Money and Banking
Mr. Southward
Money
Medium of Exchange  something that is
accepted by all parties involved and is used
as payment for a good or service;
Measure of Value  having a common
denominator which allows individuals to
establish worth from one product to
another;
Store of Value  allows purchasing power
to be saved until needed.
Money in the Early Days
Throughout history people have found
many ways to display money; the
primary way is the use of Commodity
Money, money that has an alternative
use as an economic good and has value
in and of itself.
Over time, people have shifted towards
Fiat Money, money by government
decree.
Examples: gunpowder, musket balls,
corn, etc.
Read pages 288-289,
provide a paragraph
explaining the basic details
of money that existed in
colonial America and the
origins of the dollar.
The Basic Characteristics of
Money
Portability
Durability
Divisibility
Limited Availability
Explain why each of the following
characteristics is so important when
examining money
Early Banking and Monetary
Standards
A monetary standard is the mechanism
designed to keep the money supply
portable, durable, divisible, and limited
in supply.
1811  Banks in colonial period issued
their own currencies and in 1811, there
existed around 100 state banks, banks
which receive their charter to operate
from state governments; they issued
their own currencies
Problems with State Banks Currencies
Different sizes, colors, and
denomination (no uniformity)
Could print more money when they
wanted (not in limited supply)
Counterfeiting
By Civil War time period, there were
16,000 banks with 10,000 kinds of
paper currency.
1861  Congress Authorized
printing of $60 million demand
notes; which were declared a legal
tender, fiat currency that must be
accepted in payment of debts.
1862  congress passed the Legal
Tender Act, authorizing the Union
government to print $150 million
US Notes, new federal fiat
currency that also had no gold or
silver backing.
1863  over half the currency
in circulation were US Notes, or
what they called greenbacks.
1863  government issued
gold certificates, paper
currency backed by gold
placed on deposit with the US
Treasury;
1865  the federal government
forced state banks to join the
National Banking System creating a
national currency, currency of
uniform appearances that was
backed by the US government
bonds;
1878  government introduced
Silver Certificates, paper currency
backed by silver dollars and bullion
place on reserve with the Treasury
1882  the government began
printing gold certificates in smaller
denominations for the public to
use.
1890  the federal government
printed the fifth, and final type of
paper currency called Treasury
coin notes, paper currency issued
by the treasury that was
redeemable in both gold and silver.
1893  Treasury coin notes were
repealed
1900  congress passed the Gold
Standard Act, creating the gold
standard, a monetary standard under
which the basic currency unit is equal
to a specific amount of gold; set at
$20.67 per ounce.
1930s  the depression hit and banks
began to fail because people began to
withdraw gold because it was safer to
hold instead of paper; Abandoned the
Gold Standard;
1933  President FDR declared a national
emergency, which forced people who had
more than $100 worth of gold or gold
certificates to file a disclosure to the US
Treasury.
1934  US went off the gold standard when
it confiscated gold from private citizens.
Started the inconvertible fiat money
standard, a monetary standard under which
the fiat money supply cannot be converted
into gold or silver by its citizens.
1968  the last issue of US
notes (greenbacks) took place
and the retirement of silver
certificates.
1975  Americans became
allowed to own gold and silver
certificates but neither is
officially part of the money
supply.
The Gold Standard Details
Reminder: A monetary standard under
which the basic currency unit is equal
to, and can be exchanged for, a specific
amount of gold.
Still used same currencies: greenbacks,
National bank notes, gold certificates,
silver certificates, and treasury coin
notes; now all these notes could be
exchanged for gold.
Advantages of the Gold
Standard
People feel more secure
knowing money could be
exchanged for gold.
It prevented the government
from printing too much
money.
Disadvantages of the Gold
Standard
Gold stock may not grow
enough to support the growing
economy.
People could withdraw gold
and drain the government’s
reserves
Gold is not a fixed worth
A political risk of failure
Modern Banking
 In 1913, Congress decided it was time to create a bank that could lend to other banks in time of
need, or what they called a ____Central Bank____. They created what was called the
_____Federal Reserve System_____as the nation’s first centralized banking system. The FED
was created as a corporation meaning that any bank that joined had to purchase ____Shares of
Stock____ in the system. Because it is a corporation, the government does not necessary own
the FED but _____Privately Owned Banks_____ own it and the ___President____ appoints the
Fed’s Board of Governors and its chairperson. The system created _____Federal Reserve
Notes_____, paper currency issued by the Fed that eventually replaced all other types of federal
currency.
