Introduction to Finance

Figure 2.2
indicates the major participants in the U.S. monetary system. A central bank 
is needed to defi ne and regulate the amount of the money supply in the fi nancial system. A 
central bank also facilitates the transferring of money by processing and clearing checks, a 
form of money called deposit money. The central bank in the United States is called the Fed-
eral Reserve System (or Fed, for short). We will discuss the characteristics and operation of 
the Fed in Chapter 4 and cover its policy-making activities in Chapter 5.
An effi
cient banking system also is needed. Not all types of fi nancial institutions are 
the same. For example, while insurance companies and investment companies can provide a 
fi nancial intermediation function between savers and investors, only depository institutions 
as a group can create money. Depository institutions include commercial banks, savings and 
loan associations (S&Ls), savings banks, and credit unions. For purposes of presentation, it 
is common practice to refer to all depository institutions as “banks,” and they all are part of 
the banking system. We discuss the characteristics of depository and other major fi nancial 
institutions in Chapter 3.
The banking system, as depicted in Figure 2.2, is composed of all the banks in the system. For 
illustration purposes, there is a “fi rst bank” and a “last bank.” The banking system creates money 
Starting Your Small Business 
Today, with modern telecommunication facilities and the Internet, 
many small businesses can be located wherever their owners want 
to live and work. At the same time, certain cities and geographical 
areas in the United States may be more conducive to helping small 
businesses succeed.
The Dun & Bradstreet Company (D&B) provides a wealth 
of information relating to the starting of a new business. D&B 
provides information on how to establish, manage, and grow 
your small business. When considering whether to establish, or 
start, a business, it is important to ask, “Are you really ready to 
start?” It is also important to “plan your business,” as well as 
“understand legal and tax issues.” And, before “opening your 
doors,” you might want to access the D&B website at http://
www.dnb.com.