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Corporate Finance 
Corporate Finance, branch of economics concerned with how businesses raise and spend their money. Companies spend or invest funds in projects that might make the firm more profitable, such as a new factory or an improved product. Corporate finance involves selecting and financing projects that maximize profits and make the best use of a company's funds. 

Corporate Ownership 
Major corporations are far too large to be owned by one individual. Instead they are owned by many people, called shareholders, who own shares of stock, which allows them to share in the company's profits. Each share of stock represents ownership of a portion of the firm and its possessions, or assets. Shareholders who possess a large number of shares own a larger portion of the company than those who possess only a few shares. Shares of stock are bought and sold on a number of stock exchanges. To manage a company, its shareholders elect a board of directors who hire key company executives and review their job performance. 

Investment Decisions 
A business regards an investment as successful if it increases the wealth of the shareholders who own the company. This is accomplished when the firm earns profits and passes them back to the shareholders either in the form of dividends or as increases in the value or price of the stock. Dividends are a share of profits paid to shareholders as cash or as additional shares of stock. Profits or earnings that are not distributed to shareholders stay with the firm and are called retained earnings. These earnings increase the value of the stock because they increase the total amount of assets of the firm. 

Investment decisions- that is, deciding what projects to invest in- are based on two criteria: the expected rate of return and the risk or uncertainty of achieving the expected rate of return. The project's rate of return, or simply its return, is a measurement of its profit. A financial manager estimates the return based on forecasts of potential sales, expenses, and profits that might occur from an investment. The return is influenced by its risk. Expected rates of return are higher with risky projects because they must compensate for the project's uncertainty to attract investors. The company should accept any project that is expected to earn a higher return than shareholders can earn with another investment. 

Firms also buy and sell entire businesses, sometimes with a mutual agreement to merge or combine two companies into one. In other cases one firm, the buying firm, goes against the wishes of another firm's management, the target firm, and attempts a takeover. If the buying firm acquires enough of the target firm's stock, it can control the target firm's activities. 

Raising Money for Investments 
Investments require cash. There are three common ways a corporation may be able to raise this cash: by paying smaller dividends, by borrowing, or by selling more stock. A firm can finance projects by paying smaller dividends; it can then keep more of its profits as retained earnings and use them to fund its investments. A company can also choose to borrow money to fund its projects, either from a bank or directly from investors by issuing bonds. Selling stock is a third way companies can raise funds. A financial manager must consider factors other than cost when deciding how to raise money. For example, if a firm tries to raise new funds, the public will speculate about the company's plans. If investors think the plans are a bad idea, the company's stock price could fall. 

Managing Risk 
Events outside the control of a corporation can affect the firm and its financing decisions. For example, a change in the interest rate can suddenly make borrowing money very inexpensive or very costly. A variety of tools, known as derivatives, help manage the risk of such events occurring. Four important kinds of derivatives include (1) futures, (2) forwards, (3) options, and (4) swaps. Futures are promises to buy or sell something in the future at a price that is agreed upon today. Forwards are similar to futures, but they are arranged directly between a firm and a bank. Options give a firm the right to buy or sell something in the future at a price that is agreed upon today. Swaps involve firms swapping one set of payments for another. 

Public Finance 
Public Finance, field of economics concerned with how governments raise money, how that money is spent, and the effects of these activities on the economy and on society. Public finance studies how governments provide desired services and how they secure the financial resources to pay for these services. 

Why Public Finance Is Needed 
Governments provide public goods- government-financed items and services such as roads, military forces, and street lights. Public finance also enables governments to correct or offset undesirable side effects of a market economy, called spillovers or externalities. For example, households and industries may generate pollution without considering the adverse effect pollution has on others. To correct a spillover, governments can encourage or restrict certain activities. Public finance also provides government programs such as social security, welfare, and other social programs. 

Public Spending 
Each year governments create a budget to determine how much money they will spend during the upcoming year. Government spending takes two forms: exhaustive spending and transfer spending. Exhaustive spending refers to purchases made by a government for producing public goods. In transfer spending the government transfers income to people to help them support themselves. Cash transfers are cash payments, such as social security checks and welfare payments. In-kind transfers provide goods or services to recipients. 

