Chapter 15 | Money and the Financial System

Chapter 15: Money and the Financial System
- Focus on the role of money and financial systems in the economy.
- Explains types of money, the functions of the Federal Reserve Board, and banking institutions among others.

LO 15-1: Define money, its functions, and characteristics.
LO 15-2: Describe various types of money.
LO 15-3: Explain how the Federal Reserve Board manages the money supply and regulates the banking system.
LO 15-4: Compare and contrast different types of banking institutions.
LO 15-5: Distinguish between nonbanking institutions.
LO 15-6: Analyze future challenges for the banking industry.

Money is anything generally accepted in exchange for goods and services, also called currency.

Various materials (salt, cattle, metals) were used as money because of their limited supply and inherent value.
Development of IOUs and paper money tied to commodities like gold.
Transition to fiat money (not backed by a physical commodity), fully embraced in the 1930s during the Great Depression.

Medium of Exchange: Facilitates the trade of goods and services, moving beyond barter systems.
Measure of Value: Provides a standard measure for valuing and comparing goods. Example: $4 for eggs vs $25,000 for a car, with equivalents in yen.
Store of Value: Allows individuals to save and accumulate wealth until needed, maintaining purchasing power unless inflation destabilizes value.

Acceptability: Must be trusted and accepted widely for transactions.
Divisibility: Can be divided into smaller units (pennies, dimes, and dollars).
Portability: Easy to transport; paper money is technologically more portable than coins.
Durability: Should last without loss of value through wear or decay.
Stability: Value shouldn't fluctuate excessively to maintain consumer confidence and function as effective money.
Difficulty to Counterfeit: Must feature anti-counterfeiting measures to maintain trust.

Includes coins and paper bills, but their total value is less than that stored in bank accounts and digital forms.

Checking Accounts (Demand Deposits): Allow easy withdrawal and transfer; often used for everyday transactions.
Savings Accounts: Typically require prior notice for withdrawal and often earn interest.
Money Market Accounts: Combine features of checking and savings with slightly higher interest but limit transaction frequency.
Certificates of Deposit (CDs): Time deposit accounts that pay a set interest rate for maintaining funds for a specific time period.
Credit Cards: Allow users to borrow against a pre-approved limit; usually incur high-interest rates if balances are not cleared monthly.
Debit Cards: Directly withdraw money from the user’s checking account without the benefits of credit cards.

Cryptocurrency: Digital medium of exchange that utilizes blockchain technology for transactions, lacking government backing.

The Federal Reserve System (commonly called the Fed) is a regulatory body for the American banking sector, established in 1913.
Comprised of 12 regional banks, each serving distinct areas under the guidance of a Board of Governors.

Conduct Monetary Policy: Controls money supply to balance economic growth and inflation.
Promote Financial Stability: Ensure overall stability across financial institutions.
Supervise Banks: Oversees the safety and performance of member banks.
Payment Systems: Ensures efficient payment processing.
Consumer Protection: Advocates for fairness in consumer financial practices.

Open Market Operations: Purchase/sell government securities to control money supply.
Reserve Requirement: Dictates percentage of deposits banks must keep on reserve; changing this affects loans and money supply.
Discount Rate: Interest rate charged to banks for borrowing funds; lowering it encourages lending, while raising it restrains borrowing.
Credit Controls: Regulates terms and conditions of credit availability.

Commercial Banks: The largest financial entities based on checking and savings accounts, offering a range of loan and financial services.
Savings and Loan Associations (S&Ls): Primarily focused on real estate loans; operate similarly to commercial banks.
Credit Unions: Member-owned institutions, often offering better rates and terms than commercial banks.
Mutual Savings Banks: Similar to S&Ls, designed to serve depositors, providing savings and loans without profit motives.

Insured deposits ensure depositor safety, with mechanisms like FDIC and NCUA protecting deposits against bank failures.

The rise of fintech alternatives can disrupt traditional banking.
The need to adapt to new technologies affecting payment processes and consumer interaction.
Balancing strict regulation with competitive innovation and market evolution.

Shift towards digital and mobile banking solutions.
Increasing reliance on P2P payment systems and technology integration into everyday transactions.

Money serves as a fundamental component of trade and economic stability. The financial system, especially the Federal Reserve, plays a crucial role in regulating and sustaining the economy. Banking and nonbanking institutions have evolved significantly, necessitating constant adaptation to maintain relevancy and address changing consumer behaviors and technological advancements.