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Money, Banking, and the Federal Reserve. Money . Anything society accepts in exchange for goods and services Fiat Money; commodity money Functions of money Characteristics of money Money supply, M1, currency, . Money Definitions. January 2010. Source: Federal Reserve System. 31- 3. LO1.

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Money, Banking, and the Federal Reserve

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Money banking and the federal reserve

Money, Banking, and the Federal Reserve



  • Anything society accepts in exchange for goods and services

  • Fiat Money; commodity money

  • Functions of money

  • Characteristics of money

  • Money supply, M1, currency,

Money definitions

Money Definitions

January 2010

Source: Federal Reserve System



What backs the money supply

What “Backs” the Money Supply?

  • Guaranteed by government’s ability to keep value stable

  • Money as debt

  • Why is money valuable?

    • Acceptability

    • Legal tender

    • Relative scarcity



Modern banking

Modern Banking

  • Fractional Reserve Banking

  • Banks “create” money by lending out portion of total deposits they hold.

  • Account holders are technically lending money to the banks and receive interest for keeping their money

Types of banking institutions

Types of banking institutions

  • Thrift institutions

  • Commercial Banks

Bank products

Bank products

  • Checking accounts

  • Savings accounts

  • Time deposit accounts

  • Travelers checks

  • Money order/bank checks

  • Financial services

  • Credit cards

  • Loans

    • Personal

    • Auto

    • Savings

  • Mortgages

    • Traditional

    • Home Equity

  • Insurances

Who supervises the banks and their activities

Who supervises the Banks and their activities?

Federal Reserve

Federal reserve banking system

Federal Reserve - Banking System

  • Historical background

  • Board of Governors

  • 12 Federal Reserve Banks

    • Serve as the central bank

    • Quasi-public banks

    • Banker’s bank



Federal reserve banking system1

Federal Reserve – Banking System

Board of Governors

Federal Open Market Committee

12 Federal Reserve Banks

Commercial Banks

Thrift Institutions

(Savings and Loan Associations,

Mutual Savings Banks,

Credit Unions)

The Public

(Households and




Federal reserve banking system2

Federal Reserve – Banking System

The 12 Federal Reserve Banks



Federal reserve banking system3

Federal Reserve – Banking System

  • Federal Open Market Committee

    • Aids Board of Governors in setting monetary policy

    • Conducts open market operations

  • Commercial banks and thrifts

    • 6,800 commercial banks

    • 8,700 thrifts



Federal reserve functions

Federal Reserve Functions

Issue currency

Set reserve requirements

Lend money to banks

Collect checks

Act as a fiscal agent for U.S. government

Supervise banks

Control the money supply



Federal reserve independence

Federal Reserve Independence

Established by Congress as an independent agency

Protects the Fed from political pressures

Enables the Fed to take actions to increase interest rates in order to stem inflation as needed



Financial institutions

Financial Institutions

World’s 12 Largest Financial Institutions, 2009

Assets (Trillions of U.S. Dollars)

0 1.5 2.5 3.5

Royal Bank of Scotland (UK)

Barclays (UK)

Deutsche Bank (Germany)

BNP Paribas (France)

HSBC Holdings (UK)

JPMorgan Chase (US)

Credit Agricole (France)

Citigroup (US)

Mitsubishi UFJ (Japan)

UBS (Switzerland)

ING Group (Netherlands)

Bank of America (US)

Source: Forbes Global 2000,



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