Public Revenue 
Most government revenue comes from taxes, such as income taxes, capital taxes, and sales and excise taxes. Personal income taxes are imposed on labor or activities that generate income, such as wages or salaries. Another important source of government revenue is the capital tax. Capital taxes are taken on items or facilities that generate profits, such as factories, business machinery, and real estate. A property tax is a capital tax used by state and local governments. Many state and local governments levy a sales tax on the purchase of certain items. Excise taxes are levied on a specific product, such as alcohol, cigarettes, or gasoline. 

How Public Finance Affects the Economy 
Government spending and taxation directly affect the overall performance of the economy. If the government increases spending to build a new highway, construction of the highway will create jobs. Jobs create income that people spend on purchases, and the economy tends to grow. The opposite happens when the government increases taxes. Households and businesses have less of their income to spend, they purchase fewer goods, and the economy tends to shrink. A government's fiscal policy is the way the government spends and taxes to influence the performance of the economy. When the government spends more than it receives, it runs a deficit. Governments finance deficits by borrowing money. 

Reconstruction Finance Corporation 
Reconstruction Finance Corporation (RFC), independent agency of the United States government, created during the economic depression by congressional enactment in 1932, and abolished by the Congress of the United States in 1957. 
The purpose of the RFC was "to provide emergency financing facilities for financial institutions; to aid in financing agriculture, commerce, and industry; to purchase preferred stock, capital notes, or debentures of banks and trust companies; and to make loans and allocations of its funds as prescribed by law." These functions were enlarged to include participation in the maintenance of the economic stability of the country by promoting maximum production and employment and encouraging small business enterprises. The basic activities of the RFC were to make and collect loans and to buy and sell securities. Approximately two-thirds of the disbursements of the RFC were made in connection with the national defense of the United States, especially during World War II (1939-1945). 
During 1951 and 1952 congressional investigators found considerable evidence of fraud and corruption among RFC officials. In 1953 Congress enacted the RFC Liquidation Act, providing for the gradual transfer of the functions of the RFC to other government agencies. 

ECONOMICS & BUSINESS 
Banking 

Banking, transactions carried on by any individual or firm engaged in providing financial services to consumers, businesses, or government enterprises. In the broadest sense, a bank is a financial intermediary that performs one or more of the following functions: safeguards and transfers funds, lends or facilitates lending, guarantees creditworthiness, and exchanges money. A narrower and more common definition of a bank is a financial intermediary that accepts, transfers, and creates deposits. 

Early Banking 
Many banking functions can be traced to the early days of recorded history. In the Middle Ages (5th century to 15th century), the Knights Templars, a military and religious order, stored valuables, granted loans, and arranged for the transfer of funds from one country to another. The great banking families of the Renaissance (14th century to 17th century), such as the Medicis in Florence (Italy), were involved in lending money and financing international trade. The first modern banks were established in the 17th century. 

Seventeenth-century English goldsmiths provided the model for contemporary banking. Gold stored with these artisans for safekeeping was expected to be returned to the owners on demand. The goldsmiths soon discovered that the amount of gold actually removed by owners was only a fraction of the total stored. Thus, they could temporarily lend out some of this gold to others. In time, paper certificates redeemable in gold coin were circulated instead of gold. Consequently, the total value of these banknotes in circulation exceeded the value of the gold that was exchangeable for the notes. Two characteristics of this system remain the basis for present-day operations. First, the banking system's monetary liabilities exceed its reserves. Second, liabilities of the banks (deposits and borrowed money) are more liquid—that is, more readily convertible to cash—than are their assets (loans and investments). This characteristic enables consumers, businesses, and governments to finance activities that otherwise would be deferred or canceled; however, it underlies banking's recurrent liquidity crises. When too many depositors request payment, the banking system is unable to respond because it cannot convert all its assets to cash. This means that banks must either abandon their promises to pay depositors or pay depositors until the bank runs out of money and fails. Governmental deposit insurance has done much to alleviate the fear of deposit losses due to bank failure. 

