Unit 11
Banking
Class preparation
Pre-read chapter 11 Lecture outline The central bank in the U.S. is called the "Federal Reserve System". It is often just called "The Fed". It is headquartered in Washington D.C. - see picture above. The Federal Reserve was created in 1913 by Congress and President Woodrow Wilson. The National Income Tax was instituted in the same year. They go hand-in-hand. These are two of the most important events in the U.S. in the 20th Century. Stated purpose of the Federal Reserve System: To regulate the nation's money supply and provide a favorable monetary climate that benefits the whole economy. Three major centers of decision-making
How the Fed controls the money supply
The Federal Reserve System is NOT part of the Federal Government. It is a PRIVATE - or public/private - bank. It is called "the bankers' bank". There is a lot of controversy over whether the Federal Reserve should be allowed to create the nation's money, or whether the U.S. Congress should create the nation's money as stipulated in the U.S. Constitution. This controversy is extremely worthwhile to explore and think about, but goes a little beyond the scope of this class. If you want to read about it, see the attachment below called "Fabian the Goldsmith". The U.S. Treasury Dept. is a part of the Federal Government. The purpose of the U.S. Treasury is to finance the government. The Treasury issues bonds and bills (known as "Treasuries", T-bills, government bonds, etc) to finance the shortfall between tax receipts and federal spending. In class we will talk about "who owns" the national debt, which is currently about $20 Trillion. To summarize, the U.S. Treasury borrows money to pay for federal spending. The U.S. government spends about $4 Trillion - but only collects about $3.5 Trillion in taxes - so it must borrow about $0.5 Trillion ($500 Billion) in this manner each year. That is the job of the U.S. Treasury Dept. Class exercise: Read and discuss the handout below "U.S. Money Supply and Inflation"
Activity
"Central Bank" classroom experiment: Objectives: Create several banks with "fractional reserve requirements" and demonstrate how the supply of money can be expanded and contracted by adjusting reserve requirements. Economist Milton Friedman assignment (with 4 videos below)
Central Banking homework questions
Ch. 11: Respond to the eight (8) end-of-chapter questions on page 229. Provide complete, well thought-out answers in your own words. U.S. Money Supply and Inflation questions Complete the questions on the handout below
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