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1-1McGraw-Hill/IrwinUnderstanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Nickels McHugh McHughNickels McHugh McHugh
** Understanding Understanding Money,Money,
Financial Financial Institutions,Institutions,
and and the Federal the Federal
ReserveReserve
20
CH
AP
TE
R*
* *
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Why Money?Why Money?
• Economy Depends On ItEconomy Depends On It
• Money vs. BarterMoney vs. Barter
• Unit of ValueUnit of Value
• Electronic CashElectronic Cash
• Money SupplyMoney Supply
• Global Exchange- Rise/Fall of Global Exchange- Rise/Fall of Dollar & U.S. EconomyDollar & U.S. Economy
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Characteristics Of Characteristics Of A Good Money SystemA Good Money System
• PortabilityPortability
• DivisibilityDivisibility
• StabilityStability
• DurabilityDurability
• UniquenessUniqueness
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Cost of PenniesCost of Pennies
• The cost of manufacturing a penny is The cost of manufacturing a penny is worth more than 1-centworth more than 1-cent
• The Mint estimates it will cost 1.23 cents The Mint estimates it will cost 1.23 cents per pennyper penny
• The cost of producing a penny has risen The cost of producing a penny has risen 27% in the last year27% in the last year
• Added penny and nickel expenses will Added penny and nickel expenses will reduce the Mint’s profit this year by $45 reduce the Mint’s profit this year by $45 millionmillion
Source:www.usatoday.com, May 10, 2006Source:www.usatoday.com, May 10, 2006
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$ Bills and Coins$ Bills and Coins
Source: U.S. Department of Treasury, FY 2005 Performance and Accountability Report
Fiscal Year Total Current Production
0
5
10
15
FY2003 FY2004 FY2005
Bil
lio
ns o
f U
nit
s
Coins Bills
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The Money SupplyThe Money Supply
CurrencCurrencyy
DemanDemand d
DepositDepositss
== TotalTotalM1M1
++Time Time
Deposits & Deposits & Money Money Market Market Accts.Accts.
Total Total M2 *SA M2 *SA
*SA = Seasonally Adjusted*SA = Seasonally Adjusted
++ ==
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Life Span of CurrencyLife Span of Currency
0 2 4 6 8 10
One Dollar Bill
Five Dollar Bill
Ten Dollar Bill
Twenty Dollar Bill
Fifty Dollar Bill
Hundred Dollar Bill
Years
Source: Bureau of Engraving and PrintingSource: Bureau of Engraving and Printing
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Federal Reserve Federal Reserve StructureStructure
Board of Governors
Advisory Councils
Federal Reserve Banks
Federal Open Market Committee
Member Banks
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Regional Reserve BanksRegional Reserve Banks
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Federal ReserveFederal Reserve
• Buys/Sells Foreign CurrencyBuys/Sells Foreign Currency
• Regulates CreditRegulates Credit
• Supervises BanksSupervises Banks
• Collects Data on Money Collects Data on Money Supply/Economic ActivitiesSupply/Economic Activities
• Processes ChecksProcesses Checks
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Monetary PolicyMonetary Policy
• Reserve Reserve
RequirementRequirement
•Tight/IncreaseTight/Increase
•Loose/DecreaseLoose/Decrease
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Fed Regulates Money SupplyFed Regulates Money Supply
Increase Money SupplyIncrease Money SupplyReduce Discount RateReduce Discount Rate
Buy Government BondsBuy Government Bonds
Set Credit ControlsSet Credit Controls
Slow DownSlow DownReduce Money SupplyReduce Money Supply
Increase Discount RateIncrease Discount Rate
Sell Government BondsSell Government Bonds
Set Credit ControlsSet Credit Controls
ExpandExpand
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Federal Reserve SystemFederal Reserve System
• HistoryHistory• Land BanksLand Banks
• Central BankCentral Bank
• Great Great DepressionDepression
• StructureStructure
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American Banking SystemAmerican Banking SystemDepositoryDepository
• Commercial BanksCommercial Banks
• Savings and Loan Savings and Loan Associations/ThriftsAssociations/Thrifts
• Credit UnionsCredit Unions
Non-depositoryNon-depository• Life Insurance Life Insurance
CompaniesCompanies
• Pension FundsPension Funds
• Brokerage FirmsBrokerage Firms
• Finance CompaniesFinance Companies
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United States’ United States’ Largest BanksLargest Banks
$1,082
$1,013
$706
$472
$403
$0 $200 $400 $600 $800 $1,000 $1,200
Bank of America Corp., N.C.