Commercial Banking in the United States 
Commercial banks are the most significant of the financial intermediaries. The first bank to be chartered in the United States was the Bank of the United States, established in Philadelphia, Pennsylvania, in 1791. The bank was authorized to issue banknotes as legal tender exchangeable for gold. Although it succeeded in establishing a sound national currency, its charter was not renewed in 1811 for political and economic reasons. The history of the second Bank of the United States (1816-1836) repeated that of its predecessor. It served ably as the government's banker, achieved a sound national currency, and failed for political reasons. 

In the next three decades the number of banks grew rapidly in response to the flourishing economy and to the system of free banking—that is, the granting of a bank charter to any group that fulfilled stated statutory conditions. The multiplicity of state banks, however, each issuing its own banknotes, resulted in a highly inefficient currency mechanism. The National Bank Act (1864) established the office of the comptroller of the currency to charter national banks that could issue national banknotes. The stability hoped for by the framers of the National Bank Act was not achieved; banking crises occurred in 1873, 1883, 1893, and 1907, with bank runs and systemic bank failures. The Federal Reserve Act (1913) created the centralized Federal Reserve System to act as a lender of last resort to forestall bank crises and to permit a more elastic currency to meet the needs of the economy. Reserve authorities, however, could not prevent massive bank failures during the 1920s and early 1930s. The Banking Acts of 1933 and 1935 introduced major reforms into the system and its regulatory mechanism, including the creation of the Federal Deposit Insurance Corporation (FDIC), which now insures each depositor up to $100,000 per bank. 

Loans account for over half of the total bank assets in the U.S. commercial banking system. Bankers lend to businesses, consumers, and governments (both domestic and foreign). The second largest category of bank assets is investments, held by banks for both liquidity and income purposes. These investments include U.S. government and government guaranteed securities, the bonds of states and municipalities, and private securities. Banks also hold cash assets, mostly for liquidity purposes, but also because the banking authorities require that a certain fraction of deposits be held in cash-asset form. Of the banking system's liabilities, about three-fourths are in the form of deposits, primarily from individuals and companies, but also from domestic and foreign government agencies. Nondeposit liabilities include borrowings on the federal funds market. 

Thrift Institutions 
Savings and loan associations (SLAs) and savings banks are similar but separate financial institutions. Historically, commercial banks ignored the nonbusiness sectors of the economy. This led to the evolution of a variety of institutions designed specifically to serve the neglected consumer market. SLAs first appeared in the 1830s as building societies to provide their members with funds to buy or build a home. Today, SLAs continue to concentrate on funding homes. SLAs accept deposits from the public and use these funds to make various types of investments, mostly in residential real estate mortgages, and particularly in home mortgage loans. In the late 1980s the failures of many SLAs caused the government to overhaul the industry. 

Savings banks were established to encourage thrift among working people and to provide a secure place for them to save. They pooled depositors' savings for investment. Deposits in most mutual savings banks (MSBs) are insured by the FDIC. Today, SLAs, MSBs, and savings banks are all referred to generally as savings institutions. They offer a range of consumer loans, including automobile loans, home equity and home improvement loans, educational loans, trust services, and credit card purchases. Savings institutions also offer depositors checking accounts in the form of NOW accounts and Super NOW accounts, as well as a wide range of savings instruments, including insured money market accounts. 

Role of Central Banking 
The foremost monetary institution in a market economy is the central bank. These are usually government-owned institutions and are responsible to the national interest. Most central banks perform the following functions: They serve as the government's banker, act as the banker of the banking system, regulate the monetary system for both domestic and international policy goals, and issue the nation's currency. As banker to the government, the central bank collects and disburses government income and receipts, manages the issue and redemption of government debt, advises the government on all matters pertaining to financial activities, and makes loans to the government. As banker to the nation's banks, the central bank holds and transfers banks' deposits, supervises their operations, acts as a lender of last resort, and provides technical and advisory services. Monetary policy for both domestic and foreign purposes is implemented and, in many countries, decided by the national banking authorities, using a variety of direct and indirect controls over the financial institutions. Coins and notes that circulate as the national currency are usually the liability of the central bank. 

