Functions and Types of Money

Money and Its Functions

• Money acts as a medium of exchange, unit of account, and store of value.
• Medium of exchange facilitates trade by determining value during transactions.
• Barter is the direct exchange of goods and services without using money.
• Unit of account enables comparison of goods and services' values.
• Store of value maintains its worth when saved or stored.

Types of Money

• Currency includes coins and paper bills recognized as money.
• Commodity money has intrinsic value and is used as money (e.g., gold).
• Representative money can be exchanged for a commodity of value (e.g., gold-backed notes).
• Fiat money derives value from government mandate rather than intrinsic worth.

Characteristics of Money

• Durability: Must withstand physical wear and tear.
• Portability: Easily carried and transferred.
• Divisibility: Can be divided into smaller units.
• Uniformity: Same denomination has identical value.
• Limited supply: Should be scarce to maintain value.
• Acceptability: Widely recognized and accepted as a form of payment.

Banking Overview

• Banks are institutions for managing and lending money.
• National banks are licensed by the federal government.
• Bank runs occur when many customers withdraw funds simultaneously due to panic.

Historical Context

• Greenbacks were paper currency issued during the Civil War.
• The gold standard links currency value to a specified amount of gold.
• The Federal Reserve System is the central banking authority in the U.S.
• Central banks help stabilize the economy and lend to other banks.

Key Historical Institutions and Acts

• The Federal Deposit Insurance Corporation (FDIC) insures bank customer deposits.
• The First Bank of the United States was authorized to manage government funds and issue bank notes.
• The Free Banking Era experienced instability with bank runs and numerous currencies.
• The National Banking Acts of 1863 & 1864 established national currency and required banks to hold reserves.

Monetary Policy and Economic Crises

• The Great Depression was a significant economic downturn starting in 1929.
• The S&L Crisis arose from deregulation, high-interest rates, bad loans, and fraud.
• FIRREA aimed to address the issues within the savings and loan industry.

Money Supply and Liquidity

• The money supply encompasses all money available in the economy.
• Liquidity refers to how easily an asset can be converted to cash.
• Demand deposits represent money held in checking accounts, readily available.

Financial Instruments and Loans

• Money market mutual funds pool savings to invest in short-term securities.
• Fractional reserve banking keeps a fraction of deposits on hand and lends the rest.
• Mortgages are specific loans for purchasing real estate.
• Credit cards allow purchases based on the promise to pay later, while debit cards withdraw directly from accounts.

Interest and Financial Basics

• Interest is the cost of borrowing money expressed as a percentage.
• Principal is the initial amount borrowed.
• Types of financial institutions include commercial banks, credit unions, and finance companies.

Savings Methods

• Common savings vehicles include savings accounts, checking accounts, money market accounts, and certificates of deposits (CDs).

Explore the essential functions of money, including its roles as a medium of exchange, unit of account, and store of value. Learn about different types of money, such as currency, commodity money, representative money, and fiat money. Understand the key characteristics that make money effective in an economy.