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Money and Banking
Chapter 10
Money
Chapter 10, Section 1
Money…What is it?
 Medium of exchange...used to determine
value during the exchange of goods
 Easier and more useful to exchange money than
goods straight up
 If there is no money, people barter
 Unit of Account...serves as a unit of measure
 This allows us a means to compare goods
 Store of value...assuming there is no inflation,
money keeps it’s value
Characteristics of Money
 Currency...coins and paper bills that we
use
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Durability...must withstand wear & tear
Portability...must be easy to carry (small)
Divisibility...can be broken into smaller units
Uniformity...has consistent value (can count)
Limited Supply...why it keeps its value
Acceptability...recognized by all to have
value
Sources of Money’s Value
 Something must back money to make it
valuable
 Commodity money...an object that has value in
itself and used as money (not portable or divisible)
 Diamonds, cattle
 Representative Money...represents something of
value...can be exchanged for something of value
 IOU, Checks, silver or gold certificates
 Fiat Money...money that has value because the
government says so (our currency)
Review
1. Two units of the same type of money must be the
same in terms of what they will buy, that is, they must
be
(a) divisible.
(b) portable.
(c) acceptable.
(d) uniform.
2. What is the source of fiat money’s value?
(a) it represents the value of another item
(b) government decree
(c) presidential pardon
(d) it is equal to the value of the stock market
History of American
Banking
Chapter 10, Section 2
Banks
 Institutions for receiving, keeping, and
lending money
 Banks also function as a business
 They look to make money
 They do so by using your money
 You are investing in the bank when you
deposit money
 American banking has developed over our
history to meet the needs of our population
History of Banks
 At first, merchants may have held
people’s money
 Easy to lose your money (not safe at all)
 Federalist vs. Anti-federalists
 Federalist (Hamilton) wanted a strong
central bank or a national bank
 Would be able to issue a single currency
 Anti-federalists (Jefferson) wanted to leave it
to the states
First Bank of the US
 Bank of the United States (1791)
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Granted a 20 year charter – license to operate
Hold government funds
Borrow money for the government
Issue money
Watch over state chartered banks (watched their
reserves of gold and silver)
 Provided stability but charter was not renewed
 Only lasted until 1811
State Banks
 Resulted in Chaos
 Printed more money than there was value to
back it (leads to high inflation)
 People lost confidence in the value of money
 States issued charters w/out considering if
they would be stable
 Banks created their own money
 Did not have acceptability, limited stock, or
uniformity
Second Bank of the US
 1816...similar to the first
 20 year charter – slowly rebuilt the public’s
confidence in national banking system
 Many people still opposed the nat’l bank
 Surprised state banks by asking for gold and
silver to represent their currency’s value
 Put many out of business
 State banks started to limit the notes (loans) they
issued
Free Banking Era
 After the closing of the Second Bank of
the US, state chartered banks began
 Bank Runs...many people demanded
backing for their currency
 People wanted the gold or silver
 Wildcat banks...ma and pa banks 
increased instability (high rate of failure)
 Fraud...”made up” that they were banks
 Different currencies – state, city, private, etc.
Civil War Banking
 National Banking Acts of 1863, 1864
 Gave banking powers to the federal
government...looked to stabilize currency
 Power to charter banks
 Require banks to hold reserves
 Power to issue a single currency
 Later (1900’s) adopted the gold standard
 Before this, there was about 8,000 different
banks circulating currency
Gold Standard
 Money represented a certain amount of
gold
 Set a definite value for the dollar
 Currency could only be issued if there was
gold to back it (gave people confidence)
 Abandoned in 1971
 Why abandon the gold standard?
 We turned to use Fiat Money (gov’t decree)
The FED (Federal Reserve)
 1913 Federal Reserve Act…established
the Federal Reserve
 Nation’s first true central bank  bank
that could lend to other banks
 12 Regional Banks throughout the
country that oversee member banks
 Member banks are banks that belong to the
federal reserve system
Federal Reserve
 Supervised by a Federal Reserve Board
(Board of Governors…appointed by the Pres.)
 Loan money to banks in times of demand
 This helps prevent bank failure
 Create Federal Reserve notes (our currency)
 Will increase or decrease $ in circulation
 Today…has huge influence on the economy by
controlling the money supply and setting
interest rates
FDIC
 Federal Deposit Insurance Corporation
 Established as a result of Great Depression
 Act passed in 1933
 Insures people’s money up to $250,000
 This started at $2,500
 Restricts people ability to redeem $ for
gold  because we use Fiat Money
Review
1. During the Free Banking Era between 1837 and 1863, banking in
the United States was dominated by which of the following?
(a) small, independent banks with no charters
(b) the Bank of the United States
(c) state-chartered banks
(d) savings and loans banks
2. After the Civil War, the National Banking Acts gave the federal
government the power to do all of the following EXCEPT:
(a) insure banks against failure
(b) charter banks
(c) require banks to hold adequate gold and silver reserves
(d) issue a single national currency
Banking Today
Chapter 10, Section 3
Money Supply
 All the money available in the US
Economy
 Divided in M1 & M2
 These are the two main categories
 Money in the United States also consists
of checks, checking accounts, deposits,
etc.
M1
 Assets that are liquid (directly converted
into cash)
 Currency (bills and coins) that are held by
people outside of bank vaults
 Demand Deposits (checking accounts…non
interest and interest bearing)
 Traveler’s checks
 Any transaction that can be made on
demand (debit cards, ATM machines, etc.)
M2
 M1 + those that can’t be used directly as
cash
 M2 is also known as “near money”
 Savings (you have to withdraw this $ and
then use it)
 Mutual Funds (funds that pool $ from small
savers to purchase short term gov’t and
corporate securities)
Functions of Financial
Institutions
 Store money…protected from loss
 Saving Money
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Saving accounts – small interest
Checking accounts – frequent withdrawals
Money Markets – more interest than savings
CD’s (certificate of deposit) - higher interest
for a certain amount of time but cannot
withdraw until the time has passed
Functions of Financial
Institutions
 Loans
 Lend money (new businesses)
 Fractional reserve banking (banks only keep
a fraction of $ on hand and lend out the rest)
 Default…failure to pay back loans by people
 This will cause a bank to fail or close
 Mortgage
 Loans for real estate (15, 25, or 30 years)
 Must pay back the principal plus interest
 Long term, lower interest
Functions of Financial
Institutions
 Credit Cards
 Essentially, banks are loaning you money on the
spot
 High interest, short term
 Interest…price paid to borrow money
 Principal…amount borrowed
 Simple interest…interest paid on principal alone
 Compound Interest…interest paid on principal and
interest