MONEY and BANKING
How is Money different from
Money is anything that people commonly
accept in exchange for goods and
Money was developed to overcome
problems associated with bartering.
Suppose that you go shopping and
decide to buy a jacket.
When you pay for the jacket you hand
the clerk a chicken.
The clerk refuses to accept the chicken,
so you offer him 12 oranges, a picture of
your mother and a coffee mug.
The clerk refuses all of these as well.
Finally, you open your wallet and offer
the clerk several pieces of paper with a
picture of an 18th century politician and
the number 10 printed in green.
The clerk accepts these pieces of paper
because they have a guaranteed
standard of value in the U.S.
In the U.S., money has 3 basic functions
which make it a more efficient system
Medium of Exchange
Any item that sellers accept as payment
for goods and services
Ex. – If you have a part time job in a
restaurant, you will be paid in money
rather than in barbeque sauce. You then
can use the money to buy anything you
want. (Including barbeque sauce.)
Standard of Value
A measure of the relative value of goods
Ex. – People can compare the worth of
items such as a CD and a pizza. If the
CD cost $10 and a pizza cost $5, a
consumer knows that the relative value
of the CD is twice that of the pizza.
Store of Value
Money can be saved or stored for later
For money to serve as a store of value, 2
conditions must be met
• Must be non-perishable – can’t rot over time
while being saved.
• Must keep its value over time.
5 Major Characteristics of
Refers to money’s ability to be used over
and over again.
The ability to be carried from one place
Refers to money’s ability to be divided
into smaller units.
Money must be stable in value.
Encourages saving and maintains
money’s purchasing power.
Means that people are willing to accept
money in exchange for their goods and
Money must have and must retain it’s
How does money get its value?
Economists have identified 3 sources of
value for money.
• Commodity Money
• Representative Money
• Fiat Money
An item that has value of its own and is
used as money.
• Ex. – Precious metals, gems, salt in ancient
Rome, tobacco and beaver pelts in early
An item that has value because it can be
exchanged for something valuable.
• Ex. – During the American Revolution the
Continental Congress issued representative
money, called Continentals, to finance the war
for independence against Great Britain.
Merchants accepted these and would trade
them in to the government for gold or silver
This is a Continental
An item that has value because a
government fiat, or decree, says that it
• Ex. – The majority of nations today use a form
of fiat money called currency (paper bills and
coins) for money.
The U.S. Relies on Fiat Money
It’s money takes on the form of coins,
paper money, and checks.
Coins are made by the U.S. mint.
Paper money is printed by the Bureau of
Engraving and Printing in Washington
Checking accounts make up th largest
segment of U.S. money supply.
History of U.S. Banking
Pre-Civil War (1780’s-1860)
This was the time of experimentation
and debate in U.S. Banking
Some wanted a national banking
system and some wanted states to
regulate banks within their borders.
2 National Banks were formed, one in
1791 and the other in 1816. (Both
The major problem with banking during
this period was that states issued their
own currency and some states used
pieces of dollar bills to represent
• Ex. – if you visited a store in the 1830’s and
paid for a 25 cent item with a $1 bill, the clerk
might cut the bill into 4 pieces and return 3 of
them to you as change.
Civil War to WWI (1860-1913)
The federal government created a dual
banking system made up of state and
During the Civil War, Congress issued
currency to pay for the North’s war
This new currency was called
greenbacks or U.S. notes and was not
backed by gold or silver
The Confederate States also issued their
own money, which was worthless by the
end of the war.
WWI to the Present (1913 –
In 1913 Congress passed the Federal Reserve
Act, establishing the Federal Reserve System
(commonly called the “Fed”)
The Fed became the nation’s central bank, and
all nationally chartered banks were required to
State chartered banks could choose to join or
During the 1920’s about 7,000 banks
closed because they were poorly
At the time if a bank closed the people
who had money in the bank lost all of
their money (people lost confidence in
When Franklin D. Roosevelt was elected
in 1932, he issued a “Bank Holiday” in
which he closed down every bank in the
U.S. for 4 days.
FDR then sent out inspectors to
determine which banks were strong
enough to reopen.
Almost all were reopened, and people
began to put their money back into the
FDR also created the Federal Deposit
Insurance Corporation (FDIC) to insure
bank deposits up to $5,000 ( today =
U.S. Banking Today
3 major type of financial institutions have
emerged as the U.S. banking system
Nearly 10,000 commercial banks exist in
Their main functions are to lend money,
accept deposits, and transfer funds
Saving and Loans Associations
Established to lend money and accept
Mutual Savings Banks
Set up to serve people who whished to
make small deposits that large
commercial banks did not want to