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?