Chapter 11 Money and Banking
Section 1:
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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
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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.
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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
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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
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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
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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
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3 Describe three functions of money.
It serves as a medium of exchange
Measure of value
A store of value
Assessment
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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
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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?