Money and Banking
The Functions andCharacteristics of Money
Medium of Exchange
Something a seller will accept in exchange for aproduct or service.
Without money, people would have to barter, amuch more complicated process involving a doublecoincidence of wants.
Unit of Accounting
It is used to measure and compare the values ofdifferent items and services.
Helps to keep accurate financial records
Store of Value
It is used as a store of value—sell one thing (such aslabor) and save its value (paycheck) for use at a latertime.
Any item that wants to be money must meetsix criteria:
Durable—withstands wear and tear of being passedaround
Portable—must be easy to transport
Divisible—must be able to divide it into small partsin order to purchase things of differing value
Must have stable value
Must be a scarce item so that there is not too much ofit.
Must be accepted by the sellers and buyers incommunity
Commodity Money: a medium of exchange suchas cattle or gems that has value as a commodityor good aside from its value as money
Cattle are used for food; gems are used for jewelry.
Representative Money: money that is backed byan item of value such as by gold or silver
The amount of money in ciruculation would belimited because it is linked to some scarce good, suchas gold.
Fiat Money: money that has value because agovernment fiat, or order, has established it asacceptable for payment of debts
Today, all US money is fiat money and isdeclared legal tender.
Legal Tender: money that by law must be accepted forpayment of public and private debts
History of AmericanMoney and Banking
England forbade Colonial America from usingprinted money or minted coins.
Bartering of various goods was used in place ofmoney.
When the war came, the Continental Congressissued bills of credit (Continentals) to pay wardebts.
Too many Continentals were issued and theybecame worthless.
After the war, the United States began to mintits own coins backed by gold and silver.
Checking accounts
Automatic deposit and payment
Storage of valuables
Money transfers
Overdraft checking, which allows a customerto write a check for money that is in theaccount and the bank will loan the money to bepaid back at a high interest rate.
Computers ushered in a new form ofbanking—electronic fund transfers (EFT)
Automated teller machines (ATMs)
Lack of privacy and possibility of tamperingare risks of electronic bank transfers.
Customer has little “float” time betweenwriting the check and its being cashed by thebank.
Electronic Funds Transfer Act helped calmsome of these concerns.
Types of Money in theUnited States
Currency
Coins and bills (notes)
Federal Reserve Notes and United States Notes arelegal tender.
Credit Cards and Debit Cards
Credit cards are not really money; they arerepresentative of future claims to funds.
Credit cards actually defer the completion of thetransaction to a later date.
Debit cards are similar to checks, but the withdrawalis done electronically.
Checks
Checks and checking accounts offer checkabledeposits.
Today all thrift institutions offer checkable deposits.
Checking Account: account in which deposited moneycan be withdrawn at any time by writing a check
Checkable Deposits: money deposited in a bank thatcan be withdrawn at any time by presenting a check.
Thrift Institutions: mutual savings banks, S&Ls, andcredit unions that offer many of the same services ascommercial banks
Near Moneys
Near Moneys: assets, such as savings accounts, thatcan be turned into money relatively easily andwithout the risk of loss of value
Near moneys are assets that have values stated interms of money, but are not themselves money.
Near money can easily be turned into money, suchas savings accounts or time deposits.
Definition M1 includes:
all currency,
all deposits in checking accounts,
and travelers’ checks.
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.