Money and Banking Chapter 14

The Functions of Money Historical Money Money has 3 functions: Sheep, gold, shells, whales’ teeth, beads Money has 3 functions: Medium of Exchange Unit of Accounting Store of Value

Medium of Exchange Seller accepts in exchange for a good or service Without Would have to barter Both parties would have to want in order to exchange Still used today in small societies

Unit of Accounting Allows comparison of goods and services Price indicates the value Also allows for accurate record keeping Debts, incomes, etc.

Store of Value You work and store value of the work in form of dollar and coins (in the U.S.) Inflation Less able to act as store of value

Characteristics of Money Must meet most in order to be used as exchange item: Durable – passing between people can withhold the wear and tear Portable – Must be easy to carry Divisible – Must be easy to divide into small parts so purchasing of any amount can be made Stable in Value – Cannot change rapidly or Store of Value will decrease Scarce – What gives it value Accepted – Must be accepted in exchange for goods and services.

Types of Money Commodity Money Representative Money Fiat Money Gems, Cattle, Gold, Silver Representative Money Money backed by or exchangeable for gold or silver Historically used in the U.S. Fiat Money Face value given through government order Becomes legal tender Type of Money in U.S. today

History of American Banking Colonial Period Could not print money or coin Used Bartering Wampum (bead necklaces, bracelets, etc.), Tobacco European gold or Silver Spanish Dolar Revolutionary War Continental Congress issues “Continentals” Issued as credit against deposits Many became worthless so businesses would not accept

History of American Banking Cont. After the Rev. War Constitution (1788) gives power to mint coins Private banks issued banknotes Bills that represented total of gold and silver in reserve Coinage Act of 1792 Unit of Currency for the U.S. – The Dollar

Banking Services Have both a National and State-Chartered System today Offer: Checking, automatic deposits and payments, storage of valuables, transfer money, overdraft checking Terms and Conditions vary by state KNOW YOUR BANKS POLICIES AND FEES!!

Electronic Banking Developed in late 1970s Electronic Funds Transfer (EFT) Transfer of money from one bank to another without money changing hands ATMs – Automated Teller Machines Today, Bank from home Check balances, transfer funds, pay bills, apply for loan EFT Concerns: Fraud All customer information stored on computer mainframe Hacker can access information if able to get around firewalls Electronic Funds Transfer Act of 1978 Customers only responsible for $50 if stolen or illegally used card if reported within 2 days More than two days - $500

Types of Money in the U.S. and Near Moneys Currency – The U.S. Dollar Coins (5% of Currency) Issued by Bureau of Mint Part of Treasury Department Paper (95% of Currency) Issued by Federal Reserve Bank Created by Bureau of Engraving and Printing Prints Money Redesigns money every 7 to 10 years Why? Denominations of: 1, 5, 10, 20, 50, 100 Used to have up to a 100,000 bill

Checks Money deposited into a Checking Account Offered by: Withdraw is done by writing a check Bank pays amount when presented for payment Offered by: Savings Banks, S&L’s, Credit Unions, Commercial Banks Many offer for free Banks make money through service fees Largest part of money supply in the U.S.

Credit Cards and Debit Cards Not a form of money Why??? No store of value, no unit of accounting Is a loan to you by issuer of card Debit Card Automatically withdrawals funds from a checking account Funds get transferred within 72 hours Advantage over Checks Cannot over draft the account

Near Moneys Values stated in terms of Money Have High Liquidity Examples: Savings Account Time Deposit