CHAPTER 13: Money and Banking day-to-day needs; as inflation rate rises,

people tend to hold more money.

 What money is Income The more you make, the more you spend.
o Something that serves as a medium of And the more you spend, the more money
exchange, a unit of accounting, and a store of you need to hold as cash or in your
value. checking account; as the level of income
rises, people tend to hold more money.
 The three jobs of money Interest Rate The quantity of money demanded goes
JOBS MEANING down as interest rates rise; as interest rate
rises, people tend to hold less money
Medium ofUniversally accepted; we all agree to accept
Exchange it in making transactions. Credit If you can get credit, you don’t need to hold
Availability so much money; people tend to hold less
Standard of Provides a simple device for identifying and
money as credit availability increases.
Value communicating value.
Store of ValueIt allows us to store the rewards of our labor
or business in a convenient tool.  The origins of banking
Other useful 1. Divisibility – readily made available
properties of in varying increments Medieval  The only secure place for your money
money 2. Portable - carried with the times was in the safes of the goldsmiths, so
consumer in order to effect a trade anybody who was anybody kept his
money with the local goldsmith
 These gentlemen would give receipts
 M1, M2, and M3 that possibly looked a little like the
MONEY COMPRISES OF… hatcheck slips you get as some of the
SUPPLY fancier restaurants.
M1 Currency, demand deposits, traveler’s checks, How  The goldsmiths recognized that when
and other checkable deposits paper people did come in to retrieve their gold
money coins, they did not insist on receiving the
M2 M1 + savings, small-denomination time deposits,
came identical coins they had left. They also
and money market funds
about noticed that more and more people
M3 M2 + large-denomination time deposits
were not bothering to come in at all to
get their money because they were
 The demand for money paying their debts with the receipts.
 As long as the total number of receipts
o The Keynesian Motives for Holding Money circulating was equal to the number of
gold coins in the safe, there was no
o Instead of holding their assets in banking system. But when the number
other forms, everyone opts to hold at of receipts exceeded the number of
least some of their assets in the form coins in the safe, a banking system was
of currency or demand deposits created.
MOTIVES MEANING
Transactions Determined by the level of people’s  Modern Banking
motive transactions; Keynes believed that the KINDS DEFINITION
transactions were proportional to income Commercial Account for the bulk of checkable deposits
Precautionary People hold money as a cushion against an Banks
motive unexpected need. Mutual Encourage saving by the “common people;”
Speculative People hold money as a store of wealth. Savings they traditionally made small personal
motive Banks loans, but now, they offer the same range of
services as commercial banks
o Four Influences on the Demand for Money Credit Unions Specialize in small consumer loans
The Big The top 10 largest banks include Citigroup,
INFLUENCES MEANING Banks JP Morgan, and Bank of America to name a
Inflation As prices rise, we need to hold an few; holds nearly two-thirds of all U.S. bank
increasing amount of money to meet our deposits
Internet Has no branches, checkbooks, or ATMs. It
Banking charges no fees and requires no minimum
deposit, but pays higher interest rates than
virtually every other bank
Bank Lending Even when interest rates are very low,
banks charge their borrowers a lot more
than they pay their depositors
Financial Repackage the flow of deposits, insurance
Intermediaries premiums, pension contributions, and other
forms of savings into larger chunk for large
business borrowers; they pay relatively low
rates of interest to their lenders and charge
relatively high rates to their borrowers
BRANCH BANKING
Acceptance of deposits at more than one location
Rules are set by the state in which a bank is located
Types:
 Unrestricted branching – a bank may open
branches throughout the state
 Limited branching – a bank may be allowed to open
branches only in contiguous communities
 Unit banking – state law forbids any branching
whatsoever
ATM WARS
1. Issue of fairness
a. Six out of seven ATM users don’t pay
surcharges. The fees hit only users who go
to “foreign” ATMs—machines not owned
by their own bank.
b. Why should a bank’s customers underwrite
the noncustomers who demand access to
cash wherever they are? And why should
a bank provide a free service to people
who do not otherwise patronize it?
2. Think of an ATM as a convenience
a. We pay more to shop at a “convenience
store” than at a supermarket.
b. Why not charge people for the
convenience of withdrawing cash at an
airport, at a shopping mall, or even in
another state?
3. Banning surcharges would leave consumers with
fewer choices
a. It would presumably become unprofitable
to operate the machines in some out-of-
the-way places that didn’t have them
before the fees
The very fact that the government is ready to do this has
apparently provided enough confidence in the banking
system to avoid any situation that could lead to widespread
panic.
 The savings and loan debacle
What is The savings and loan (S&L) crisis began
Savings and under the volatile interest rate climate of the
Loan Crisis – 1970s when vast numbers of depositors
S&L? withdrew their money from S&L institutions
and deposited them in money market funds.
This increased interest rates because the
funds were not governed by Regulation Q (to
limit loan sharking and other such unseemly
actions).
Dangerous Money was lent to farmland speculators in
speculation the Midwest and to people buying up oil
properties in the Southwest.
Junk bonds Used extensively to finance corporate
takeovers or to stave off hostile takeovers
Organized Mob families and their associates bellied up
crime to thrifts and sucked out hundreds of millions
of dollars.
What is a Central Bank?
 A central bank or monetary authority is a monopolized
and often nationalized institution given privileged
control over the production and distribution of money
and credit.
 Usually responsible for the formulation of monetary
policy and the regulation of member banks.
 Central banks are inherently non-market-based or
even anticompetitive institutions.
 Even if a central bank is not legally owned by the
government, its privileges are established and
protected by law.
 The critical feature of a central bank — distinguishing
it from other banks — is it legal monopoly status, which
gives it the privilege to issue bank notes and cash.

 The Federal Deposit Insurance Corporation (FDIC)

Purpose To avert bank panics by assuring the public that

the federal government stands behind the bank,
ready to pay off depositors if it should fail.