Chapter 12

Money and Financial Institutions

Money and Banking

The Purpose of Money- Enables people and businesses to buy and sell

goods and services easily around the world. Money is a standard of value and a means of

exchange or payment. Money can be anything that people accept as a standard of payment. Ex. Shells, stones, corn.

Modern society uses coins, currency, checks, and debit cards.

Functions of Money

Barter-to trade goods or services directly for other goods or services. Bartering can be difficult, trying to find someone who wants what you have and they have what you want. Ex. Tradio.

3 Basic Functions of Money:

It is a medium of exchange (a measure of value or wealth)

It functions as a standard of value (a way to measure the value of something)

It functions as a store of value (it holds it value over time and can be saved)

Characteristics of Money

Must be stable in value. Must be scarce-it can’t be overplentiful. Must be accepted-people have to be

willing to take it in exchange. Should be divisible into parts. Must be portable and durable. Must be hard to counterfeit or copy.

The Functions of Banks

Financial Institutions (Banks) are firms that manages money.

Storing Money Transferring Money Lending Money

Function of Storing Money

Service banks provide storing money. Bank account is a record of the account of

money a customer has deposited into or withdrawn from a bank.

Deposit-money put into an account. Withdrawal-money taken out of an account. Keeping money in a bank helps prevent it from

being stolen or lost.

2 Types of Bank Accounts

Checking Accounts-used for storing money in a short term. Banks charge a fee.

Savings Accounts-used for storing money over a longer period of time. Money earns interest.

Interest is the rate that the bank pays customers for keeping their money.

Function of Transferring Money

Banks use checks and electronic fund transfers to move money.

EFT (Electronic Funds Transfer) allow money to be transferred from one bank to another through an network of computers.

Direct Deposit is the electronic transfer of a payment directly from the payer’s bank account to that of the party being paid. (Payroll)

Function of Lending Money

Lending money is the primary way for banks to generate profit. Money that you deposit makes it possible for a bank to lend money to others.

Banks pay interest to those who put money in an account with a bank, customers also pay interest on borrowing money from a bank. Banks then use the interest they earned to pay interest on customer’s savings accounts.

Collateral is property or goods pledged by a borrower to use as security against a loan if it is not repaid.

4 Main Types of Loans

Mortgage-real estate Commercial-businesses to buy supplies

and equipment Individual-individual for personal items,

car, home repairs, or vacation Line of Credit-banks lends an amount of

money to be used at any time for any purpose

Other Financial Services

Banks not only store money, they also store valuable items.

Safe-deposit boxes are secure boxes in a bank’s vault used for the safe storage of a customer’s valuables.

Debit Cards Credit Cards

Financial Institutions

To open a federal or a state bank in the United States, the owners have to meet special requirements.

The owners must also apply for a charter from the government.

The owners need to prove they have enough capital to start a bank.

3 Types of Banks in the US

Commercial Banks Savings and Loan Associations Credit Unions

Commercial Banks

Offer the entire range of banking services.

Full service banks. Serve individuals and businesses. To make a profit, they charge more

interest on money that they lend than the interest they pay on savings accounts.

Savings and Loans Associations

Hold customers funds in interest-bearing accounts and invest mainly in mortgage loans.

In the late 1980’s, about 20 percent of the savings and loans associations failed due to new regulations.

Credit Unions

Not-for-profit banks set up by organizations for their customers or members to use.

Offer members credit cards, checking accounts, low-interest loans, and high interest savings accounts.

Some pay interest on checking accounts.

Other Financial Institutions

Mortgage Companies Finance Companies-short term loans to

businesses and consumers at higher interest rates

Insurance Companies-provide protection against problems such as fire and theft, and loans to businesses and consumers

Brokerage Firms-sell stocks and bonds

The Federal Reserve System

“The Fed”-Central Bank of the US The bankers bank. Congress established in 1913. Based in Washington DC It monitors the money supply. 12 Federal Reserve Districts. 25 branch banks. 5,000 member banks. Ran by the Board of Governors 6 Functions

6 Functions of the Federal Reserve

1. Clearing Checks 2. Acting as the Federal Government’s

Fiscal Agent. 3. Supervising Member Banks 4. Regulating the Money Supply 5. Setting Reserve Requirements-funds

set aside for emergencies 6. Supplying Paper Currency

Vocabulary:

Money Monetary System Financial Institution Bank Account Deposit Withdrawal Interest Electronic Fund Transfer (EFT) Direct Deposit Collateral Mortgage Safe-Deposit Box Commercial Banks Savings and Loan Associations Credit Unions Mortgage Companies Finance Companies Insurance Companies Brokerage Firms Federal Reserve System Reserves