International Banking 
The expansion of trade in recent decades has been paralleled by the growth of multinational banking. Banks have historically financed international trade, but the notable recent development has been the expansion of branches and subsidiaries that are physically located abroad, as well as the increased volume of loans to foreign borrowers. Similarly, the number of foreign banks with offices in the United States has increased. 

ECONOMICS & BUSINESS 
Money 
Money, any medium of exchange that is widely accepted in payment for goods and services and in settlement of debts. Money also serves as a standard of value for measuring the relative worth of different goods and services. The number of units of money required to buy a commodity is the price of the commodity. 

Money and the Economy 
Without the use of money, trade would be reduced to barter, which is the direct exchange of one commodity for another. In a barter economy, a person having something to trade must find another who wants it and has something acceptable to offer in exchange. In a money economy, the owner of a commodity may sell it for money, which is acceptable in payment for goods, thus avoiding the time and effort that would be required to find someone who could make an acceptable trade. The term money supply denotes currency in circulation plus bank deposits. The real value of money is determined by its purchasing power, which in turn depends on the level of commodity prices. 

The most important types of money are commodity money, credit money, and fiat money. The value of commodity money is about equal to the value of the material contained in it, usually gold, silver, and copper. Credit money is paper backed by promises by the issuer, whether a government or a bank, to pay an equivalent value in the standard monetary metal. Paper money that is not redeemable in any other type of money and the value of which is fixed merely by government edict is known as fiat money. Both the fiat and credit forms of money are generally made acceptable through a government decree that all creditors must take the money in settlement of debts; the money is then referred to as legal tender. 

The Monetary System of the United States 
In the American colonies, coins of almost every European country circulated. The colonists also used bullets, tobacco, and animal skins as mediums of exchange. The first unified currency consisted of the notes issued by the Continental Congress to finance the American Revolution (1775-1783). In 1792 the United States adopted a bimetallic standard under which both gold and silver coins were to be minted. The first Bank of the United States, which was chartered by the Congress of the United States in 1791 for 20 years, and the second Bank of the United States, which existed from 1816 to 1836, issued bank notes. After the closing of the second Bank of the United States, most of the paper currency consisted of notes of state-chartered banks, which circulated only in a limited area. 

American money had been backed by commodities, but during the American Civil War (1861-1865), the governments in both the North and the South financed their needs through the issue of fiat money. The notes issued by the Confederate treasury and the Southern states became entirely worthless after the war. The U.S. notes (called greenbacks) and other paper money issued by the federal government also depreciated rapidly. In 1863 the National Banking Act authorized the establishment of national banks that could issue bank notes backed by government bonds. In the late 1800s there was a movement to establish silver as the standard of currency, but in 1900 the Gold Standard Act affirmed the gold dollar as the standard unit of value. 

The next important change in the currency system was introduced by the Federal Reserve Act of 1913, which created the Federal Reserve System, under which was issued the Federal Reserve note. This became the standard currency. The economic depression and the epidemic of bank failures in the early 1930s led to reforms in the nation's monetary structure, including the ending of the gold standard. The country returned to a modified gold standard with a devalued dollar. Silver was also coined and added to the monetary base. At the Bretton Woods Conference in 1944, a new international monetary system was set up. The U.S. dollar played a key role, becoming, in effect, the world's currency. This was true because all members of the International Monetary Fund (IMF) defined the value of their own currencies in terms of the dollar, and because the United States agreed to convert all dollars held by foreign governments into gold on demand. 

When the quantity of dollars held by foreign governments began to exceed U.S. gold holdings by large amounts, the system started to falter. In 1971 the United States suspended gold payments of U.S. dollars. Since then the United States has had a fully managed currency system, one with no metallic base whatsoever. Historically, the nation has gone from a wholly metallic system, when coins were the primary money in circulation, to a managed system, in which, aside from the currency in people's pockets, most of the money consists of entries in the books of banks. In the continuing evolution, as more money is exchanged and transferred electronically, the U.S. money supply will increasingly be represented by entries in computer data banks.