XIII -- 1
Topic: Chapter #13, McConnell & Brue
Money and Banking
I. Characteristics of any Modern Economy
1. Large amount of real capital
2. Much division of labor--specialization
3. Use of fiat money.
II. Money Definition
Anything that is readily acceptable in payment for resources, goods, and services, or in
payment for debts.
1. Money is a social convention.
2. Money is debt of the U.S. Treasury and commercial banks.
III. Types of Money
(1) Things that have "use" value
(2) Problems with commodity monies
(a) may deteriorate
(b) may not circulate
(c) often inconvenient
(d) high storage cost
(e) changing value as commodity price changes
XIII -- 2
(3) Examples of commodity monies
2. Fiat Money
(1) Defined by society in which it is used.
(2) Has no intrinsic or use value other than for use as money
(3) Major components of fiat money
(a) paper bills
(4) Problems with fiat money
(a) subject to abuse by monetary authority
(c) control of supply
XIII -- 3
IV. Factors that give fiat money value
1. Acceptability -- because it performs the functions of money
(a) medium of exchange
(b) measure of relative value
(c) store of value
2. Legal Tender -- it's the law
(1) Creditors must accept it
(2) Government must accept for payment of taxes
3. Relative scarcity
(1) Scarce relative to usefulness
(2) Purchasing power determined by quantity available
V. Maintaining Money's Value
1. Use appropriate fiscal policy (government spending and taxing)
2. Maintain effective control over money supply (appropriate monetary policy)
3. Separate money supply control from political influence
XIII -- 4
VI. History of Development of Modern Fiat Money
1. Goldsmith's receipts
2. Early world wide trading companies issued receipts.
3. In U.S., states issued money--caused lots of confusion and trade problems.
4. Need for centralized banking system in U.S.--Federal Reserve System,