This chapter discusses the history and evolution of money, including: 1) Money has evolved from barter systems to commodity currencies like salt and spices, then to precious metals like gold and silver, and eventually to paper currencies and modern fiat money issued by governments. 2) Banks play an important role in modern economies by accepting deposits, issuing loans, and facilitating transactions, though they are also susceptible to failures and panics without regulation and insurance. 3) The U.S. has experienced various monetary systems throughout its history such as commodity-backed and gold-standard currencies, and more recently a fiat system managed by the Federal Reserve central banking system.

1. Chapter Eleven: Money
and Banking

3. “Money is whatever is generally
accepted in exchange for goods
and services—accepted not as an
object to be consumed but as an
object that represents a
temporary abode of purchasing
power to be used for buying still
other goods and services.”
-- Milton Friedman
Chapter 11
Assent of Money.

4. What is Money?
 1. Money is anything that is generally acceptable to
sellers in exchange for goods and services.
 2. Paper money ONLY has value because WE all agree
that it has worth. Gold/Silver Bugs.
 3. The stronger that people believe in the strength of a
gov’t AND its economy, the more valuable the
currency.
 4. Hard v. Soft money.

5. Why We Need Modern
Money.
1. Medium of exchange.
2. Measure of value.
3. Store of value.
4. Easy to carry around.
5. Without it, we have no modern economy.

7. Money in Early Societies.
 1.Commodity money: tea bricks, tobacco leaves, even
salt or spices.
 2. Why salt/pepper spices?
 3. Gold and silver. Why is it STILL of high value?
 4. Paper currency or bank notes.
 5. Fiat Money- All modern money today is by gov’t fiat.
Even the U.S.

9. History of Money

11. The First Evolutionary Step
From barter trade to commodity money.
Barter Limitations:
1.Barter depends upon the coincidence of
wants and needs.
2. All ag. products rot!
3. Moving bulk products are difficult.
4. Money overcomes the above
weaknesses.

12. Examples of Commodity
Money
 1. Various commodities have
historically served as money –
 Cattle, tobacco, sugar, salt,
spices, grains, nails, shells,
hides, metals, etc.
 2. But the transaction is still
essentially a barter trade of
one good or service for
another good.

13. Commodity Money

14. The Second Evolutionary Step
From commodity money to credit money.
 “Some ingenious goldsmith
conceived the epoch-making
notion of giving notes not
only to those who had
deposited metal, but to those
who came to borrow it, and
so founded modern
banking.”
Hartley Withers, The
Meaning of Money.
What is money?

15. Privately Issued Bank Notes.
 Gold or silver was deposited and the
depositor got a “receipt” stating the
amount in the bank.
 This “receipt” could be transferred to
another person without actually seeing
the gold or silver.
 “Receipts” turned into bank notes-
Money.

16. Characteristics of Successful
Money.
1. Portability.
2. Durability.
3. Divisibility.
4. Limited availability.

17. Abuses of (Wild Cat) State
Banks
 1. State banks printed too much money
for the gold/silver they had on hand.
Why would they do this?
 2. Too much printed money lessened its
value. Why?
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18. “Not Worth a Greenback!”
 1. America’s first fiat paper money was
during the Civil War.
 2. Americans didn’t accept it.
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19. The Gold Standard.
 1900 Congress passed the Gold Standard Act.
 Advantages:
1. People trust it.
2. Helps prevent the gov’t from printing too much money.
3. Dollar was strong!
4. Stopped inflation.
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Gold Standard

20. Gold Standard.
 Disadvantages:
1. Gold may not grow fast enough for the economy.
2. There may be a “Run” on gold during panics.
3. The price of gold will change.
4. The gov’t may fail to carry out the policy.
5. Gold stunted our economic growth.
6. Remember “U.S.S Central America?”
Nixon

23. Redeemable For Gold

24. Why Paper Currency is NOW
accepted as a Means of Payment
 1. Paper money FIAT money is a 20th century
invention.
 2. Until 1972, the U.S. money was backed by
gold or silver.
 3. Not enough gold to allow the economy to
grow.
 4. Made U.S. Exports more expensive.
 5. IF a country falls apart OR ceases to exist,
the money is worthless.
 6. Fiat money usually leads to inflation.
Gold Standard/Inflation.

25. U.S. Economic Growth
Strangled by Lack of Gold.
 1. From Colonial times till the California Gold Rush,
lack of gold stunted U.S. growth.
 2. Large silver production from the West, especially
from Nevada.
 3. William Jennings Bryan lead the “Bimetallism”
movement.
 4. ”…you shall not crucify mankind upon a cross of
gold.”
 5. What did he mean?

