VI. Money, Banking, and the Creation of Money View Chapter 13
    A. Functions of money
        1. Medium of exchange: facilitate exchange eliminating barter 
        2. Standard of value: allows for the pricing of heterogeneous goods.
        3. Store of value: maintains value and provides liquidity so extra spending
             power  is available as needed.
        4. Standard of deferred payment: makes credit contracts possible so
            credit   transactions are possible.
    B. The supply and demand for money
         1. Three categories of the supply of money
             a. M1 = Currency, coins, and demand deposits (checking accounts). 
             b M2 = M1 plus near monies such as small time deposits (savings
                 accounts) and short-term government securities. 
             c. M3 = M2 plus large time deposits (over $100,000)
         2. What backs the dollar?
             a. It is a debt of the federal government.
             b. Backed by faith in the government's ability to control inflation.
             c. Value is determined by acceptability (it is legal tender and scarce).
             d.  It's fiat (by decree of the government) money.
             e. Coins have little intrinsic value and are  called token money.
             f.  Commodity money such as tobacco used as money in the Virginia
                 colony has  intrinsic value of its own.

C. The Demand for Money 
   1. Transaction Dt, results because people hold money
          often in a money market account,  to use as a medium of exchange.
          2. Asset Demand, Da, results because people accumulate money, 
              often held in an investment account, to buy assets.
          3. The demand for money Dm= D t + Da
          4. Interest rates are set in the money market.

  

D. Maintaining money's value requires
    1. A sound fiscal policy (a reasonable federal debt)
    2. A sound monetary policy (not using inflation to pay the federal debt)

E. United States private banking system
     1. Two kinds of banks
          a. Commercial banks offer demand deposits (checking accounts)
          b. Savings and loan associations used to specialize in time deposits
              (saving accounts) and home mortgages. Now, because of dereg-
              ulation during the early 1980's, they are similar to commercial banks. 
      2. Federal deregulation contributed to banking difficulties in the 1980's.

 
F. The Federal Reserve
  1. Organization  
    a. Board of Governors oversee the Federal Reserve System
          1. Seven governors
          2. Governors are appointed by the President and confirmed by the Senate.
          3. The chair is appointed by the President for a four-year term.
              a)  To foster independence, the term does not coincide with the President's term. 
              b) Other board members are appointed to 14-year terms on a staggered basis
                   to insure an experienced board.
       b. Federal Open Market Committee
           1. Membership consists of the Board of Governors and 5 of the 12 Federal Reserve
                bank presidents with the N.Y. president always a member because N.Y. City is the
                financial center for U.S. international trade.
           2. The Committee tries to affect interest rates by affecting the supply of money by
                buying and selling U.S. government bonds (See Chapter 15).
       c. Federal Advisory Council 12 prominent commercial bankers, one from each district,
             who advise the Board of Governors
       d. Twelve Federal Reserve Banks
      1.The United States is divided into 12 homogenous districts each with its own bank
                

       2. Bank for the federal government
       3. Bank for member banks
       4. Graphic is complements of the Board of Governors
          of the  Federal Reserve System.
       5. Member commercial banks
       6.  Nonmember commercial banks and thrifts are
            regulated by other government agencies
2. Functions of the Federal Reserve
     a. Regulate the money supply
     b. Oversea the financial system
     c. Check collection and clearing
     d. Fiscal agent for the government
     e. Supervise (audit) member banks 
     f. Hold reserves (deposits) for member banks
     g. Compile economic statistics such as the 2010
         BeigeBook,  which is a quarterly summary of 
         each districts' recent economic activity.