• Barter Economy
Chapter 11: Money and Banking
Evolution of Money
Functions of Money
– Moneyless economy that __________________________
– Hindered b/c some products offered may be undesirable
• Life is ___________________________ in an economy WITH money
Three Functions
• Medium of Exchange:
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– Accepted by all parties as payments for
________________________________
– _____________________,___________________, and
_____________________
Measure of Value
– ____________________________________ that can be used to
express worth in terms that most individuals understand
– Price Tag : dollar and cents
Store of Value
– Property that allows ____________________________ to be saved
until needed
– Goods and services can be converted
into________________________
– Enables a period of time to pass between
________________________________ an income
Money in Early Society
Use of money was developed in ancient times
– Made life easier
Commodity money:
– Money that has an alternative use as an economic
________________________
________________________ money
– Money by government decree
– ______________________, and
_________________________________
– Served as money b/c government said they were money
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Money in Colonial America
__________________ and _________________________ once accepted
currencies
States passed laws to print
_________________________________________
– Backed by local banks with gold and silver
American revolution
– Continental dollars (w/o gold and silver backing); worthless at end
of the war
Colonies used
– Specie, gold and silver coins (limited in supply)
– ___________________________
• Spanish Peso
Origins of the Dollar
– Formed in Mexico from ____________________
– Ships became victims of Caribbean pirates
– Known as “pieces of eight”
• Divided into 8 sub parts known as____________________
– Talers = name of Austrian money
• Franklin and Hamilton liked how______________________ sounded
(dollars)
Origins of the Dollar: Franklin and Hamilton
• Dollar
– _____________________________________ (or standard unit of
currency)
– Divided into __________________________(different form the
peso)
Characteristics of Money
• Must be___________________________
– Easily transferred from one person to another
• Must be__________________________
– Lasts when handled or store for long periods
• Must be __________________________
– Facilitate all transactions
• Must be __________________________
– Retain its value
Early Banking and Monetary Standards
Privately Issued Bank notes
• Monetary standard
– The mechanism designed to keep money supply portable, durable,
divisible and limited in supply
• Continental currency was worthless
– Only ______________________ coins
– Congress has the power to coin money; prevented states from
“coining” money
– Private banks ________________________________________
Growth of State Banking
• 1811 the nation had 100 state banks
– Banks that receive a ________________________ to operate from a
state government
– __________________________paper notes for gold and silver
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Abuses in Banking
Banks only printed amount of currency they could____________ with
gold and silver
________________________________________ (dishonest/fraudulent
banks)
– Printed larger amounts of currency in remote areas
– Made redemption of currency difficult
Problems with Currency
First, each bank issued its _____________________________
– Different color, size, denominations
– 100’s different notes
Second, bank could print money
___________________________________
– Issue too many notes
Third, _____________________________ became a major problem
– Just made their own up
By Civil war, 1600 banks issued 10,000 different kinds of currency
_______________________________were worried about backing of
money
The Greenback Standard
• Civil War Congress authorized (1861) printing of $60 million of
______________________________________
– Did not have gold and silver to backing
– Government declared them _____________________________
• 1862: new federal currency
– Called _________________________________ b/c of green ink
– Did not have gold and silver backing
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National Currency
People ________________________________greenbacks and avoided
using them
NC: Paper currency of uniform appearance that was backed by
United States government bonds
Congress created the
_____________________________________________ (NBS)
– Banks privately owned but chartered by the Federal Government
– ________________________________________________________
– Backed by US bonds
– _____________________ banks withdrew their notes
National Currency
1863: Fed Gov’t issued gold certificates backed by gold
– At first they were printed in_________________ denominations for
banks
1886: issued silver certificates
– Printed in_______________________________ denominations for
public use
National Currency
__________________________________: paper currency backed by
gold placed on deposit with the United States Treasury
__________________________________: paper currency backed by
silver dollars and bullion placed on reserve with the treasury
____________________________________: paper currency issued by
the Treasury that was redeemable in both gold and silver
Gold Standard
• Defined as the dollar being worth a ____________________________
of gold. Gold certificates could be exchanged for an
__________________ amount of gold.
• 1900: Congressed passed
– Basic unit = ___________________________
– Equivalent to specific amount of gold
– Did not change the use of
______________________________________
– Americans could exchange them for gold
• Remained in effect until the Great Depression
Gold Standard
• Advantages
–
____________________ Americans felt about their money
– It prevents the government from
______________________________________ paper currency
• Disadvantages
– Gold stock _____________________fast enough to support a
growing economy
– People may decide to convert their paper
_______________________________
– _____________________ will respond to the market and lose
substantial value
– Political risk of failure
Abandoning the Gold Standard
• ____________________________________: Removed the U.S. from
the Gold Standard
• We moved to _______________________________, using an
inconvertible fiat money standard
• _______________________ (legal tender): anything the government
decrees is valuable
The Inconvertible Fiat Money Standard
• 1934: US has been on an inconvertible fiat money standard
– _____________________________ under which the fiat money
supply cannot be converted into _____________ or
_____________________ by its citizens
• Money supply of the US is managed by the
________________________________
Characteristics of Modern Money
• __________________________ component of modern money
– Coins
– Federal Reserve notes
• __________________________ component
– Traveler’s checks
– checking accounts
– Savings accounts
• Portable
• Durable
• Divisible
Characteristics of Modern Money