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inator that can be used to express worth in terms
a store of value. If it satisfies these three functions, it
that most individuals understand. This is what we
will be accepted and used by everyone in a society.
observe whenever we see a price tag on something”
a value that we can use to make comparisons with
Medium of Exchange other products. In the United States, our measure
of value is expressed in dollars and cents.
For something to function as money, it must
serve as a medium of exchange”something
Store of Value
accepted by all parties as payment for goods and
For something to function as money, it must
services. Throughout history, societies have used
also serve as a store of value, the property that
many materials as a medium of exchange, includ-
allows purchasing power to be saved until needed.
ing gold, silver, and even salt. In ancient Rome, salt
For example, goods or services can be converted
was so valuable that each soldier received an annual
into money, which is easily stored until needed.
salt payment called a “salarium.” The modern term
Money enables a period of time to pass between
for an annual income”or “salary””is based on this
earning and spending an income.
Latin term.




The Future Smart cards


of Money
As you have learned, money must have certain character-
istics to perform its functions in the economy. Money must
be accepted. This means that everyone in the economic sys-
tem must agree that the money has value and be willing to
take it as payment for debts. Money must also be divisible.
This means that units of money can be divided into smaller
units without losing their relative value. Money must be
portable. This means that it must be possible to move the
money from one place to another with ease. In addition,
Internet. Some economists and analysts contend that
money must have a reasonably stable value. This means that cybercurrency has the potential to assume an important
a person will be able to buy about the same number or place in domestic and worldwide payment systems.
value of products today, next week, or next year.
Nobel Prize“winning economist Milton Friedman noted
Despite the widespread use and advantages of currency, that paper and coin eventually will give way to electronic
some analysts predict that the use of electronic payments money. Walter Wriston, the former president of the finan-
will grow tremendously. Have you heard of cybercurrency? cial institution Citicorp, estimates that in the not-too-
Smart cards? Electronic money? One analyst defines distant future, one in every four Americans will have a
cybercurrency as the use of microchip-based electronic smart card. Smart cards are wallet-sized plastic cards that
money for financial transactions, via smart cards and the serve three purposes: as data carriers, for identification,

286 UNIT 3 MACROECONOMICS: INSTITUTIONS
Money in Early Societies The use of money became accepted because it
served everyone™s best interests to do so. In this
The use of money developed because it sense, money was then”and is now”a social con-
makes life easier for people. Money comes in vention, much like the general acceptance of laws
an incredible variety of forms, shapes, and sizes. and government.
Tea leaves compressed into “bricks” comprised
money in ancient China, and compressed cheese
was used in early Russian trade. The East African
Money in Colonial America
Masai used a currency made of miniature iron
The money used by early settlers in America
spears fastened together to form a necklace.
was similar to the money found in early soci-
Today, this money would be classified as
eties. Some of it was commodity money, and some
commodity money”money that has an alternative
was fiat money.
use as an economic good, or commodity. For exam-
Many products”including gunpowder, musket
ple, the compressed tea leaves could be made into tea
balls, corn, and hemp”served as commodity
when not needed for trade. Other items became fiat
money. It could be used to settle debts and make
money”money by government decree”such as the
purchases, or could
tiny, metallic coins used in Asia Minor in the seventh
even be consumed
century B.C. These coins served as money largely
if necessary.
because the government said they were money.
Did You Know?
Dollars and Cents The United
States decimalized monetary system,
based on dollars and cents, was adopted
in 1784. The units of the monetary
system were the mill (1/100th of
and for financial transactions. Wriston notes that “peo- strong. In addi-
a cent), cent, dime, dollar, and
ple will use an ATM or home computer to download the tion, coin and
eagle ($10).
money from their bank accounts to the cards.” paper money pro-
vide an advantage
Features Do these new forms of money meet the in privacy”you are in
characteristics of useful currency? Supporters say they charge of your money and
do and, additionally, provide an added feature”trans- no one else needs to know. Will
fer velocity”almost instantaneous transfer of funds cybermoney lead the way to a cashless age?
from point to point. Another advantage is reduced Only the future will tell.
transaction costs. Merchants pay credit card transaction
fees, and those fees usually include a minimum that can
erase profit margins on low-cost items. Research analyst
Heather Aston says, “It doesn™t make a lot of sense to
have to process something that costs $2 the same way
you process something that costs $50.” Micropayment
schemes eliminate the expensive step of asking the
credit card issuer to confirm the card holder™s ability to
pay for each transaction. What is needed is confirma-
tion that the encrypted serial number is valid.

Will Cybermoney Catch On? Some economists
and analysts believe that the use of U.S. currency and
credit cards is too deeply ingrained for new forms to
displace them. While technological innovation may
make cash less essential, public demand for it is “Key” and sensing pad


CHAPTER 11: MONEY AND BANKING 287
Barter Economy




Medium of Exchange As the cartoon shows, a barter economy can cause problems for those wanting to
exchange goods for products they may use. How does money function as a medium of exchange?