27. Morgan Silver Dollar. Special
Law for Silver Mines?

28. Money No Longer Printed

38. Why Doesn’t The Gov’t Print
Anything Higher Than This Bill
Today?

39. U.S. Educational Money
Banned in Boston

40. Electricity surrounded by
other allegorical figures,
representing the dominant
force in the world. The
United States Capitol
building can be seen
behind the female figures.
Ulysses S. Grant, Philip
Sheridan.

43. Science presents Steam and
Electricity to Commerce and
Manufacture Science (center)
presents Steam and Electricity
(the two children) to the more
mature figures of Commerce
(left) and Manufacture (right).
Robert Fulton & Samual Morse.

45. History Instructing Youth.
Goddess History instructing a
youth, pointing to a panoramic view of
the Potomac River and Washington
D.C. The Washington Monument and
the US Capitol Building are visible in
the background. The United States
Constitution is displayed to the right.
Circling the motif are the last names of
famous Americans. Some of those
listed are: (George) Washington,
(Benjamin) Franklin, (Thomas)
Jefferson, (Robert) Fulton, (Samuel
F.B.) Morse, & (Ulysses S.) Grant.

48. Financial Intermediaries,
or Banks.
Financial intermediaries are firms that
take deposits from households and
firms and make loans to other
households and firms.

50. Financial Intermediaries
Four Types of Financial Intermediaries
1) Commercial banks.
2) Savings and Loan associations.
3) Savings banks and credit unions.
4) Money market mutual funds.

51. Role of Banks?
 1.Banks recycle(Loans) and help circulate money.
 2. With out banks, the economy would dry up.
 3. Great Depression made worse by consumer lack
of faith in banks.
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54. Bank Panics and Crisis –
1873 – 1907.
 1. Central Banks created and destroyed from 1791 – 1836.
 2. 1837 to 1912, “Free” banking period. Disaster!
 3. 1907 Bank Panic was stopped by Pierpont Morgan,
richest person in world.
 4. Morgan/other mega rich people/gov’t officials meet
secretly(Until 1930.) on Jekyll Island in 1910 to “Duck” hunt.
 5. They create the the ground work for the Federal Reserve
System “FED” or U.S. Central Bank of 1913.

55. Development of Modern
Banking.
 1.Federal Reserve System:
 2. Central Bank.
 3. F.D.I.C. Federal Deposit Insurance
Commission.
 4. Sets interest rates, reserves, and
issues bonds.
 5. Takes over failing banks.
Federal Reserve/Banks.

56. Deposit Insurance – F.D.I.C.
 1. F.D.I.C. prevents bank panics and stops
depositors, from rushing to withdraw their funds out
of panic.
 2. Bank runs have ruined perfectly health banks.
3. The Federal Deposit Insurance Corporation (FDIC)
was created in 1933.
 4. Very few countries, if any, have a F.D.I.C.
insurance system.
 5. Japan have banks, but have no F.D.I.C like
insurance, so many people deposit money in their
national post office. NO interest paid OR loans given.
 Its a Wonderful Life - 51 Minutes.

57. Savings and Loan Crisis
 1. Savings and Loans deregulated by 1982 so they
could be like “regular” banks.
 2. Many S&L’s took many investment risks like
investing in Junk Bonds.
 3. F.D.I.C. and the gov’t had to bail out the industry
with 500 billion current dollars in 1985. 1.2 trillion in
constant dollars.
 4. 534 bank Co. failures/$500 million bail out.

58. Real Estate Bubble and the
“FED.”
 1. Housing collapse of 2007.
 2. “Sub Prime” loans.
 3. Massive insurance failures-Credit Default Swaps.
 4. Investment firm failures.
 5. Bank failures.
 6. Auto bail out.
 7. “Too big to fail.”
 8. T.A.R.P. = Troubled Asset Relief Program.

59. Romney’s Folly of Ohio?

64.  The $1.2 trillion peak on Dec. 5, 2008 -- the combined
outstanding balance under the seven programs tallied
by Bloomberg -- was almost three times the size of the
U.S. federal budget deficit that year and more than the
total earnings of all federally insured banks in the U.S.
for the decade through 2010, according to data
compiled by Bloomberg.

66. What Does This Have In
Common with the Bailout?
 Marshal Plan.
 Louisiana
Purchase.
 Entire Moon
Program.
 Savings and Loan
Crisis.
 Both Iraq Wars.
 The war in
Afghanistan.
 Vietnam War.
 N.A.S.A’s Entire
history.