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MONEY & 
BANKS
BARTER GAME: 
You have one item card and one 
shopping list in front of you. 
Barter to acquire the item you 
need.
THE END OF BARTER: 
Why do you think we 
stopped bartering and 
started using money?
END OF BARTER: 
Barter (the exchange of one good for 
another) fails in a modern economy 
because it requirers a “double 
coincidence of wants.” 
Double coincidence of 
wants: a situation in which 
two people each want 
some good or service that 
the other can provide.
TRIVIA QUESTION: 
In the history of the world, 
what was used as money 
for the longest period of 
time, and over the largest 
geographic area?
The Cowrie Shell
The Cowrie Shell 
• Used in China as early as 700 BCE, spread to 
Southeast Asia, India, Africa, and Southern 
Europe. Used until the 1800s CE. 
• Durable - they could last a century or more 
• Impossible to counterfeit 
• Collection was controlled by governments
Money makes complex 
economic activity possible 
because it acts as a medium 
of exchange: something 
that is widely accepted as a 
method of payment for 
goods and services.
Money acts as a unit of 
account: a way that value is 
widely measured. Without a 
unit of account, you would 
have to think of the 
opportunity costs of all 
goods and services!
Finally, money acts as a 
store of value: something 
that holds its value over 
time and can be spent in the 
future. Money is a much 
more convenient store of 
value than say, refrigerators.
BANKS
BANKS… 
…are institutions that operate 
between a saver who deposits 
money in the bank, and a borrower 
who receives a loan from the bank. 
Loan: money individuals 
and businesses borrow 
from the bank and promise 
to pay back over time.
HOW BANKS MAKE A PROFIT: 
1. Interest payments people 
make on their loans. 
2. Other fees charged by the 
bank for various services. 
3. Investing your money 
in the stock 
market.
INTEREST RATES: 
The amount charged by a lender to a 
borrower for the use of assets (money).
BANKS INVEST MONEY: 
Some banks invest your money in low-risk 
stocks. This is an additional way that 
banks generate a profit. Governments set 
regulations on the banks preventing them 
from making risky investments. Banks not 
regulated by the government (shadow 
banks) are allowed to make riskier 
investments with the money they do not 
keep in reserves.
BANK EXPENSES: 
1. Interest payments made to 
people who deposit money. 
2. Loans that are not repaid. 
3. Paying bank employees.
BANKS… 
You collect interest from the bank 
when you make a bank account! 
The bank collects interest from you 
when you purchase a loan!
RESERVE REQUIREMENT: 
Banks typically keep 10% of the money 
people deposit within the banks 
themselves as reserves that can be 
instantly withdrawn. Each central bank 
sets a different reserve requirement. 
10% 
90% 
10% of depositors money remains in the bank 
90% of depositors money becomes loans 
or investments
HOW BANKS GO BANKRUPT: 
A well-run bank assumes that not all 
borrowers will repay their loans, and will 
budget accordingly. But, if banks loan out 
too much money, and then people try 
to withdraw their 
money that no 
longer exists, they 
can face bankruptcy.
BANK RUNS: 
(also called bank panics) 
When people become concerned, for 
reasons legitimate or not, that the bank will 
not have enough reserves for them to 
withdraw their money, they will quickly try 
to remove their money from the bank. If 
too many people withdraw their money and 
the bank actually does run out of reserves, 
the bank will go “bankrupt” (it will fail).
BANK RUNS: 
(also called bank panics)
BANKS CREATE MONEY: 
Imagine that a man deposits 10,000 
USD in a bank. 
The bank keeps 
$1,000 in reserves. 
The bank loans the other $9,000 to a 
woman who wants to buy a car.
BANKS CREATE MONEY: 
Next, the woman spends the $9,000 she 
borrowed on a car. 
The man who sold 
the car deposits 
the $9,000 profit 
into the bank. 
Now, the bank has the original man’s deposit of 
$10,000 in the bank, and the second man’s 
deposit of $9,000 in the bank.
