Functions and Types of Money in the United States

1. Chapter 14 Money and Banking

2. Chapter 14Section 1 The Functions and Characteristics of Money

3. The Functions of Money • Medium of Exchange • Something a seller will accept in exchange for a product or service. • Without money, people would have to barter, a much more complicated process involving a double coincidence of wants. • Unit of Accounting • It is used to measure and compare the values of different items and services. • Helps to keep accurate financial records

4. The Functions of Money • Store of Value • It is used as a store of value—sell one thing (such as labor) and save its value (paycheck) for use at a later time.

5. Characteristics of Money • Any item that wants to be money must meet six criteria: • Durable—withstands wear and tear of being passed around • Portable—must be easy to transport • Divisible—must be able to divide it into small parts in order to purchase things of differing value • Must have stable value • Must be a scarce item so that there is not too much of it. • Must be accepted by the sellers and buyers in community

6. Types of Money • Commodity Money: a medium of exchange such as cattle or gems that has value as a commodity or good aside from its value as money • Cattle are used for food; gems are used for jewelry. • Representative Money: money that is backed by an item of value such as by gold or silver • The amount of money in circulation would be limited because it is linked to some scarce good, such as gold.

7. Types of Money • Fiat Money: money that has value because a government fiat, or order, has established it as acceptable for payment of debts • Today, all US money is fiat money and is declared legal tender. • Legal Tender: money that by law must be accepted for payment of public and private debts

8. Chapter 14Section 2 History of American Money and Banking

9. History of American Banking • England forbade Colonial America from using printed money or minted coins. • Bartering of various goods was used in place of money. • When the war came, the Continental Congress issued bills of credit (Continentals) to pay war debts.

10. History of American Banking • Too many Continentals were issued and they became worthless. • After the war, the United States began to mint its own coins backed by gold and silver.

11. Banking Services • Checking accounts • Automatic deposit and payment • Storage of valuables • Money transfers • Overdraft checking, which allows a customer to write a check for money that is in the account and the bank will loan the money to be paid back at a high interest rate.

12. Electronic Banking • Computers ushered in a new form of banking—electronic fund transfers (EFT) • Automated teller machines (ATMs) • Lack of privacy and possibility of tampering are risks of electronic bank transfers.

13. Electronic Banking • Customer has little “float” time between writing the check and its being cashed by the bank. • Electronic Funds Transfer Act helped calm some of these concerns.

14. Chapter 14Section 3 Types of Money in the United States

15. Money and Near Moneys • Currency • Coins and bills (notes) • Federal Reserve Notes and United States Notes are legal tender. • Credit Cards and Debit Cards • Credit cards are not really money; they are representative of future claims to funds. • Credit cards actually defer the completion of the transaction to a later date. • Debit cards are similar to checks, but the withdrawal is done electronically.

16. Money and Near Moneys • Checks • Checks and checking accounts offer checkable deposits. • Today all thrift institutions offer checkable deposits. • Checking Account: account in which deposited money can be withdrawn at any time by writing a check • Checkable Deposits: money deposited in a bank that can be withdrawn at any time by presenting a check. • Thrift Institutions: mutual savings banks, S&Ls, and credit unions that offer many of the same services as commercial banks

17. Money and Near Moneys • Near Moneys • Near Moneys: assets, such as savings accounts, that can be turned into money relatively easily and without the risk of loss of value • Near moneys are assets that have values stated in terms of money, but are not themselves money. • Near money can easily be turned into money, such as savings accounts or time deposits.

18. The Money Supply • Definition M1 includes: • all currency, • all deposits in checking accounts, • and travelers’ checks.

19. The Money Supply • Definition M2 includes: • all of M1 plus savings deposits, • Time deposits, • small denomination CD’s, • money market deposit accounts, • money market mutual fund balances, • And other specialized account balances.