 to learn more about our monetary system and how the government works to promote economic stability and growth.
Chapter Intro 2
Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth.
Section 1-Preview
Section Preview
In this section, you will learn that money functions as a medium of exchange, a measure of value, and a store of value.
Section 1-Key Terms
Content Vocabulary
• Federal Reserve System (Fed)
• Federal Reserve notes
• barter economy
• commodity money
• fiat money
• specie
• monetary unit
• medium of exchange
Academic Vocabulary
• evolution • converted
• measure of value
• store of value
• demand deposit accounts (DDAs)
• M1
• M2
A. A
B. B
Section 1
Would you prefer to obtain goods by bartering or exchanging paper currency?
A. bartering
B. exchanging paper currency
A B
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Section 1
The Evolution, Functions, and Characteristics of Money
• The Federal Reserve System (Fed) issues most of the money in U.S. circulation.
• Paper currency—Federal Reserve notes
Section 1
The Evolution of Money (cont.)
• In a barter economy, exchange of goods and services must have a “mutual coincidence of wants.”
• Money in primitive societies
– Commodity money
– Fiat money
Section 1
• The Continental Congress issued paper money to finance the Revolutionary War in 1775.
• Colonists also used specie like English shillings, Austrian talers, and Spanish pesos brought over by immigrants.
• The dollar is the basic monetary unit of currency in the U.S. money system.
The Evolution of Money (cont.)
A. A
B. B
C. C
Section 1
A “mutual coincidence of wants” refers to
A. A barter economy
B. Commodity money
C. Fiat money
A B C
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Section 1
Characteristics and Function of Money
Anything can be used as money as long as it is portable, durable, divisible, and limited in supply.
Section 1
• Characteristics of money
– Portable
– Durable
– Divisible into smaller units
– In limited supply
Characteristics and Function of Money (cont.)
Section 1
• Functions of money in the economy
– Medium of exchange
– Measure of value
– Store of value
Characteristics and Function of Money (cont.)
Section 1
• Today’s money
Characteristics and Function of Money (cont.)
– Federal Reserve notes
– Metallic coins issued by the U.S. Bureau of the Mint
– Demand deposit accounts (DDAs)
Section 1
• The Fed has different definitions for the money supply.
– M1
– M2
Characteristics and Function of Money (cont.)
A. A
B. B
C. C
D. D
Section 1
A B C D
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What areas of the world were participants in the “triangular trade”?
A. Africa, Spain, and the North American colonies
B. Spain, North American colonies, and the Caribbean
C. Africa, Caribbean, and North American colonies
D. Caribbean, Spain, and Africa
Section 2-Preview
Section Preview
In this section, you will learn that many different types of money have been used throughout American history, and fiat money is used today.
Section 2-Key Terms
Content Vocabulary
• state bank
• legal tender
• national bank
• national currency
• gold certificate
• silver certificate
• central bank
• bank run
• bank holiday
Academic Vocabulary
• clauses • initially
• fractional reserve system
• legal reserves
• reserve requirement
• member bank reserves (MBR)
• excess reserves
A. A
B. B
C. C
Section 2
Do you think the government should regulate banking?
A. Yes
B. No
C. Sometimes
A B C
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Section 2
The Development of Banking in America
The United States experimented with many different kinds of money before it created the Federal Reserve System.
Section 2
The Development of Banking in America (cont.)
• Abuse and other problems in an unregulated money supply led to government intervention.
• After ratification of the U.S. Constitution, state banks issued their own paper currency.
Section 2
The Development of Banking in America (cont.)
• Currency problems
– Each bank issued own currency in different sizes, colors, and denominations.
– Banks were tempted to issue more notes than backed with silver or gold.
– Counterfeiting became a problem.
Section 2
The Development of Banking in America (cont.)
• Congress printed paper currency in 1861 declaring it legal tender.
• Individuals referred to new paper notes as “greenbacks.”
• The National Currency Act in 1863 created a National Banking System (NBS).
Section 2
The Development of Banking in America (cont.)
• A national bank issued its own notes called national currency.
– This was backed with bonds banks purchased from federal government.
– Government was engaged in bank inspections.
– 10% tax applied to all privately issued bank notes.
Section 2
The Development of Banking in America (cont.)
– Gold certificates were issued.
– Silver certificates were introduced in 1878.
A. A
B. B
C. C
D. D
Section 2
A B C D
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What event changed the commercial banking industry in the United States forever?
A. Revolutionary War
B. Industrialization
C. Civil War
D. Mining of silver
Section 2
The Creation of the Fed
The Federal Reserve System is the nation’s central bank.
Section 2
• By the 1900s, the National Banking System was showing signs of strain.
The Creation of the Fed (cont.)
– Difficulty in providing enough currency for a growing nation
– System not designed for popular method of paying—checking accounts
– Minor recessions caused major problems for banks and lending institutions.
Section 2
• Congress created the Federal Reserve System, or Fed, as the nation’s central bank in 1913.
The Creation of the Fed (cont.)
– Membership required by all national banks
– State-chartered banks were eligible for membership.
