Money and Banking
The Functions and
Characteristics of Money
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Medium of Exchange
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Something a seller will accept in exchange for a
product or service.
Without money, people would have to barter, a
much more complicated process involving a double
coincidence of wants.
Unit of Accounting
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It is used to measure and compare the values of
different items and services.
Helps to keep accurate financial records
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Store of Value
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It is used as a store of value—sell one thing (such as
labor) and save its value (paycheck) for use at a later
time.
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Any item that wants to be money must meet
six criteria:
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Durable—withstands wear and tear of being passed
around
Portable—must be easy to transport
Divisible—must be able to divide it into small parts
in order to purchase things of differing value
Must have stable value
Must be a scarce item so that there is not too much of
it.
Must be accepted by the sellers and buyers in
community
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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
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Cattle are used for food; gems are used for jewelry.
Representative Money: money that is backed by
an item of value such as by gold or silver
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The amount of money in circulation would be
limited because it is linked to some scarce good, such
as gold.
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Fiat Money: money that has value because a
government fiat, or order, has established it as
acceptable for payment of debts
Today, all US money is fiat money and is
declared legal tender.

Legal Tender: money that by law must be accepted for
payment of public and private debts
History of American
Money and Banking
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England forbade Colonial America from using
printed money or minted coins.
Bartering of various goods was used in place of
money.
When the war came, the Continental Congress
issued bills of credit (Continentals) to pay war
debts.
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Too many Continentals were issued and they
became worthless.
After the war, the United States began to mint
its own coins backed by gold and silver.
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Checking accounts
Automatic deposit and payment
Storage of valuables
Money transfers
Overdraft checking, which allows a customer
to write a check for money that is in the
account and the bank will loan the money to be
paid back at a high interest rate.
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Computers ushered in a new form of
banking—electronic fund transfers (EFT)
Automated teller machines (ATMs)
Lack of privacy and possibility of tampering
are risks of electronic bank transfers.
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Customer has little “float” time between
writing the check and its being cashed by the
bank.
Electronic Funds Transfer Act helped calm
some of these concerns.
Types of Money in the
United States
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Currency
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Coins and bills (notes)
Federal Reserve Notes and United States Notes are
legal tender.
Credit Cards and Debit Cards
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Credit cards are not really money; they are
representative of future claims to funds.
Credit cards actually defer the completion of the
transaction to a later date.
Debit cards are similar to checks, but the withdrawal
is done electronically.

Checks
Checks and checking accounts offer checkable
deposits.
 Today all thrift institutions offer checkable deposits.
 Checking Account: account in which deposited money
can be withdrawn at any time by writing a check
 Checkable Deposits: money 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
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Near Moneys
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Near Moneys: assets, such as savings accounts, that
can be turned into money relatively easily and
without the risk of loss of value
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Near moneys are assets that have values stated in
terms of money, but are not themselves money.
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Near money can easily be turned into money, such
as savings accounts or time deposits.
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Definition M1 includes:
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all currency,
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all deposits in checking accounts,
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and travelers’ checks.
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Definition M2 includes:
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all of M1 plus savings deposits,
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Time deposits,
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small denomination CD’s,
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money market deposit accounts,
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money market mutual fund balances,
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And other specialized account balances.