chapter 24 money and banking. functions of money medium of exchange store of value measure of value

CHAPTER 24

Money and Banking

Functions of Money

Medium of ExchangeStore of ValueMeasure of Value

Types of Money

Salt, animal hides, gems, shells, and tobacco have are been used as mediums of exchange. Why could this cause a problem?

Today we use coins (pennies, nickels, dimes)and currency (coins and paper money).

The Financial System

When people and businesses accumulate money they store it in one of the different financial institutions.

These financial institutions don’t just store it in a box in the back. They loan it out so they can earn interest on it. Only a small portion is kept on hand in cash.

Types of Financial Institutions

Commercial Banks Offer full banking services and because of their popularity

they are able to offer convenience and locations that other smaller institutions cannot. These come at a price however. Fees and interest are typically higher at commercial banks.

Savings and Loan Associations Traditionally loaned money to people buying houses. They

also issue savings accounts and deposit only accounts.Credit Unions

Not for profit. Fees and interest rates are usually lower. Often sponsored by larges businesses or labor unions and are open to only members within that group. Because of their small size though, there are few branches and can be somewhat inconvenient.

Keeping the Financial System Safe

In the US we have both insurance and regulation to help keep our financial institutions safe.

Regulations: The banking industry is one of the most heavily regulated

industries in the country. They are required to report to one or more regulatory agencies. Also required to follow rules and accounting practices that minimize unnecessary risk.

Insurance Despite regulations some financial institutions will fail, so we

have the FDIC to insure consumer’s deposits. The Federal Deposit Insurance Corporation was established by FDR during the New Deal to try to restore people’s confidence in banks. Each account is insured up to $100,000.

How Banks Operate

Checking accounts: Allow you to deposit money and withdraw it by writing

checks or using a debit card/ATM. This is the quickest and most efficient means to transfer funds to a person/company.

Savings Accounts Allow people to deposit money and collect interest on that money. These accounts have rules about how often you can withdraw money. The longer you leave the money in the bank, the more interest it collects.

Certificates of Deposit Customers loan a specific amount of money to the

bank for a specific period of time (example: a 20 yr CD). In return, the bank pays interest on the money during that period. When the time is up, the customer can turn in their CD and regain their money plus interest. The plus side to this is the interest rates are higher than savings accounts, so you make a greater profit. The down side is you lose control of your money for a period of time and cannot withdraw it early.

Loans

The main way banks make money is through loans. They loan a certain amount of money to a customer and as the customer repays the loan they also pay interest. Interest rates differ based on the type and length of the loan.

While having a long term loan can lower the payment owed each month, it will increase the total interest paid and in some cases you will end up paying more interest than you borrowed in the first place.

The Fed

The Federal Reserve System, known as the Fed, is the central bank of the US.

When people or businesses need to borrow money, they borrow from a bank. When banks need to borrow money, they borrow from the Fed.

The US is divided into 12 Federal Reserve districts.

Established in 1913

Functions of the Fed

Two main regulatory functions: Banking regulation

Oversees large banks Decides if large banks can merge Regulates connections between American and foreign

banks Consumer Credit

Enforces the laws that deal with consumer borrowing Specifies what information lenders must provide