1. Chapter 14 Money & Banking Money is usually exchanged for a good or service. Money can be something other than bills, coins and checks (Disney dollars, shells, gold, & sheep) Money – anything customarily used as a medium of exchange, a unit of accounting, and a store of value

2. Functions of Money Medium of Exchange – use of money in exchange for goods and services Barter – exchange of goods and services for other goods and services (works in small societies with simple economic systems) Unit of Accounting – use of money as a yardstick for comparing the values of goods and services in relation to one another Money allows people to determine best bargain and keep accurate financial records. Store of Value – use of money to store purchasing power for later use

3. Characteristics of Money Durable – must withstand wear and tear – paper money lasts 1 year Portable – must be easy to carry Divisible – must be able to be divided for purchases of any price Stable in Value – value cannot change rapidly or it won’t be a good store of value Scarce – scarcity gives money value Accepted – must be accepted as a medium of exchange for debts

4. Types of Money Commodity Money – a medium of exchange such as cattle (food) or gems (jewelry) that has value as a commodity or good aside from its value as money Representative Money – money that is backed by an item of value, such as gold or silver Fiat Money – money that has value because a government fiat, or order, has established it as acceptable for payment of debts (U.S. money) Legal Tender – money that by law must be accepted for payment of public and private debts

5. History of American Money & Banking England did not permit the colonies to print or coin money. Hamilton sets up First Bank of U.S. with opposition to those supporting banks set up by states. First Bank hold govt. accounts, makes loans, regulates state banks and issues money backed by gold 1811 charter not renewed due to fears of too much power. State banks issues notes not backed by gold and silver. War of 1812 exposes weaknesses of banking system and 2 nd Bank is established 1832 President Jackson ends 2 nd Banks charter.

6. History of American Money & Banking Prices and business activity fluctuates for 30 years as amount of money in circulation varies widely Civil War exposes additional weakness of banking system and National Banks are created. Fiat money is issued and uniform currency is created. 1860s to early 1900s gold standard results in money shortages, panics occur and several banks fail. 1913 – Federal Reserve system established Federal Reserve regulates money supply and bank reserve requirements 1929 – Great Depression begins and bankrupt businesses cannot repay loans 1929-1934 Banks collapse as loans are not paid. FDIC is created to insure deposits. 1930s to 1960s – Reforms lead to long term stability in banking

7. History of American Money & Banking 1960s to 1970s – laws passed to protect consumers 1980s to present – deregulation allows risky loans and many S & Ls fail. Bailout costs $300 billion or $4,000.00 per family

8. Banking Services Checking & savings accounts Vacation accounts Overdraft protection – coverage for checks written above amount in account Direct deposit Debit & credit cards Investments Various loans ATMs Electronic and online banking Lollipops and dog treats!

9. Types of Money Currency – coins and bills Checks – Checking Account – account in which money can be withdrawn at any time by writing a check Checkable Deposits – money deposited in a bank that can be withdrawn at any time by presenting a check Credit Card – not a store of money but it is a loan Debit Card – similar to checkable account money Near Moneys – assets, such as savings accounts, that can be turned into money relatively easily and without the risk of loss of value

10. Money Supply M1 – narrowest definition of the money supply; consists of moneys that can be spent immediately and against which checks can be written M2 – broader definition of the money supply; includes all of M1 plus such near moneys as money market mutual fund balances, CDs and Eurodollars.