1. Money and Banking

2. Why we need money? Robinson-Crusoe Economy: autarky, do not need money
Robinson + Friday: need exchange or trade, barter economy
Barter economy has a drawback: “double coincidence of wants”

3. The Functions of Money Money Medium of exchange Unit of account
Standard object - exchange goods & services
Unit of account
Standard unit – quoting prices
Store of value
Store wealth

4. What serves as money? For a money, we need it Divisible
Identical (uniform)
Storable and durable
Compact (easy to carry): high value per unit of volume or weight
Candidate: gold, silver, copper, …

5. What serves as money? Money today: Fiat money
Decreed as money by government
Little value as commodity- wampum
Maintains value - medium of exchange because people have faith that the issuer will stand behind it

6. The Banking System Federal reserve banking system
Bank keeps reserves only a fraction of deposits
Given depositors would not withdraw quite often
Features
Bank profitability
Banks earns the spread of interest rate
Bank discretion over money supply
Create money
Exposure to bank runs
Keep prudency and lend out money carefully

7. Americans use credit to make many purchases. 
The total amount of funds borrowed and lent each year is enormous. 
In addition to individuals borrowing funds, the federal, state, and local governments all borrow funds, too. 
The nation’s economy, in fact, depends on individuals and groups being able to buy and borrow on credit. 
In this section, you’ll learn what credit is and why people use it.
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8. What Is Credit?
To receive funds for services or goods with the intent of paying back those funds in the future. 
Principal is the amount originally borrowed, and interest is the amount added on for the privilege of borrowing.
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9. Click the mouse button or press the Space Bar to display the answer.
Why do lenders such as banks charge interest?
They must pay interest to their depositors or investors as well as finance the services of the bank.
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10. Installment Debt A loan paid back in equal payments over time 
Used for purchase of durable goods or manufactured products that last over three years 
Longer payback periods have lower payments but higher total interest. 
Mortgages on houses are a popular form of installment debt.
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11. Deciding to Use Credit
Consider the benefit of having the product now instead of later. 
Consider costs of interest and inability to buy other items. 
You do not have to accept every offer of credit.
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12. Gold was losing its favor worldwide as a monetary standard by the early 1900s. In 1914, World War I broke out, and the United States and other nations were cut off from international trade. Nations no longer trusted shipping gold as payments for international debt; it stayed in the nations’ vaults. During such tenuous wartime conditions, gold lost most of its monetary importance.
Gold Standard ended 1933.
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13. .)
By 1811 the nation had about 100 state banks, which had a charter from the state governments. People could exchange the paper notes for gold or silver. 
Each bank had its own currency design so thousands of different notes were in circulation. Counterfeiting became a problem. Because some currencies did not have silver or gold backing, some merchants were wary to accept all forms of currency.
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14. The Greenback and money Standard
To finance the Civil War, congress authorized in 1861 the printing of $60 million of demand notes. They had no silver or gold backing, but the government declared them legal tender. By 1862, Congress authorized a new federal currency. Both of these currencies were called greenbacks because of their green ink.
Civil War mark the first printed currencey.
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15. In time, people feared that greenbacks had little value, like Continental dollars, and they avoided using them. Congress then created a National Banking System (NBS1863) of national banks, which were privately owned but chartered by the federal government. These banks issued National bank notes, backed by the United States government bonds. State banks withdrew their notes.
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16. The Inconvertible Fiat Money Standard
Since 1934 the United States has been on an inconvertible fiat money standard. 
The money supply of the United States is managed by the federal government. 
The tangible component of modern money consists of coins and Federal Reserve notes. The intangible components include travelers’ checks, and checking and savings accounts. 
Modern money must also be portable, durable, and divisible.
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17. Introduction
Banks fulfill two distinct needs. 
They provide a safe place for people to deposit their money, and they lend excess funds to individuals and businesses temporarily in need of cash. 
This can only happen if the nation has a strong banking system.
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18. The Federal Reserve System
Congress responded to the call for reform with the Federal Reserve System, or the Fed, the nation’s first true central bank—a bank that lends to other banks in need. 
The Fed was set up like a corporation and any bank that joined the system had to purchase shares of stock in the system; as a result, privately owned banks own the Fed, not the government. The Fed, however, is publicly controlled. The president appoints and Congress approves the Fed’s Board of Governors.
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19. The Federal Reserve System
Congress responded to the call for reform with the Federal Reserve System, or the Fed, the nation’s first true central bank—a bank that lends to other banks in need. 
The Fed was set up like a corporation and any bank that joined the system had to purchase shares of stock in the system; as a result, privately owned banks own the Fed, not the government. The Fed, however, is publicly controlled. The president appoints and Congress approves the Fed’s Board of Governors.
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20. Section 3: The Development of Modern Banking
The National Banking System brought uniformity to banking. National banks also issued their own currency known as National Bank notes. State-chartered banks that chose not to join gave up printing currency in favor of demand deposit accounts. 
The Federal Reserve System (Fed) was established in 1913, giving the country a true central bank. All national banks were required to join the Fed, and all state banks were also invited to join. 
Despite the Fed, massive banking failures occurred during the Great Depression.
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21. End of notes

22. Section 2: Early Banking and Monetary Standards
In 1863 the National Banking System was set up to strengthen the banking system and to generate new demand for government bonds. Later, other federal currencies became popular, including gold certificates, silver certificates, and Treasury coin notes. 
The gold standard was adopted in 1900, which made all currencies, including Federal Reserve notes, convertible into gold on demand. However, the country left the gold standard in 1934 because gold stocks ran low during the Great Depression. 
After 1934 Americans could not convert dollars into gold.
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