Money is anything that serves as a medium of exchange, a unit of account and a store of value.
1. Medium of exchange - anything used to measure value
during the exchange of goods and services.
2. Unit of account - money is a way to compare the value of
goods and services.
3. Store of value. This means money keeps its value if you hold on
The coins and paper bills used as money in a society are called currency. Currency must have six characteristics: durability, portability, divisibility, uniformity, scarcity, and acceptability. It must have durability, or be able to withstand a lot of use. It must have portability, or be easily carried and transferred. It must be divisible, or easily divided into smaller units. It must have uniformity, meaning that people must be able to count and measure money accurately. Currency must exhibit scarcity, meaning it must have a controlled supply. Finally, it must have acceptability, the ability to be accepted by all people in society.
10-2- THE HISTORY OF AMERICAN BANKING
A bank is an institution for receiving, keeping, and lending money. In 1791, Congress set up the Bank of the United States. It lent money to the federal government and issued bank notes, a form of representative money backed by gold and silver. The Bank brought stability to American banking. However, many people were opposed to it. They worried that a centralized bank would respond only to the needs of wealthy individuals and large businesses. It ceased to exist in 1811, when its charter, or license, expired. A second central bank had the same fate, expiring in 1836. The period between 1837 and 1863 is known as the Free Banking Era. This period was dominated by state-chartered
banks. Many did not have enough gold and silver to back their paper money. During the Civil War, Congress enacted important bank reforms. These laws gave the federal government the power to charter banks. Banks were now required to hold adequate gold and silver reserves. The government also established a uniform national currency.
In 1913, Congress established the Federal Reserve System. It served as the nation’s first true central bank, or bank that can lend to other banks in times of need. In the 1930s, the severe economic decline called the Great Depression led to new laws regulating banks. One established the Federal Deposit Insurance Corporation (FDIC), which insures customer deposits if a bank fails.
10-3 BANKING TODAY
The money supply is all the money available the United States economy. The money supply is divided into categories called M1 and M2. M1 is money that people can easily use to pay for goods and services, such as currency and deposits in checking accounts. These are assets that have liquidity, which means they can be used as cash or easily turned into cash. M2 consists of all the assets in M1 plus several other assets which have less liquidity, such as savings accounts and money market mutual funds. These are funds that pool money from small investors to purchase government or corporate bonds. The basic service banks provide is a safe way for people to store and save money.
Banks offer savings accounts, checking accounts, money market accounts and certificates of deposit. Most of these accounts pay interest, the price paid for the use of borrowed money. Banks also provide loans, mortgages, and credit cards. A mortgage
is a loan used for real estate. When banks lend money, they make a profit by charging interest. The borrower also has to repay the principal, the amount borrowed. Computers are rapidly changing the world of banking. Automated Teller Machines (ATMs) are computers that customers can use to deposit money, withdraw cash, and obtain information. Many people are starting to use the Internet to handle their finances. A growing number of financial institutions allow people to check account balances, transfer money between accounts, and pay their bills by computer.