Money can be any substance that serves the following functions. Medium of Exchange Measure of Value Store of Value
What are the Functions of Money? Money is a Medium of Exchange Accepted by all parties as a payment for goods and services Money is a Measure of Value Used to express worth in terms that most individuals understand Money is a Store of Value Allow purchasing power to be saved until needed
Commodity Money Tea, tobacco and other crops was used as a medium of exchange. Fiat Money Anything that is declared money by government decree.
Paper Currency Privately printed money States printed money Specie Coins made from silver & gold
In 1789 the most plentiful coins in circulation when George Washington became president was the Spanish peso. The Austrian taler was used by Franklin & Hamilton to model the U.S. dollar.
Portability Easily transferred from person to person Durability It does not deteriorate Divisible Should be divisible into smaller units (change) Limited Availability Money loses value when there is too much of it
Monetary Standard is the mechanism designed to keep the money supply portable, durable, divisible and limited in supply. Legal Tender is currency that must be accepted in payments for debts.
Greenbacks & United States Notes were currencies printed by the Confederacy and the Union printed during the Civil War. Gold & Silver Certificates is paper currency that can redeemed for actual gold or silver.
What is the Demand for Money? Transaction Demand for money to make exchanges Asset Demand for money to hold wealth
Inconvertible Fiat Money Standard - is a money standard which the fiat money supply cannot be converted into gold or silver by its citizens. Gold Standard a monetary standard where the currency is backed by, and can be exchanged for, a specific amount of gold. (abolished in 1933)
The creation of the Federal Reserve occurred in 1913 Public/Private Central Bank FDIC was created with Banking Act of 1933 Created bank oversight and deposit insurance Financial Reform, Recovery, and Enforcement Act 1989 Abolished the independence of the savings & loan industry
The Federal Reserve or the nation s central bank is a bank that can loan money to other banks in times of need. Structure The FED is a public / private institution created in 1913 to remove the influence of government from economic & monetary policy.
The United States is divided into twelve regions Member banks belong to the Federal Reserve System Each Federal Reserve Bank operates as a private business with its own president and board of directors. Six members elected by member banks and three appointed by the Board of Governors
Commercial Banks are banks that cater to business and commerce. Thrift Institutions cater to small investors and make loans primarily on home purchases. Credit Unions a nonprofit service cooperative that is owned by, and operated for the benefits of its members.
At high interest rates, the quantity of money demanded is less than the quantity supplied, so the interest rate is likely to fall. At low interest rates, the quantity of money demanded is greater than the quantity supplied, so the interest rate is likely to rise.