 At the start of the Great Depression, about 25,000 banks existed; which did not allow for much
confidence in the banking system. It was not uncommon for people to make a ___Run on the
Bank_____ to withdraw their funds from a bank before it failed. This made the situation worse
and caused more banks to fail. President Roosevelt attempted to alleviate the situation with a
__Bank Holiday___ on March 5th, 1933, where all banks were required to close down for the day.
By 1934, 15,000 banks had either closed down or were forced to merge with ____Stronger
Partners____.
 The Federal Deposit Insurance Corporation was created in 1933 with the ____Banking Act_____,
also known as the ______Glass Steagall Act___. In addition to strengthening the banking system
as a whole, the FDIC created insurance on customer deposits if banks were to fail. This did not
give money back to the people who lost it during the Great Depression, but it did provide a sense
of __Security____ in banking for the future. People now worried less about their _____Safety of
their Deposits____.
Chapter 15: The Fed and
Monetary Policy
Use the diagram to explain the
structure of the Federal Reserve
banking system. Provide all the
information provided asked for
under the components which make
up the FED.
Responsibility of the Fed
 1. Monitoring the reserves the member banks
are required to keep on hand either in the Fed
or as cash in the vault
 Used to clear checks
 And to control money supply
2. Bank Holding Companies – Corporations
which own one or more banks; these
companies were originated because some
bankers tried to get around the banking laws.
The Fed will regulate on these corporations.
3. International Operations –
foreign banks control about 20
percent of all banking assets of
US. Fed can regulate as
necessary on these foreign
banks.
4. Member Bank Mergers –
must have approval of the Fed
for a merger.
Other Federal Reserve Services
Clearing Checks – Examine the
figure on page 412, and
explain/draw the process of
clearing a check.
Other Federal Reserve Services
Consumer Legislation – Regulation Z 
the authority of the Fed to extend truthin-lending disclosures to individuals
who borrow.
Maintaining currency and coins
Financial Services to the Government –
does for the Government what our
banks do for us (but to an extreme).
Vocabulary of Monetary Policy
Use the following paper to provide
explanations for all the terminology
found which help understand
Monetary Policy. As you read,
simply show you understanding of
the concepts by writing out
explanations in your own words.
Monetary Policy
Controlling the supply of
money in order to effect the
cost and availability of
borrowing money.
Fractional Reserve System
Keeping a fraction of the money people
have deposited on hand as legal
reserves (money held as cash in the
vault or as deposits in the Fed).
The percentage set aside of every
deposit placed in legal reserves is call
the reserve requirement; usually around
10%.
Excess reserves is the money the bank
has beyond the required reserve.
How do banks operate?
A bank has Liabilities – debts they owe;
And Assets – property, possessions and
claims on others.
When liabilities and assets are
diagramed together, they create a
balance sheet;
Balance sheets helps establish the
banks net worth, the amount the assets
of the bank outweigh the liabilities;
Deposits and Loans
Deposits is the money in the
bank which they must give
back;
With excess reserves, the bank
makes loans; they cannot start
the next day without the proper
amount of required reserves;
Other banking functions
Purchasing Government Bonds
Savings accounts/ time
deposits – interest bearing
accounts;
Certificates of deposit (CDs)
Monetary Expansion
Money multiplies as it is
continuously loaned out from
person to bank to a new person
to a new bank and so on.
Remember, each bank can loan
out a percentage of every
deposit made which adds up
over time;
Tools of Monetary Policy
Easy money policy – increases the
supply of money which will
decrease interest rates and will
stimulate an economy;
Tight Money Policy – decreases the
supply of money which will
increase interest rates and slow an
economy;
Tools of Monetary Policy
Change the reserve requirement –
allows for more or less loans;
Use Open Market Operations – buying
or selling of government securities; this
puts more or less money into the
reserves of the banks.
Discount Rate – interest rate the Fed
charges banks to borrow from them;
again, will entice banks to borrow or not
to borrow;