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Central Banking
Chpt. 11
Objectives:
List the three creators of money in the U.S. Explain why the Federal Reserve System was organized Describe the supervisory bodies of the Federal Reserve Explain the necessity of the Federal Reserve List and describe the functions of the Federal Reserve Describe the effects that change the discount rate Describe the effects of the open market operations has upon the money supply Identify two reasons that the Fed attempts to control the supply of money Explain the dangers of the Fed's actions to control the money supply
BIBLICAL INTEGRATION
Wisdom and understanding are to be more valuable than money.
"How much better is it to get wisdom than gold! and to get understanding rather to be chosen than silver! Prov. 16:16
Central Banking
Central Banking
What is a central bank?
A public authority that provides banking services to banks and regulates financial institutions and markets.
Central Banking
Why should you keep your money in a bank? Safety Convenience Cost Security Financial Future
(Who Is the FDIC?)
Central Banking
Choosing An Account
1. Decide what type of account suits your needs the best.
1. Checking
1. Student/College 2. Interest baring
2. Savings
1. Student/College 2. Money Market
(Who Is the FDIC?)
Central Banking
Choosing A Bank?
Services Fees Convenient Insured (FDIC)
(Who Is the FDIC?)
Independent Agency
Created: 1933 Started: January 1, 1934 Main Office: Washington, D.C.
State chartered banks still have the choice of joining the Federal Reserve System.
(Who Is the FDIC?)
Sheila Blair, Chairman Martin Gruenberg, Vice Chairman Thomas Curry, Director John Dugan, Comptroller of the Currency John Bowman, Director of the Office of Thrift Supervision
(Board of Director)
(Bade 665)
Required Reserves
The Federal Reserve requires most banks to hold a portion, up to 10 percent, of their deposits in reserve. These are called required reserves. Present rates:
$0 to $10.7 million = 0% More than $10.7 million to $55.2 million = 3% More than $55.2 million = 10%
(Hill)
Discount Rate
The discount rate is the interest rate at which the Fed stands ready to lend to commercial banks. A change in the discount rate begins with a proposal to the FOMC by at least one of the 12 Federal Reserve banks. If the FOMC agrees that a change is required, it proposes the change to Board of Governors for its approval.
(Bade 665)
(Bade 666)
Monetary Base
The monetary base is the sum of coins, Federal Reserve bills, and banks reserves at the Fed. The monetary base is so called because it acts like a base that supports the nations money. The larger the monetary base, the greater is the quantity of money that it can support.
(Bade 666)
(Bade 667)
(Bade 667)
Financial Institution
Creates money by lending out customers deposits to others.
(Carter, 147)
Federal Reserve Bank Under Supervision of the Board of Governors Located in Washington, D.C. Appointed by the president and confirmed by the Senate Serve 14 yrs. terms
(www.federalreserve.gov)
(Carter, 147)
(Emery)
The Board of Governors meets regularly, typically every other Monday. The public is invited to attend meetings that are open under the Government in the Sunshine Act. (Meet twice a month pursuant to title 5, section 552b,of the U.S. Code) (Federal Reserve Board)
There are 12 Federal Reserve banks, one for each of 12 Federal Reserve districts. Each Federal Reserve Bank has nine board of directors, three of whom are appointed by the Board of Governors and six of whom are elected by the commercial banks in the Federal Reserve district. The Federal Reserve Bank of New York implements some of the Feds most important policy decisions
(Bade 664)
Each Federal Reserve district has its own Federal Reserve Bank.
The Board of Governors of the Federal Reserve System is located in Washington, D.C. (Bade 664)
Recap!
FDIC: Five member Board of Directors Federal Reserve Bank: Seven member Board of Governors Twelve Districts: (each) Nine member Board of Directors FOMC: Twelve member committee: Fed Board of Governors (seven members) President of the Federal Reserve Bank of N.Y. Four other Federal Reserve Presidents (serving a one-year term)
Bank Failure
When many depositors run into a bank at the same time to get their money out, we call that a bank run. When a bank run that begins at one bank spreads to other banks and causes people to generally distrust banks, we call that a bank panic.
