[ 6.1 ] The Role of Money

The Three Uses of Money Money as a Medium of Exchange Money as a Unit of Account Money as a Store of Value

The Three Uses of Money Money has three main functions. Analyze Information Why is it important to have a means of exchange that is a stable, consistent unit of account?

Characteristics of Money To be successful money must be: PORTABLE DURABLE DIVISIBLE LIMITED IN SUPPLY

Portability Easily transferred from one person to another Examples in early years: dog teeth, feather stick money, wampum, tobacco, and compressed blocks of tea

Durability Needs to be able to last when handled and does not deteriorate when being held as a store of value

Divisibility Money must be easily divisible into smaller units, so that people can use only as much as needed

Limited availability Money loses its value whenever there is too much of it

The Six Characteristics of Money This wampum belt was made from shells and used as money by Northeast Native Americans when they traded with European colonists.

The Six Characteristics of Money One characteristic of money is that it is divisible into smaller amounts. Divisibility of money into small amounts such as coins means that you can pay the exact amount for something that you buy.

Sources of Money’s Value Commodity Money- Objects that have value in and of themselves Cattle, Gems, Tobacco

Representative Money Objects that have value solely because the holder can exchange them for something else. IOU

Fiat Money “Legal Tender”-Has value because a government has declared that it is acceptable means to pay debts. Dollars, Pesos, Franks, Euros

Sources of Money’s Value Although cattle's inherent value has led it to be used as money throughout history, this cartoon humorously shows the problems with using commodity money.

Quiz: The Three Uses of Money Which of the following is true about bartering? A. It is usually fast and convenient. B. It is often used in urban areas the United States. C. It involves the exchange of currency. D. It involves the exchange of goods or services.

Quiz: The Six Characteristics of Money The fact that you can pay for a five-dollar item with a ten-dollar bill and get five dollars back in change shows which of the following? A. that money is durable B. that money is a store of value C. that money is uniform D. that money is divisible

Quiz: Sources of Money’s Value Why does fiat money have value? A. because it is backed by a government in which people have confidence B. because it is always more portable and divisible than commodity money C. because it has all of the characteristics of representative money D. because it is the only form of currency that meets the six characteristics of money

The Gold Standard Advantages Disadvantages

Advantages People feel more secure about their money Supposed to prevent the government from printing too much paper currency Enough gold to back up paper currency in circulation

Disadvantages The gold stock may not grow fast enough to support the growing economy People may suddenly decide to convert their currency into gold, thereby draining the government’s gold reserves

Disadvantages Con’t The price of gold is likely to change dramatically over time if it is not fixed There is always the political risk of failure. A government that announces an official price for gold looks ineffective and foolish as it cannot carry out its intentions

[ 6.2 ] Changes in American Banking

American Banking Before the Civil War Opposing Views of Banking The First Bank of the United States Financial Chaos in America The Second Bank of the United States The Free Banking Era

American Banking Before the Civil War Analyze Charts What does the chart suggest about the role of government in banking during the twentieth century?

American Banking Before the Civil War Alexander Hamilton, a Federalist, was a staunch supporter of a strong federal government and, therefore, of a strong central bank.

Stability in the Later 1800s By 1860, an estimated 8,000 different banks were circulating currency. To add to the confusion, the federal government played no role in providing paper currency or regulating reserves of gold or silver. The Civil War, which erupted in 1861, made existing problems worse.

Stability in the Later 1800s Currencies of the Civil War National Banking Acts The Gold Standard

Stability in the Later 1800s During the Civil War, the Confederate government issued currency such as this bill. After the Confederacy lost the war, this currency became worthless.

Banking in the Early 1900s The Federal Reserve System Banking and the Great Depression FDR Reforms

Banking in the Early 1900s The Panic of 1907, illustrated here on a magazine cover at the time, contributed to many people’s belief that the nation needed a central banking system.

Two Crises for Banking As a result of the many bank failures of the Great Depression, banks were closely regulated from 1933 through the 1960s. The government restricted the interest rates banks could pay depositors and the rates that banks could charge consumers for loans. By the 1970s, bankers were eager for relief from federal regulation.

Two Crises for Banking The Savings and Loan Crisis Financial “Meltdown,” Bailout, and “Recovery”

Two Crises for Banking Analyze Graphs During which year did the percentage of subprime mortgages increase the most?

Quiz: American Banking Before the Civil War Which of the following did the Federalists support? A. an economy based on agriculture B. state-regulated banks C. a national bank D. a decentralized banking system

Quiz: Stability in the Later 1800s The official name of the 1861 currency issued by the Federal Reserve was ___________. A. demand notes B. greenbacks C. continentals D. gold standards

Quiz: Banking in the Early 1900s Why did Roosevelt want to take the United States off the gold standard? A. He wanted to increase the value of the dollar. B. He wanted to decrease the value of gold. C. He wanted to encourage people to trust their banks. D. He wanted to give the Fed more control of the money supply.

Quiz: Two Crises for Banking Approximately one third of Obama’s stimulus package was devoted to A. spending increases. B. healthcare. C. tax cuts. D. war-fighting efforts.