Chapter 11 Money and Banking Section 1: Barter economy economic system where money is not used. Relies on trade Hard to value trade items Hard to divide trade items

Money any substance that serves as a medium of exchange Measure of value Store of value Accepted by society

Medium of exchange something accepted by all parties as payment for goods and services Gold Silver Salt Salarium: annual pay for Roman soldiers = salary

Measure of value a common denominator that expresses worth that most people can understand. US: price expressed in dollars and cents.

Store of value property of a medium that allows purchasing power to be saved until needed Goods and services can be converted into money. Some, more than others Precious metals/minerals Vintage items (cars, wines, art….) Money itself is a store of value

Commodity money has an alternative use as an economic good Compressed tea Spears Dog teeth

Alternative forms of Currency Come up with 10 alternative forms of currency. Bottle Caps Gum Salt Gold Silver Gasoline Water Food Coffee Cloths Shoes Glasses Medicine Wood Alcohol

Characteristics of Money Durability Must be able to last when handled so that it can last. Roman coins that still exist today Portability Easily transferable from one person to another. Divisibility Money should be able to be divided into smaller units so that you only spend what you need to. Limited Availability If the product is too common then it would have no value.

Fiat money has a monetary value by government decree. Metallic coins/paper bills It has value because we have faith in our government. Without this trust in the government the currency has no value.

specie money in the form of coins made from silver or gold.

Monetary unit 289 standard unit of currency in a country US, dollar Japan, yen Britain, pound China, yuan Europe, Euro-dollar India, rupee Russia, rouble

Section 2: Monetary standard the mechanism that keeps the money supply….. Portable Durable Divisible In a limited supply

State banks banks that received their charter to operate from a state government Issued their own currency Backed by gold/silver Subject to Fraud Counterfeiting

Legal tender fiat currency that must be accepted in payment of debts Paper issued during the American Civil War Aka: “greenbacks”

United States Notes a new fiat currency issued in 1862 Legal Tender Act Also called “greenbacks” No gold or silver backing.

National banks privately owned banks that received their charters from the federal government. Part of the National Banking System All banks would be forced to join the NBS after 1865 US government put a 10% tax on private banks not in the system.

National bank notes, national currency paper currency that was backed by US government bonds Uniform appearance Confidence backed by “rigorous” government inspections and audits of banks.

Gold certificate paper currency backed by gold Gold deposited in the Federal Treasury First used in large denominations for banks Later smaller denominations for public use.

Silver certificate 1878 paper currency backed by silver Political gimmick to help the silver industry Also put more currency in economy to stimulate consumption

Treasury coin notes paper currency issued by the US Treasury Redeemable in gold or silver Ended in 1893

Gold standard basic currency was equal to, could be exchanged for, a specific amount of gold. 1900 Gold Standard Act Could be exchanged at the Treasury for gold at any time.

Inconvertible fiat money standard US system since 1934 A monetary standard under which the fiat money supply cannot be converted into gold or silver by its citizens.

Assessments: Checking for Understanding 1 How does money advance the exchange of goods and services? Money allows people to buy directly what they need instead of waiting for a “mutual coincidence of wants” Mutual coincidence of wants allows barter to happen.

Assessment 3 Describe three functions of money. It serves as a medium of exchange Measure of value A store of value

Assessment 4 Name four types of early money. Tea leaves cheese Spears Various commodity money

Assessment 5 Explain how the dollar was adopted as the basic monetary unit. US states printed their own money Backed by gold/silver Worked only for region national economy was in chaos. Federal government needed funds for the revolution and issued paper bills. Idea was temporarily successful, but inflationary in the long run The idea of a national monetary unit was popular, though. Specie, not paper. Name for dollar came from Austria

Assessment 6 Identify the four characteristics of money. Portability Durability Divisibility Limited availability

Assessments: Checking for Understanding 1. What is the purpose of a monetary standard? To keep the money supply Portable Durable Divisible In a limited supply

Assessment 3 Explain how privately issued bank notes became part of the money supply. Before the US Civil War, most of the money was paper currency used by privately owned state-chartered banks.

Assessment 4 List the five major currencies in use after the Civil War. Greenbacks National currency Gold certificates Silver certificates Treasury coin notes

Assessment 5 Identify the advantages and disadvantages of a gold standard. Advantages: Some feel secure if they know money can be converted into gold Can prevent the government from printing too much paper currency Disadvantages: Gold stock may not grow fast enough to meet the needs of the economy Drain on the government’s gold reserves The price of gold fluctuates Political risk of failure.

Assessment 6 Describe the inconvertible fiat money standard the United States uses. It is a system under which the fiat money supply cannot be converted into gold or silver by its citizens.

Image, p. 288 How does money function as a medium of exchange? It is generally accepted as payment for goods and services.

Image, p. 289 What characteristics must money have to be a successful medium of exchange? Portability Durability Divisibility Limited availability

Image, p. 293 What part of the Constitution gives Congress the right to coin money? Article I, section 8

image, p. 294 In what order re the quarters being released? In the order in which the states were admitted to the Union.

p. 297 1 Why does the writer believe countries will not accept a common currency? The depictions on currency reinforce national icons and symbols Countries reluctant to surrender control of the own banking systems and macroeconomic policy. 2 Is the writer’s argument valid or not? For ten years, the Euro has been successful. At one point, it was worth over USD $1.60. Presently, due to member nations’ economic failures (Greece, Ireland, etc.), the Euro has dropped in value of USD $1.30

Quick Write Why do you think that Great Britain did not switch over to the Euro in 2002?