(Hill)
Bank Failure
Throughout history, there have been episodes where too many people tried to take their money out of their banks at the same time. During such episodes, banks usually ran out of cash and therefore couldnt honor withdrawal requests, and many banks went bankrupt. When a bank goes bankrupt, its called a bank failure.
(Hill)
Great Depression
In A Monetary History of the United States, 1867-1960 (1963), Milton Friedman and Anna Schwartz attributed much of the depression's severity to four banking crises, or panics. They argued that the crisis of late 1930 and early 1931, in particular, converted a mild recession into a major depression as "a contagion of fear" initiated by crop failures swept the country. Friedman and Schwartz reported the significant increase in the failure rate (761 banks during November 1930 to January 1931, compared with 744 during the first ten months of 1930), led by New York City's Bank of the United States, then the largest failure in American history.
(Friedman 308-311)
Great Depression
They found the Federal Reserve guilty of neglect for failing to deal with these panics, a failure that was particularly culpable because correct, "lender-oflast resort," actions would simply have required "the policies outlined by the System itself in the 1920s, or for that matter by Bagehot in 1873"
(Friedman 407)
Output
This economic variable is a key indicator and serves as a gauge of the economys ability to provide products and services to people. Over the long run, the standard of living rises when this indicator grows faster than the population. One of the goals of the Federal Reserves monetary policy is to achieve maximum sustainable growth of this economic variable.
(Hill)
(Emery)
Monetary Policy
By making credit conditions tighter or easier, monetary policy can help dampen inflationary and recessionary pressures that have historically led to economic booms and busts. Although monetary policy cannot prevent business cycles from occurring, it can help make them less severe.
(Emery)
(Emery)
(Emery)
Over-tightening
Raising the federal funds rate will slow investment in the economy in the short run. Raising the federal funds rate would be appropriate if the economy showed signs of overheating and inflationary pressures were building. However, if the economy were already slowing, a higher federal funds rate would tend to weaken it.
(Emery)
Inflation
This condition occurs when there is an increase in the average level of prices of the products and services we buy. Significant changes in the price level distort economic incentives because those changes alter the purchasing power of money. A 5 percent annual rate of increase in prices means that the income you earn this year will buy 5 percent less next year. One of the goals of the Federal Reserves monetary policy is to achieve price stabilitythat is, no overall tendency for the prices of goods and services to generally rise or fall.
(Hill)
(Hill)
Works Cited
Board of Directors & Senior Executives FDIC.gov 3 Jan 2006. 14 Mar 2006 Blade, Robin, and Michael Parkin. Foundations of Economics: Instructors Manual. 2nd ed. Boston: Pearson Education, Inc., 2007. Carper, Alan. Economics for Christian Schools.Greenville: Bob Jones Uniersity Press, 1998. Emery, Barbara. Monetary Policy. Federal Reserve Bank of Philadelphia. 18 Feb 2009<http://www.philadelphiafed.org/education/teachers/lessonplans/index.cfm?tab=3&CFID=1604898&CFTOKEN=97766325&jsessi onid=383079bdcb242df693e17a7e4b313a554b54> Federal Reserve Board. Federalreserve.gov. 1 March 2006. 14 March 2006. <http://www.federalreserve.gov/general.htm > Friedman, Milton and Anna Schwartz .A Monetary History of the United States, 1867-1960 .Princeton University Press; 1963. Hill, Andrew T. What Does the Fred Do? Federal Reserve Bank of Philadelphia. 18 Feb 2009. <http://www.philadelphiafed.org/education/teachers/lessonplans/index.cfm?tab=3&CFID=1604898&CFTOKEN=97766325&jsessi onid=383079bdcb242df693e17a7e4b313a554b54> Who is the FDIC?. FDIC.gov. 28 Jul 2003. 11 March 2005. <http://www.fdic.gov/about/learn/symbol/index.html>