MONEY AND BANKING

WHAT IS MONEY?

1. A MEDIUM OF EXCHANGE - ALTERNATIVE BARTER

2. STANDARD OF VALUE - HOW WE MEASURE WORTH

3. STORAGE OF VALUE - YOU CAN SAVE IT FOR SOME FUTURE PURCHASE

MONEY SUPPLY - M 1

1. COINS

2. CURRENCY

3. DEMAND DEPOSITS - CHECKING

MONEY SUPPLY - BROADER MEASURES - M 2

4. SAVINGS ACCOUNTS

5. SHORT TERM TIME DEPOSITS

COMMERCIAL BANKS

1. BANKS HOLD DEMAND DEPOSITS AND PERMITS CHECKS TO BE DRAWN ON THESE DEPOSITS.

2. BANKS LEND MONEY

HOW BANKS OPERATE

1. BANKS GENERALLY MAKE LOANS TO FIRMS, INDIVIDUALS, AND INVEST IN SECURITIES, PRIMARILY BONDS.

2. BANKS OPERATE TO MAKE A PROFIT. - CONCEPT OF SPREAD BETWEEN SHORT TERM CD RATES AND LOAN RATES.

3. MUST BALANCE THERE DESIRE FOR HIGH RETURNS FROM LOANS AND INVESTMENTS AGAINST THE REQUIREMENT THAT THESE LOANS AND INVESTMENTS BE SAFE AND EASILY TURNED INTO CASH.

WHAT IS FDIC INSURANCE - FEDERAL DEPOSIT INSURANCE CORP.

BANK BALANCE SHEET PAGE 191

ALL BANKS HOLD LESS CASH THEN THEY OWE THEIR DEPOSITORS.

FRACTIONAL RESERVE BANKING - ISN'T IT RISKY TO ALLOW BANKS TO ONLY HOLD 8 OR 9% OF THEIR DEPOSITS IN AVAILABLE RESERVES?

NO - THE ODDS OF EVERYONE DRAWING MONEY AT THE SAME TIME IS SLIM.

WHAT IS THE FEDERAL RESERVE? - OUR NATIONS CENTRAL BANK

1. HELPS CONTROL NATIONS MONEY SUPPLY

2. PROVIDES FACILITIES FOR THE COLLECTION OF CHECKS.

3. SUPPLIES THE PUBLIC WITH CURRENCY

4. SUPERVISES THE OPERATION OF COMMERCIAL BANKS.

THE FEDERAL RESERVE SETS RESERVE REQUIREMENTS FOR BANKS.

(KNOWN AS LEGAL RESERVE REQUIREMENTS.

WHY DOES THE FEDERAL RESERVE IMPOSE LEGAL RESERVE REQUIREMENTS?

1. KEEP BANKS SAFE - IS THE MOST COMMON ANSWER BUT MORE IMPORTANT IS

2. CONTROL THE MONEY SUPPLY.

HOW BANKS CREATE MONEY

LETS ASSUME I HAVE $10,000 IN A SAVINGS ACCOUNT.

LETS CALL THE BANK KEY FEDERAL

PHOEBE BUYS A CAR FOR $8,333 AND GETS A LOAN FROM KEY FEDERAL

THE BALANCE OF $1,666 THE BANK HOLDS IN RESERVE.

I HAVE ASSETS OF $10,000

PHOEBE HAS A CAR WORTH $8,333 AND A LOAN FOR $8,333

THE BANK HAS A DEPOSIT FOR $10,000, $1,666 IN RESERVES, AND A LOAN (ASSET) OF $8,333 (RESERVE REQUIREMENT IS $1 FOR EVERY $6 OF DEPOSITS.

$8,333 IN NEW MONEY HAS BEEN CREATED.

THIS CONTINUES - LETS ASSUME THE HYUNDAI DEALER DEPOSITS THE $8,333 IN KEY FEDERAL.

KEY FEDERAL THEN LENDS THE MONEY TO SHAWN WHO BUYS A MOTORCYCLE.

SO NOW WE HAVE

LOAN TO SHAWN $6,944

RESERVE REQUIREMENT HELD BY BANK $1,399

BOTTOM LINE IS THAT WITH RESERVE REQUIREMENTS OF 1/6 AND THE INITIAL DEPOSIT OF $10,000 THE BANK CAN CREATE $50,000 IN NEW MONEY.

YOU ARE NOT REQUIRED TO COMPUTE AMOUNT OF MONEY CREATED - PAGE 203.