J.P. Morgan Chase and Co., N.Y.
Citigroup, N.Y.
Wachovia Corp., N.C.
Wells Fargo & Co., CA
Source: Infoplease.com
Assets In BillionsAssets In Billions
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Services Available at MostServices Available at Most Commercial BanksCommercial Banks
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Thrift HighlightsThrift Highlights
Office of Thrift Supervision (OTS):Office of Thrift Supervision (OTS):• There are 854 thrifts supervised by OTSThere are 854 thrifts supervised by OTS
• In addition, OTS supervised 480 In addition, OTS supervised 480 company enterprises that owned 448 company enterprises that owned 448 thriftsthrifts
• Thrift industry controlled over $1.5 Thrift industry controlled over $1.5 trillion in total assets (2trillion in total assets (2ndnd Quarter of Quarter of 2006)2006)
Source: www.ots.treas.gov, August 23, 2006
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Number of Credit UnionsNumber of Credit Unions
Source:www.ncua.govSource:www.ncua.gov
Number of Credit Unions as of December 31
8,000 8,500 9,000 9,500 10,000 10,500
2001
2002
2003
2004
2005
Yea
r
Credit Unions
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Regulation ofRegulation of Financial InstitutionsFinancial Institutions
• Federal Reserve BoardFederal Reserve Board
• FDICFDIC
• SAIF(FSLIC)SAIF(FSLIC)
• NCUANCUA
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Future of BankingFuture of Banking
• Repeal of Glass-Steagall (1933)Repeal of Glass-Steagall (1933)
• Gramm-Leach-Bliley (1999)Gramm-Leach-Bliley (1999)
• One-Stop ShoppingOne-Stop Shopping
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Number of HouseholdsNumber of Households That Bank OnlineThat Bank Online
0
5
10
15
20
25
30
35
40
1999 2000 2002 2003 2004
In MillionsIn Millions
Source: USA Today, “Snapshots”, and CNNMoney.com
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Safe Online BankingSafe Online Banking
• Verify Bank Uses Verify Bank Uses Encryption TechnologyEncryption Technology
• Bank Has Liability Bank Has Liability GuaranteeGuarantee
• Pick Random PIN Code- Pick Random PIN Code- Letters & NumbersLetters & Numbers
• Regularly Scan For Regularly Scan For Unauthorized TransactionsUnauthorized Transactions
• Use Anti-Virus Software & Use Anti-Virus Software & FirewallFirewall
Source: Parade Magazine, May 18, 2003
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Electronic BankingElectronic Banking Trends in the U.S. Trends in the U.S.
• InternetInternet
• Electronic Funds Electronic Funds Transfers (EFTs)Transfers (EFTs)
• Check ConversionCheck Conversion
• Debit Card- TeenagersDebit Card- Teenagers
• Smart CardSmart Card
• Automatic TransfersAutomatic Transfers
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When Will The U.S. When Will The U.S. Become Cashless?Become Cashless?
0%
5%
10%
15%
20%
25%
20 Yrs orMore
10 - 19Yrs
Never 1 - 9 Yrs Lessthan a Yr
Source: New Designs for Your Money, U.S. Department of Treasury
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International Banking International Banking
• Currency or Money Currency or Money ExchangeExchange
• Letter of CreditLetter of Credit
• Banker’s AcceptanceBanker’s Acceptance
• World BankWorld Bank
• IMFIMF
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World’s Largest BanksWorld’s Largest Banks
$1,295
$944
$895
$714
$698
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400
Mizuho Holdings, Japan
Citigroup, USA
Deutsche Bank, Germany
J.P. Morgan Chase, USA
UBS, Switzerland
Source: USA Today, “Snapshots”
In BillionsIn Billions