The Evolution of Money: From Barter to Modern Banking

1. Chapter 11 Spring 2016

2. The Evolution of Money • Barter Economy – A moneyless economy that relies on trade • Money – A substance that serves as a medium of exchange, a measure of value, and a store of value • Medium of Exchange – Something accepted by all parties as payment for goods and services • Measure of Value – A common denominator that can be used to express worth in terms that most individuals understand • Store of Value – The Property that allows purchasing power to be saved until needed • Commodity Money – Money that has an alternative use as an economic good, or commodity • Fiat Money – Money by government decree

3. The Evolution of Money • Specie – Money in the form of coins made from silver or gold • Pesos in America – When George Washington became president the most common form of currency was the peso • Ben Franklin and Alexander Hamilton were put in charge to change this and came up with the dollar • Characteristics of Money • Portability – Easy to carry and transfer • Durability – Duh • Divisibility – Again…duh • Limited Availability – Wait for it……………Duh

4. Early Banking and Monetary Standards • Monetary Standard – The mechanism designed to keep the money supply portable, durable, divisible and limited in supply • Article 1, Section 10…No State can make their own money • This was enforced until the Civil War • The Civil War was when the government started producing paper money • Problems with Currency • Each bank had their own money • Banks could print more money even if they didn’t have it • Counterfeiting

5. Early Banking and Monetary Standards • The Greenback Standard – When the Federal Government started producing legal tender • Legal Tender – Fiat currency that must be accepted in payment for debts • 1862 – Legal Tender Act – Federal Government started making money known as “Greenbacks” • This becomes known as a national currency • A 10% tax was levied on all other currency • Gold and Silver Certificates – Legal Tender backed by its worth in Gold or Silver • Treasury Coin Notes – Could be exchanged for Gold or Silver • Gold Standard – The concept that all legal tender must not exceed the amount of gold we have as a nation

6. Early Banking and Monetary Standards • Disadvantages of the Gold Standard • Gold stock may not grow fast enough • People may decide to cash in all their gold • Price of gold changes • Political Failure • Abandoning the Gold Standard • FDR during the Depression • Nixon in the 70’s

7. The Development of Modern Banking • 1913 – Federal Reserve created – A central bank that can lend to other banks – Created by Woodrow Wilson • Issued Federal Reserve Notes • Banking during the Great Depression • Banks expanded too quickly • 10,000 of 25,000 banks failed • A “Run on the Bank” bankrupted many banks • FDR declared a national “Bank Holiday” • FDIC created – (Glass-Stegal Act) Federal Deposit Insurance • When created $2,500 was insured for every customer • Increased to $100,000 • Now it’s $250,000

8. The Development of Modern Banking • Commercial Banks – Banks strictly for business and commerce • Time Deposits – Money cannot be removed for a certain amount of time • Checking Accounts – Also known as Demand Deposits • NOW (Negotiable Order of Withdrawal) accounts – A checking account that pays interest • Savings and Loans (S&L) – Banks that invest the majority of their funds into home mortgages • Credit Union – A nonprofit bank for only its members • Deregulation by Reagan– The removal or relaxation of government restrictions on business • Led to the Savings and Loans crisis in the 1980’s • Many S&L’s changed their name to avoid scandal (WAMU)

9. The Development of Modern Banking • M1 = Cash, coin and demand deposits • M2 = M1 + Small Time Deposits + Savings Deposits • M3 = M2 + Large Time Deposits (No longer exists)

10. All Content Created by DJ Cook