Chapter 10 – Money and Banking

The Evolution of Money History In the beginning, cultures used the “barter system”: moneyless economy that relied on trade. Life is much simpler within a monetary economy. “Money”: any substance that serves as a medium of exchange, a measure of value, and a store of value.

3 Functions of Money: “Medium of Exchange”: something accepted by all parties as a payment for goods and services (gold, silver, salt) “Measure of Value”: a common denominator that can be used to express worth in terms that most people understand (dollars and cents). “Store of Value”: property that allows purchasing power to be saved until needed (money can be stored until needed).

4 Characteristics of Money: 1. Portability: must be easily transferred from one person to another. 2. Durability: must have lasting power, not break down (literally). 3. Divisibility: must be able to break it down into smaller units. 4. Limited Availability: must have limited supply or it loses value (inflation)

Early Banking and Monetary Standards “Monetary Standard”: the mechanism designed to keep the money supply portable, durable, divisible, and limited in supply. “National currency”: paper currency of uniform appearance, backed by U.S. government bonds.

The United States used to be on the “gold standard”: the basic currency unit is equal to, and can be exchanged for gold. System failed when people exchanged money for gold during the Great Depression and banks could not handle it, leading to bank failures.

Currently, the U.S. uses “The Inconvertible Fiat Money Standard”: The fiat money supply cannot be converted into gold or silver by its citizens. Government controls the composition, quantity, and quality of money supply.

The Development of Modern Banking In 1913, government created the Federal Reserve System (“Fed”). This was the nation’s first true “central bank”: a bank that can lend to other banks in times of need. WORD The Fed is privately owned but publicly controlled – the President and Congress tells it what to do. The Fed creates and controls supply of our national currency.

Banks serve 2 basic needs: 1. Provide a safe place to deposit money. 2. Loan funds to people temporarily in need of cash.

Federal Deposit Insurance: “Glass-Steagall Act (1933)” created the Federal Deposit Insurance Corporation (FDIC) – insures bank accounts up to $100,000. Video Site Fed Update *If someone loses more than $250,000, they can go to the court as a “creditor”: (a person to whom money is owed) and sue the bank’s owner to recover the rest.

“Commercial Banks”: banks that cater to business and commerce (offered checking accounts and that’s about it). “Savings Banks”: cater to individuals (offer checking, savings, etc.) “Savings and Loan Associations”: invests majority of its funds in home mortgages. “Credit Unions”: nonprofit service cooperative that is owned by, and operated for, the benefit of its members (low costs, organized around employer, deductions from paychecks.