Chapter Introduction
Section 1: The Functions and
Characteristics of Money
Section 2: History of American
Money and Banking
Section 3: Types of Money in the
United States
Visual Summary
Governments strive for a balance
between the costs and benefits of
their economic policies to
promote economic stability and
growth.
When you think of the word
money, what comes to mind?
Besides coins and cash, what
other types of money can you
name? In this chapter, read to
learn about the functions of
money and the role of the
banking system.
Section Preview
In this section, you will learn about the
different uses, characteristics, and types of
money.
The Functions of Money
Money functions as a medium of
exchange, a unit of accounting, and a
store of value.
The Functions of Money (cont.)
• Economists identify money by certain
functions.
• Medium of exchange
– Without money, people would have to
barter.
The Functions of Money (cont.)
• Unit of accounting
– Price allows people to determine the
better bargain and to keep accurate
financial records.
• Store of value – use of money to store
for future time.
Can you name some reasons that
using money is more efficient than
bartering?
A. Many reasons
B. Some reasons
C. No reasons
0%
A
A. A
B. B
C.0%C
B
0%
C
Characteristics of Money
Any item to be used as money must
first meet certain criteria.
Characteristics of Money (cont.)
• Anything that people are willing to accept
in exchange for goods can serve as
money.
• However, some items are easier than
others to use.
View: Characteristics of Money
Which one of the following
characteristics do you view as most
important regarding money?
A. Durability
B. Portability
0%
D
A
0%
A
B
C0%
D
C
D. Acceptability
B
C. Scarcity
A.
B.
C.
0%
D.
Types of Money
Today, all United States money is fiat
money that is not backed by gold or
any other commodity.
Types of Money (cont.)
• Past mediums of exchange:
– Commodity money
– Representative money
Types of Money (cont.)
• Today all U.S. money is fiat money.
• It is considered legal tender.
Can you think of reasons that fiat
money is better than commodity or
representative money?
A. Many reasons
B. Some reasons
C. No reasons
0%
A
A. A
B. B
C.0%C
B
0%
C
Section Preview
In this section, you will learn about
important events in the history of U.S.
money and banking and about present-day
banking services.
Have you witnessed any changes in
banking or money in your lifetime?
A. Many changes
B. Some changes
C. No changes
0%
A
A. A
B. B
C.0%C
B
0%
C
History of American Banking
Throughout history, instability in the
banking system has contributed to
business fluctuations.
History of American Banking (cont.)
• The history of money in the U.S. is closely
tied to the development of the nation’s
banking system.
View: Time Line of Money and Banking
Banking Services
The efficiency of banking services has
increased as computer technology has
reduced the dependence on paper.
Banking Services (cont.)
• Banks and savings institutions offer a wide
variety of services, including:
– Checking accounts
– Interest on certain types of checking
accounts
– Automatic deposit and payment
– Storage of valuables
Banking Services (cont.)
– Transfer of money from one person to
another.
– Overdraft checking
Banking Services (cont.)
• Banking changed greatly in the late 1970s
with the computer.
• Electronic funds transfer (EFT) has
increased speed and efficiency of banking.
• Most common feature of EFT is the
automated teller machines (ATMs).
• The internet allows people to do their
banking from home.
Banking Services (cont.)
• There are some concerns with the use of
EFT.
• The possibility of tampering and lack of
privacy are drawbacks of EFT.
• The Electronic Funds Transfer Act of 1978
describes the rights and responsibilities of
participants in EFT systems.
Would you do your banking online
even with the threat of identity theft?
A. Definitely
B. Depending on the
situation
C. Not at all
0%
A
A. A
B. B
C.0%C
B
0%
C
Section Preview
In this section, you will learn about what
counts as money and near money in the
United States.
Money and Near Moneys
The money supply consists of not only
bills and other coins, but also checking
and savings deposits and certain other
liquid investments.
Money and Near Moneys (cont.)
• The Bureau of Mint makes all the coins in
the United States.
• They account for about 5% of the currency
in circulation.
• The rest consists of Federal Reserve
Notes issued by Federal Reserve banks.
Money and Near Moneys (cont.)
• The largest part of the money supply in the
U.S. consists of checking accounts.
These are also called checkable
deposits.
• Today all thrift institutions offer many of
the same services as commercial banks.
View: Managing a Checking Account
Money and Near Moneys (cont.)
• The use of a credit card to purchase goods
and services is not money. It is really a
loan by the issuer of the card.
• A debit card, on the other hand,
automatically withdraws funds from a
checkable account.
• Other assets are almost, but not exactly
like money. Time deposits and savings
account balances are near moneys.
Do you feel that the use of a credit
card is wise?
A. Definitely
B. Somewhat
C. Not at all
A. A
B. B
0% C.0%C
A
B
0%
C
The Money Supply
Economists use both narrow and broad
definitions of the money supply to
measure the amount of money in
circulation.
The Money Supply (cont.)
• Two definitions of money supply are used
in the United States today:
– M1—narrowest definition of the money
supply
– M2—broader definition of the money
supply
View: M1 and M2
Money functions as a medium of exchange,
a unit of accounting, and a store of value.
All money, whether bills, coins, or some
other item, must have specific
characteristics.
Money and near moneys include bills,
coins, checkable deposits, savings accounts,
debit and credit cards, and time deposits.
Economic Concepts
Transparencies
Transparency 5
Economic Institutions
and Incentives
Transparency 6
Exchange, Money,
and Interdependence
Select a transparency to view.
money: anything customarily used as
a medium of exchange, a unit of
accounting, and a store of value
medium of exchange: use of money
for exchange for goods or services
barter: exchange of goods and
services for other goods and services
unit of accounting: use of money as
a yardstick for comparing the values
of goods and services in relation to
one another
store of value: use of money to store
purchasing power for later use
commodity money: a medium of
exchange such as cattle or gems that
has value as a commodity or good
aside from its value as money
representative money: money that
is backed by an item of value, such
as gold or silver
fiat money: money that has value
because a government fiat, or order,
has established it as acceptable for
payment of debts
legal tender: money that by law must
be accepted for payment of public
and private debts
overdraft checking: checking
account that allows a customer to
write a check for more money than
exists in his or her account
electronic funds transfer (EFT):
system of transferring funds from one
bank account directly to another
without any paper money changing
hands
automated teller machine (ATM):
unit that allows consumers to do their
banking without the help of a teller
checking account: account in which
deposited funds can be withdrawn at
any time by writing a check
checkable deposits: funds
deposited in a bank that can be
withdrawn at any time by presenting a
check
thrift institutions: mutual savings
banks, S&Ls, and credit unions that
offer many of the same services as
commercial banks
debit card: device used to make
cashless purchases; money is
electronically withdrawn from the
consumer’s checkable account and
transferred directly to the store’s bank
account
near moneys: assets, such as
savings accounts, that can be turned
into money relatively easily and
without the risk of loss of value
M1: narrowest definition of the money
supply; consists of moneys that can
be spent immediately and against
which checks can be written
M2: broader definition of the money
supply; includes all of M1, plus such
near moneys as savings deposits,
small denomination time deposits,
money market deposit accounts, and
retail money market mutual fund
balances
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