– Membership banks purchased stock in the Fed.
Section 2
• The Fed issued its own currency, replacing all other types of currency.
• Despite creation of the Fed, banking industry was overextended when Great Depression began in 1929.
The Creation of the Fed (cont.)
State and National Banks
Section 2
• Banks did not have deposit insurance for customers.
• Bank runs caused many banks to fail.
• Bank holiday—declared by President Roosevelt March 5th, 1933
The Creation of the Fed (cont.)
Section 2
• The Banking Act of 1933 (Glass-Steagall Act) created the FDIC:
The Creation of the Fed (cont.)
– Insures customer deposits to a maximum specified amount if case of failure
– Provides sense of security
– Can seize banks and sell them if in danger of collapse
Section 2
• Popularity of checking accounts led to reforms in the use of fractional bank reserves.
• Fractional reserve system—banks are required to keep only a portion of their total deposits in the form of legal reserves.
• Size of reserve is determined by a reserve requirement and is set aside in vault as cash or in a member bank reserve (MBR).
The Creation of the Fed (cont.)
Section 2
• Remaining excess reserves represents the bank’s lending power and can be loaned out.
The Creation of the Fed (cont.)
Fractional Reserves and the Money Supply
A. A
B. B
C. C
D. D
Section 2
A B C D
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What is the percentage of reserve requirement currently used by banks?
A. 25%
B. 15%
C. 20%
D. 10%
Section 3-Preview
Section Preview
In this section, you will learn how the Federal Reserve System is organized and conducts monetary policy.
Section 3-Key Terms
Content Vocabulary
• member bank
• monetary policy
• interest rate
• easy money policy
• tight money policy
• open market operations
• discount rate
• prime rate
Academic Vocabulary
• aspects • functions
• quantity theory of money
• currency
• coins
• bank holding companies
• Regulation Z
A. A
B. B
Section 3
The chairman of the Federal Reserve Board is considered to be the second most powerful individual in the nation.
A. True
B. False
A B
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Section 3
Structure of the Fed
The Fed is organized as a corporation, owned by its member banks, and directed by a government-appointed board.
Section 3
Structure of the Fed (cont.)
• The Fed
– Privately owned by its member banks
– Directed by a seven-member Board of Governors
• Appointed by the President and approved by the Senate
• Each serves a 14-year term
• Primarily a regulatory and supervisory agency to member banks
Section 3
Structure of the Fed (cont.)
• The Fed
– Operates 12 Federal Reserve district banks
• The Federal Open Market Committee (FOMC) makes decisions about interest rates.
– Twelve voting members including seven-member Board of Governors
– Meet eight times a year to review the economy and make monetary changes
Section 3
Structure of the Fed (cont.)
• Three committees advise the Board of Governors.
– The Federal Advisory Council advises on matters concerning overall health of economy.
– The Consumer Advisory Council advises on consumer credit laws.
Profiles in Economics:Ben S. Bernanke
Section 3
Structure of the Fed (cont.)
• Three committees advise the Board of Governors.
– Thrift Institutions Advisory Council advises on matters pertaining to Savings and Loan industry.
Structure of the Federal Reserve System
A. A
B. B
C. C
D. D
Section 3
A B C D
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What are some trends in the economy that the FOMC reviews?
A. Construction
B. Employment
C. Consumer spending
D. All of the above
Section 3
Conducting Monetary Policy
Monetary policy involves expanding and contracting the money supply to change the level of interest rates.
Section 3
• The Fed is responsible for monetary policy.
• More money is demanded when the interest rate is low.
• Easy money policy
• The Fed restricts the size of the money supply in a tight money policy.
Conducting Monetary Policy (cont.)
Short-Run Impact of Monetary Policy
Section 3
• Fed uses three major tools to conduct monetary policy:
– Reserve requirement
– Open market operations
– Discount rate—Prime rate
Conducting Monetary Policy (cont.)
The Reserve Requirement as aTool of Monetary policy
Section 3
• Impact of monetary policy
Conducting Monetary Policy (cont.)
– Impact is complex
– Length of time for impact is unknown.
– Money supply also affects general price level—quantity theory of money.
Monetary Policy Tools
A. A
B. B
C. C
Section 3
If the Fed lowers the discount rate, what effect does that have on your purchase of a used car?
A. Interest rate decreases, lowering the cost of financing.
B. Interest rate increases; therefore, cost of financing goes up.
C. No impact on your purchase A B C
0% 0%0%
Section 3
Other Fed Responsibilities
As the nation’s central bank, the Fed is responsible for most aspects of banking and the payments system.
Section 3
• Additional Fed responsibilities
Other Fed Responsibilities (cont.)
– Maintaining the money supply
• Currency—notes printed by the U.S. Bureau of Engraving and Printing
• Coins produced by the Bureau of the Mint
Section 3
• Additional Fed responsibilities
Other Fed Responsibilities (cont.)
– Maintaining the payments system
• Electronic transfer of funds via clearinghouses
• Internet banking
Section 3
• Additional Fed responsibilities
Other Fed Responsibilities (cont.)
