1. Chapter 14
Money, Banking and the Fed

2. 14-1: The Evolution, Functions and
Characteristics of Money
• What is money?
• Characteristics of money
1. Portable
2. Durable
3. Divisible
4. Limited supply
• Types of money
– Barter economy - moneyless economy that relies on trade
– Commodity money - money that has an alternative use as an
economic good or commodity
– Fiat money - money by government decree such as metal coins or
paper currency
– Specie - money in the form of silver or gold coins

3. • Functions of money
1. Medium of exchange – accepted as payment for goods and
services
2. Measure of value – serves as a common way to express value
3. Store of value – allows people to preserve value for future
use
• Money Supply
– M1: money as a medium of exchange
• coins and currency, travelers’ checks, checking accounts,
demand deposit accounts
– M2: money as a store of value
• M1 plus savings accounts, time deposits, and money market
funds

4. 14-2: The Development of Modern Banking
• After the Revolutionary War, banks were allowed to issue paper
currency, known as “bank notes”.
• In 1861 Congress authorized the printing of $60 million in a national
currency and declared it “legal tender”. Called “greenbacks” because
the reverse sides of the noted were printed in green ink.
• Created National banks that were privately held banks that receive
operating charters from the federal government. They printed their
own currency but had to buy bonds from the federal government as
backing.
• As a result of the need to finance the Civil War, the makeup of the
paper component of the money supply went from being entirely
privately issued to being entirely publically issued.

5. 14-2: The Development of Modern Banking
• In 1913 Congress created the Federal Reserve System, or
“Fed” as the nation’s central bank. A central bank can lend to
other banks in times of need.
– The Fed issued its own currency, known as Federal Reserve
notes, which eventually replaced all other types of federal
currency.
• Creating Money

6. 14-3: The Federal Reserve System and
Monetary Policy
• The Federal Reserve System

7. • Monetary Policy