BANKS CREATE MONEY: 
The bank, which started with $10,000 
now has $19,000 because they made a 
loan, and the money eventually made it 
back into the bank.

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Money and Banks

  • 2. BARTER GAME: You have one item card and one shopping list in front of you. Barter to acquire the item you need.
  • 3. THE END OF BARTER: Why do you think we stopped bartering and started using money?
  • 4. END OF BARTER: Barter (the exchange of one good for another) fails in a modern economy because it requirers a “double coincidence of wants.” Double coincidence of wants: a situation in which two people each want some good or service that the other can provide.
  • 5. TRIVIA QUESTION: In the history of the world, what was used as money for the longest period of time, and over the largest geographic area?
  • 7. The Cowrie Shell • Used in China as early as 700 BCE, spread to Southeast Asia, India, Africa, and Southern Europe. Used until the 1800s CE. • Durable - they could last a century or more • Impossible to counterfeit • Collection was controlled by governments
  • 8. Money makes complex economic activity possible because it acts as a medium of exchange: something that is widely accepted as a method of payment for goods and services.
  • 9. Money acts as a unit of account: a way that value is widely measured. Without a unit of account, you would have to think of the opportunity costs of all goods and services!
  • 10. Finally, money acts as a store of value: something that holds its value over time and can be spent in the future. Money is a much more convenient store of value than say, refrigerators.
  • 11. BANKS
  • 12. BANKS… …are institutions that operate between a saver who deposits money in the bank, and a borrower who receives a loan from the bank. Loan: money individuals and businesses borrow from the bank and promise to pay back over time.
  • 13. HOW BANKS MAKE A PROFIT: 1. Interest payments people make on their loans. 2. Other fees charged by the bank for various services. 3. Investing your money in the stock market.
  • 14. INTEREST RATES: The amount charged by a lender to a borrower for the use of assets (money).
  • 15. BANKS INVEST MONEY: Some banks invest your money in low-risk stocks. This is an additional way that banks generate a profit. Governments set regulations on the banks preventing them from making risky investments. Banks not regulated by the government (shadow banks) are allowed to make riskier investments with the money they do not keep in reserves.
  • 16. BANK EXPENSES: 1. Interest payments made to people who deposit money. 2. Loans that are not repaid. 3. Paying bank employees.
  • 17. BANKS… You collect interest from the bank when you make a bank account! The bank collects interest from you when you purchase a loan!
  • 18. RESERVE REQUIREMENT: Banks typically keep 10% of the money people deposit within the banks themselves as reserves that can be instantly withdrawn. Each central bank sets a different reserve requirement. 10% 90% 10% of depositors money remains in the bank 90% of depositors money becomes loans or investments
  • 19. HOW BANKS GO BANKRUPT: A well-run bank assumes that not all borrowers will repay their loans, and will budget accordingly. But, if banks loan out too much money, and then people try to withdraw their money that no longer exists, they can face bankruptcy.
  • 20. BANK RUNS: (also called bank panics) When people become concerned, for reasons legitimate or not, that the bank will not have enough reserves for them to withdraw their money, they will quickly try to remove their money from the bank. If too many people withdraw their money and the bank actually does run out of reserves, the bank will go “bankrupt” (it will fail).
  • 21. BANK RUNS: (also called bank panics)
  • 22. BANKS CREATE MONEY: Imagine that a man deposits 10,000 USD in a bank. The bank keeps $1,000 in reserves. The bank loans the other $9,000 to a woman who wants to buy a car.
  • 23. BANKS CREATE MONEY: Next, the woman spends the $9,000 she borrowed on a car. The man who sold the car deposits the $9,000 profit into the bank. Now, the bank has the original man’s deposit of $10,000 in the bank, and the second man’s deposit of $9,000 in the bank.
  • 24. BANKS CREATE MONEY: The bank, which started with $10,000 now has $19,000 because they made a loan, and the money eventually made it back into the bank.