Economics: Principles and Practices © 2008
Money, Banking, and the Fed
Section 1: The Evolution, Functions, and Characteristics of Money
Over the years, products and services have been obtained through bartering, commodity money, or specie. Now, we have the basic monetary unit. Studies have shown that anything can be used as money as long as it is portable, durable, divisible, and limited in supply. Money must service three roles in economy: a medium of exchange, a measure of value, and a store value.
Section 2: The Development of Modern Banking
The United States experimented with many different kinds of money and faced many issues with it before it created the Federal Reserve System. Initially, each bank printed its own currency in different sizes, colors, and denominations. As a result, there were hundreds of different kinds of notes in circulation. Another issue was banks were tempted to print too much money because they could simply print more. Finally, counterfeiting became a concern. In 1861, the government printed greenbacks to finance the Civil War. In 1863, the National Banking System (NBS) was established which issued its own currency called National Bank notes. Other currencies of the period included gold certificates and silver certificates. The Federal Reserve System (Fed) was established in 1913 in order to assist with modern banking.
Section 3: The Federal Reserve System and Monetary Policy
The Fed is organized as a corporation, owned by its member banks, and directed by a government-appointed board. Monetary policy affects the size of the money supply and the level of interest rates. The first "tool" of monetary policy—and the one used least often—is a change in the reserve requirement. The second and most popular and powerful tool of monetary policy is open market operations. A change in the discount rate is the third major tool. The Federal Reserve has other responsibilities as well. These include maintaining the money supply and the payments system, regulating and supervising banks, preparing consumer legislation, and serving as the federal government's bank.