2. 14-1: The Evolution, Functions and Characteristics of Money• What is money?• Characteristics of money 1. Portable 2. Durable 3. Divisible 4. Limited supply• Types of money – Barter economy - moneyless economy that relies on trade – Commodity money - money that has an alternative use as an economic good or commodity – Fiat money - money by government decree such as metal coins or paper currency – Specie - money in the form of silver or gold coins
3. • Functions of money 1. Medium of exchange – accepted as payment for goods and services 2. Measure of value – serves as a common way to express value 3. Store of value – allows people to preserve value for future use• Money Supply – M1: money as a medium of exchange • coins and currency, travelers’ checks, checking accounts, demand deposit accounts – M2: money as a store of value • M1 plus savings accounts, time deposits, and money market funds
4. 14-2: The Development of Modern Banking• After the Revolutionary War, banks were allowed to issue paper currency, known as “bank notes”.• In 1861 Congress authorized the printing of $60 million in a national currency and declared it “legal tender”. Called “greenbacks” because the reverse sides of the noted were printed in green ink.• Created National banks that were privately held banks that receive operating charters from the federal government. They printed their own currency but had to buy bonds from the federal government as backing.• As a result of the need to finance the Civil War, the makeup of the paper component of the money supply went from being entirely privately issued to being entirely publically issued.
5. 14-2: The Development of Modern Banking• In 1913 Congress created the Federal Reserve System, or “Fed” as the nation’s central bank. A central bank can lend to other banks in times of need. – The Fed issued its own currency, known as Federal Reserve notes, which eventually replaced all other types of federal currency.• Creating Money
6. 14-3: The Federal Reserve System and Monetary Policy• The Federal Reserve System