Econ Ch10 Pt1

Chapter 10

Money and Banking

Money

The Three Uses of Money

●Money as a medium of exchange

○Determines value via exchange of goods and

services

○Replaces the barter system

●Money as a unit of account

○Compares the value of goods and services

●Money as a store of value

○Savings and wealth

Multiple Choice

Money replaces the ______ system

• Barter

• International

• Political

• Banking

The Six Characteristics of Money

1. Must be accepted (#1 characteristic)
2. Must be portable
3. Must be in limited supply
4. Must be divisible
5. Must be durable
6. Must be uniform and stable

Multiple Choice

Money must be

• Accepted

• Portable

• Divisible

• All of these

Sources of Money’s Value

●Commodity money

○Objects that have value- e.g. tea leaves

●Representative money

○Receipts to be paid back later- e.g. IOUs

●Fiat money

○Backed by a government (legal tender)

Multiple Choice

The type of money the United States uses is

• Representative

• Fiat

• Commodity

• Shells

The History of American Banking

American Banking before the Civil War

●Two views of banking

○Debated during the 1780s and 1790s

■Decentralized system (anti-federalists)
■Centralized system (national bank)(federalists)

●The First Bank of the United States

○Established a centralized bank in 1791
○20 year charter

Chaos in American banking

●Once the charter expired, state banks took over
●State banks issued their own currency
●Problems with private currency

○Many different types of notes
○Too many notes issued
○Easy to counterfeit

Multiple Choice

One issue with the private currency the States issued was

• Easy to counterfeit

• No one liked the color

• California was left out

• It was too heavy

The Second Bank of the United States

●Chartered in 1816 (20 years)
●Restored confidence in banks

The free banking era

●Period between 1837 and 1863
●Known as the “wildcat era”
●Many of the same chaotic problems as earlier

Currency in the North and South

●North- “Greenbacks”
●Standardized national currency

○Necessary to pay for the Civil War

●South- currency backed by cotton

Unifying American banks

●National banking acts of 1863 and 1864

Multiple Choice

The money in the South was backed by

• Gold

• Paper

• Cotton

• Bronze

The Gold Standard (1870s)

●The dollar was backed by gold
●Increased stability and faith in the banking system