In a barter economy, a mutual coincidence of wants is required for trade to take place. Settlers in Colonial America used commodity money or fiat money. Early paper currency in Colonial America was a form of fiat money. Specie—silver or gold coins—were the most desirable form of money because of their mineral content and because they were in limited supply. Pesos were nicknamed “talers,” which sounded like “dollars,” and the term “dollars” became so popular that it became the basic monetary unit in the U.S. money system. The Evolution of Money

Money must be portable, durable, divisible, and available, but in limited supply. Money plays three roles in the economy: a medium of exchange, a measure of value, and a store of value. Modern money shares the same fundamental characteristics of all money: portability, durability, divisibility, and scarcity. Components of modern money include Federal Reserve Notes, metallic coins, and demand deposit accounts (DDAs). The Fed defines money supply as M1 and M2. o M1: coins, currency, traveler’s checks, DDAs, checking accounts o M2: everything in M1, plus savings deposits, time deposits, and money market funds Characteristics and Functions of Money

During the Revolutionary War, Continental dollars were printed. The Constitution left the printing of paper currency to the individual states. State banks received their operating charters from individual state governments. Problems with pre-Civil War currency included: each bank printed its own currency, resulting in many different notes; banks issued too many notes; counterfeiting. Congress printed paper money for the first time to pay for the Civil War. The National Banking System was established in 1863, consisting of national banks that issued currency backed by federal bonds. Other federal currencies included Gold Certificates and Silver Certificates. Early Banking in America

The United States went on the gold standard in 1900, allowing people to exchange other federal currencies for gold. Advantages of a gold standard: people feel secure about currency and the government does not create too much money, so the money keeps its value. Disadvantages of a gold standard: slowing of the money supply if gold is scarce and the risk that a people may their convert currency, depleting the gold supply. In 1933, President Roosevelt issued orders denying U.S. citizens the right to redeem dollars for gold, although foreign countries could still do so. In 1971, President Nixon declared that the U.S. would no longer redeem any dollars for gold. The Gold Standard

Congress created the Federal Reserve System in 1913 as the nation’s central bank. During the Great Depression, many smaller banks failed. In 1933, President Roosevelt declared a bank holiday, during which all banks were required to close; most were allowed to reopen after Congress passed legislation to strengthen the banking industry. The Federal Deposit Insurance Corporation (FDIC) was formed in 1933 to insure customer deposits. All other forms of federal currency have now been replaced by Federal Reserve Notes. Our monetary system today is sound and has a uniform currency, but some banks have become so large that they cannot be allowed to fail. Creation of the Fed

Most banks are established as corporations so that they can raise money by issuing stock and so that consumers will not be responsible for the bank’s debt. New banks may begin operations by accepting deposits and paying interest on them, and may offer certificates of deposit (CDs). When a bank receives a new deposit or CD, it must keep 20 percent of the deposit as a fractional reserve, but is allowed to lend the remaining 80 percent. Banks earn money on consumer and business loans, investments, and fees charged to consumers. How a Bank Gets Its Money

To evaluate your banking needs, consider which services you need, the bills you normally pay, and how you wish to pay them. Services offered by banks include checking accounts or DDAs, savings accounts, time deposits, debit cards, credit cards, smart cards, electronic funds transfer (EFT), and safety-deposit boxes. Selecting a Bank

Saving on a regular basis will provide funds for future use and will demonstrate that you have the discipline and patience to embark on a career-long path to financial success. Pay attention to products and fees charged by your bank so that you can avoid unnecessary fees. You can make yourself creditworthy by purchasing an item on time and keeping up with the payments or by building a good financial relationship with a bank. Rounding Out Your Financial Literacy