Money &
Banking
History of Money

Most early societies operated on a barter
system. Goods and services were
exchanged for items of tangible value.
Societies eventually evolved to the use of
commodity money or fiat money. This was
brought upon by the realization by
goldsmiths (the original bankers) that
money could be created so long as their
own precious metal deposits remained
relatively stable.
History of Money

This system of money creation was
essentially flawed in that it could be
abused out of greed or manipulated for
profit. It would become necessary for
governments to oversee the money
supply and set rules and regulations for
banks to abide by. These rules have been
altered dramatically, and the greed and
corruption are still present. The power to
control it has simply shifted.
Early Banking Examples

The Knights Templar
were able to provide
security for much of the
gold in and around
Europe after the
Crusades. This allowed
them to enter the world
of banking by issuing
usury notes in
exchange for deposited
treasure.
Functions of Money


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Medium of Exchange – any time you buy
something, money is operating as this
Measure of Value – common system that
all agree on that places value on goods
and services
Store of Value – the ability to save, money
must hold it value over time so that
savings can be accumulated
Gradual Change


The barter system was not completely
eliminated however as it still remained
common for individuals to trade items of
value. Colonial America was no different.
Tea, tobacco, gun powder are examples of
commonly exchanged items. Tobacco
even became so common that it was
accepted as commodity money as well.
Cost of Tobacco - 3 shillings per pound
Money in Early Societies

Commodity Money – money that has an
alternate use as an economic good, or a
commodity.

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Examples: ancient Chinese compressed tea
leaves & early Russian dried cheese & meats
Fiat Money – money by government
decree. Money doesn’t have enough value
to be considerd valuable on its own.

Examples: modern money and ancient coins
Money in Early America


Continental Dollars – Used to financed the
Revolutionary War, printed by the Continental
Congress, no gold or silver backing, 550
million in circulation by the end of the war,
virtually worthless
.
Specie Money

Coins also existed
and were the most
desired form of
money due to their
limited supply and
because they were
made from actual
precious metal.
Origins of the Dollar

The Spanish peso was the most common
form of currency in America at the time
that Washington took office. This was a
result of the Spanish mining silver in
Mexico and engaging in a triangle of trade
with the U.S. that involved molasses,
slaves, and silver. This led to abundant
supplies of all three in the colonies.
Origins of the Dollar

The U.S. then created its own “peso”
borrowing also from the Austrian “taler”
essentially creating the U.S. dollar.
Characteristics of Money



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Portability – Has to be accessible to be
effective in a consumer driven economy
Durability – Must hold up over repeated
use and constant handling
Divisibility – Be able to “change”
Limited Availability – Too much money in
circulation devalues quickly
Monetary Standards



Several have existed for the U.S.
throughout history.
After the disaster that was the Continental
Dollar, private banks in the newly formed
states began issuing their own currency.
Results were the same. Unregulated
issuance and a lack of uniformity
eventually doomed this particular
monetary standard.
Enemy of the Bank

President Andrew
Jackson fought hard
against the 2nd National
Bank. Ultimately, he
won as he vetoed the
Bank’s charter and
deposited tax revenues
in state banks or “pet
banks.” Jackson
thought a Federal bank
was a threat to civil
liberties.
Monetary Standards



The Civil War required once again each
side to print their own currency to finance
their end of the War. The Union funds
were known as “greenbacks.”
The Confederacy mirrored this action by
creating its own currency
Legal Tender Act (1862)
Monetary Standards

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Gold Certificates – Issued by the Federal
Government, backed by gold deposits
Silver Certificates – Also issued by the
Federal Government, backed by silver
deposits.
Treasury Coin Notes – Issued in 1890, last
currency issued until the banking
overhaul of 1913.
All forms of currency existed together
until 1913
The Origins of the (FED)eral
Reserve

Prior to the creation of the Fed and the
modern banking system the country had
experimented numerous times with a
“Central” bank to govern bank activity
nationwide. The 1st and 2nd Banks of the
United States were destroyed by
accusations of corruption and the public’s
distrust of the Federal Government.
The Origins of the (FED)eral
Reserve

A third attempt was made shortly after the
Civil War in an attempt to keep
greenbacks from becoming devalued. The
NBS was created and included numerous
national banks that printed and issued
currency secured by the Federal
Government. The NBS forced out private
run banks by heavily taxing any deposits
into these banks essentially establishing
itself as the “only bank in town.”
The Federal Reserve

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Panic of 1907 leads to movement for
banking overhaul
1913 – Federal Reserve System is
established
Federal Reserve = Central Bank that can
loan to banks in times of emergency
Issued Federal Reserve Notes, replaces all
money, same money as in your wallet,
backed by gold until 1934
Gold Standard

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1900 - Gold Standard Act
Money could now be exchanged for a set
amount of gold.
Gold set at $20.67 per ounce
As of yesterday, May 12, gold was at
$1242.20 per ounce.
Pros & Cons of the Gold
Standard




Advantages
Consumer
Confidence
Promotes discipline
in regards to the
circulation of money
Idea is that money will
only be printed
relative to the amount
of gold deposits



Disadvantages
Price of gold really
can’t be controlled by
a single government –
Swiss Example
Limits growth in an
economy by not being
able to increase
money supply
effectively
Bank Failures & Abandonment


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1934 – United States abandons gold
standard after numerous bank failures
initiated by the Great Depression.
Fear of a “run on gold” led FDR to move
the country off the standard and move to
an “exchange” system.
Current system is based on “faith &
credit”
Sleep tight 
FDIC – Federal Deposit
Insurance Corporation


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Glass-Steagall Act 1934
Currently insures up to $250,000 per account
FDIC budget currently operating in the “red”
No worries, it is backed by the “full faith &
credit of the United States”