– Regulating and supervising banks
• Establishes and monitors guidelines governing banking behavior including bank holding companies
Section 3
• Additional Fed responsibilities
Other Fed Responsibilities (cont.)
– Preparing consumer legislation
• Implements consumer legislation such as federal Truth in Lending Act
– Regulation Z
• Serving as the federal government’s bank
A. A
B. B
C. C
D. D
Section 3
A B C D
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Which is not considered an action conducted by the government’s bank?
A. Nationwide auctions of Treasury securities
B. Regulation Z disclosures
C. Maintains demand deposit accounts for Treasury
D. Operation of clearinghouses
Money People began using money because it made buying and selling easier than bartering.
VS 1
VS 2
Development of Modern Banking Problems with the money supply before 1914 led to the creation of the Federal Reserve System.
VS 3
Monetary Policy The Federal Reserve System has three main policy tools at its disposal. It uses these tools to affect the money supply and interest rates.
Figure 1
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Profile
Ben S. Bernanke (1953– )
• distinguished academic career as an economics professor
• sworn in as chairman of the Federal Reserve Board in 2006
Concept Trans Menu
Economic Concepts Transparencies
Transparency 5 Economic Institutions and Incentives
Transparency 6 Exchange, Money, and Interdependence
Transparency 18 Monetary Policy
Select a transparency to view.
Concepts Trans 1
Concepts Trans 2
Concepts Trans 3
DFS Trans 1
DFS Trans 2
DFS Trans 3
Vocab1
Federal Reserve System (Fed)
privately owned, publicly controlled, central bank of the United States
Vocab2
Federal Reserve notes
paper currency issued by the Fed in use today
Vocab3
barter economy
moneyless economy that relies on trade or barter
Vocab4
commodity money
money that has an alternative use as an economic good
Vocab5
fiat money
money by government decree
Vocab6
specie
money in the form of gold or silver coins
Vocab7
monetary unit
standard unit of currency in a country’s money supply
Vocab8
medium of exchange
money or other substance generally accepted as payment for goods and services
Vocab9
measure of value
a function of money that allows it to serve as a common way to express value
Vocab10
store of value
a function of money that allows people to preserve value for future use
Vocab11
demand deposit account (DDA)
account from which funds can be removed by writing a check and without having to gain prior approval from the depository institution
Vocab12
M1
component of the money supply relating to money’s role as a medium of exchange
Vocab13
M2
component of the money supply relating to money’s role as a store of value
Vocab14
revolution
an overthrow of government
Vocab15
converted
changed into a different form
Vocab16
state bank
bank that receives its charter from the state in which it operates
Vocab17
legal tender
fiat currency that must be accepted for payment by decree of the government
Vocab18
national bank
commercial bank chartered by the National Banking System
Vocab19
national currency
currency backed by government bonds and issued by commercial banks in the National Banking System
Vocab20
gold certificate
paper currency backed by gold and issued between 1863 and 1934
Vocab21
silver certificate
paper currency backed by, and redeemable for, silver from 1878 to 1968
Vocab22
central bank
bank that can lend money to other banks in times of need
Vocab23
bank run
sudden rush by depositors to withdraw all deposited funds, generally in anticipation of bank failure or closure
Vocab24
bank holiday
brief period during which all banks or depository institutions are closed to prevent bank runs
Vocab25
fractional reserve system
system requiring financial institutions to set aside a fraction of their deposits in the form of reserves
Vocab26
legal reserves
currency and deposits used to meet the reserve requirement
Vocab27
reserve requirement
formula used to compute the amount of a depository institution’s required reserves
Vocab28
member bank reserve (MBR)
reserves kept by member banks at the Fed to satisfy reserve requirements
Vocab29
excess reserves
financial institution’s cash, currency, and reserves not needed for reserve requirements
Vocab30
clauses
distinct articles or provisions in a contract, treaty, will, or other formal or legal document
Vocab31
initially
originally; at the beginning
Vocab32
member bank
bank belonging to the Federal Reserve System
Vocab33
monetary policy
actions by the Federal Reserve System to expand or contract the money supply in order to affect the cost and availability of credit
Vocab34
interest rate
the price of credit to a borrower
Vocab35
easy money policy
monetary policy that results in lower interest rates and greater access to credit
Vocab36
tight money policy
monetary policy that results in higher interest rates and restricted access to credit
Vocab37
open market operations
sales or purchases of U.S. government securities by the Fed
Vocab38
discount rate
interest rate that the Federal Reserve System charges on loans to the nation’s financial institutions
Vocab39
prime rate
lowest rate of interest rate that banks charge their best customers
Vocab40
quantity theory of money
hypothesis that the supply of money directly affects the price level over the long run
Vocab41
currency
paper component of the money supply, today consisting of Federal Reserve notes
Vocab42
coins
metallic forms of money such as pennies, nickels, dimes, and quarters
Vocab43
bank holding company
company that owns and controls one or more banks
Vocab44
Regulation Z
provision extending truth-in-lending disclosures to consumers
Vocab45
aspects
parts, phases
Vocab46
functions
roles or purposes
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