A commonly accepted commodity money was to print their own paper currency. Backed by gold
tobacco, with a value set at three English shillings and silver deposits in banks, it served as currency
per pound by the governor of colonial Virginia in for the immediate area.
1618. Two years later, as you read in the cover Most states printed money in the form of tax-
story, the colonists used some of this money to anticipation notes that could be redeemed with
bring wives to the colonies. interest at the end of the year. State governments
Other colonies established fiat monies. In 1645 printed these notes and then used them to pay
Connecticut set a monetary value for wampum”a salaries, buy supplies, and meet other expenditures
form of currency the Narragansett Native until taxes were received and the notes redeemed.
Americans made out of white conch and black Paper money was issued to finance the
mussel shells. Because white shells were more Revolutionary War. In 1775, Continental dollars, a
plentiful than black ones, and because the form of fiat paper currency with no gold or silver
Narragansett and the settlers used them in trade, backing, were printed by the Continental Congress.
one English penny was made equal to six white or By the end of the war, nearly one-quarter billion
three black shells. In 1648 the General Court of Continental dollars had been printed to pay sol-
Massachusetts passed a law ordering the wampum diers and buy supplies”a volume so large that it was
to be “suitably strung” in lengths of 1, 3, and 12 virtually worthless by the end of the revolution.
pennies.
Specie
Paper Currency A modest amount of specie”or money in the
As time passed, Americans used other forms of form of coins made from silver or gold”was also
money. In some cases, state laws allowed individuals used in the colonies. These included English

288 UNIT 3 MACROECONOMICS: INSTITUTIONS
shillings, Austrian talers, and various European Paper Currency
coins that immigrants brought to the colonies.
Coins were the most desirable form of money,
not only because of their mineral content, but
because they were in limited supply. By 1776, only
$12 million in specie circulated in the colonies as
compared to nearly $500 million in paper currency.


Origins of the Dollar
When George Washington became president
in 1789, the most plentiful coin in circula-
tion was the Spanish peso. Consequently, one of
Washington™s first challenges was to establish a
money supply for the new country, a task he
assigned to Benjamin Franklin and Secretary of the
Treasury Alexander Hamilton.

Pesos in America
Long before the American Revolution had
begun, the Spanish were mining silver in Mexico.
They melted the silver into bullion”ingots or bars
of precious metals”or minted it into coins for ship-
ment to Spain. When the Spanish treasure ships
Characteristics Various forms
stopped in the West Indies to buy fresh provisions, of paper currency have been used in the United
however, they often became victims of Caribbean States. What characteristics must money have
pirates who spent their stolen treasure in America™s to be a successful medium of exchange?
southern colonies.
Meanwhile, the colonies engaged in a profitable
exchange known as the triangular trade, which like the word “dollars.” This term became so popu-
exported rum in exchange for enslaved people and lar that Franklin and Hamilton decided to make
molasses. Molasses from the West Indies was the dollar the basic monetary unit, or standard
shipped to the colonies where it was made into unit of currency, in the U.S. money system.
rum. The rum was shipped across the Atlantic Rather than divide the dollar into eighths as the
Ocean to Africa, where it was exchanged for Spanish had done with the peso, Franklin and
enslaved Africans. The Africans were packed into Hamilton decided to divide it into tenths, which
ships and taken across the Atlantic to the West was easier to understand. Even today, some of the
Indies where they were sold for molasses and pesos. terminology associated with the Spanish peso
The molasses, silver pesos, and some enslaved peo- remains, as when people sometimes call a 25-cent
ple were then returned to the colonies to begin the coin”one quarter of a dollar”“two bits.”
triangle again.

Characteristics of Money
From “Talers” to “Dollars”
Pesos were known as “pieces of eight,” because The study of early money is useful because it
they were divided into eight sub-parts known as helps us understand the characteristics that
bits. Because the pesos resembled the Austrian give money its value. To be successful, money must
talers, they were nicknamed talers, which sounds be portable, durable, divisible, and limited in supply.

CHAPTER 11: MONEY AND BANKING 289
Portability spear currency, the necklace was untied and some
of the spears removed. The blocks of tea or cheese
First, money must be portable, or easily trans-
were cut with a knife. Bundles of tobacco leaves
ferred from one person to another, to make the
were broken apart.
exchange of money for products easier. Most
money in early societies was very portable”
including dog teeth, feather-stick money,
Limited Availability
wampum, tobacco, and compressed blocks of tea
Finally, if something is to serve as money, it
and cheese.
must be available, but only in limited supply. The
dog teeth of New Guinea, for example, were
Durability extracted from packs of wild dogs. Because the
islanders hunted the dogs for their teeth, the wild
Money must also be reasonably durable so that
dog population never grew large. Stones used as
it lasts when handled and does not deteriorate
money on the Yap Islands were carried in open
when being held as a store of value. Most colonial
canoes from other islands 400 miles away. Because
money was quite durable, especially monies like
navigation was uncertain and the weather unpre-
musket balls and wampum. Wampum, for exam-
dictable, only one canoe in 20 completed the
ple, did not require special care when being han-
round-trip”circumstances that limited the supply
dled, and it lasted a long time. Even the fiat paper
of stone money.
money of the colonial period had a type of dura-
Money”like almost everything else”loses its
bility in that it could be easily replaced by issuing
value whenever there is too much of it, a major
new bills when old ones became worn.
problem for most types of commodity money. In
Virginia, for example, the price of tobacco went
Divisibility from 36 pennies a pound to 1 penny a pound after
everyone started growing their own money.
Money should be easily divisible into smaller
Wampum even lost its value when settlers used
units, so that people can use only as much as
industrial dyes to turn the white shells into black”
needed for any transaction. Most early money was
thereby doubling its value.
highly divisible. In the case of the Masai™s iron




Checking for Understanding Applying Economic Concepts
1. Main Idea How does money advance the 7. Money Write a brief critique of the following
exchange of goods and services? statement: “Money is our servant, not our
master. Those who treat money as the master
2. Key Terms Define barter economy, money,
rather than the servant do not really under-
medium of exchange, measure of value, store
stand money.”
of value, commodity money, fiat money,
specie, monetary unit.
3. Describe three functions of money.
8. Drawing Conclusions Suppose the color
4. Name four types of early money.
and shape of our currency was changed.
5. Explain how the dollar was adopted as the
How would these changes affect the role
basic monetary unit.
money played?
6. Identify the four characteristics of money.
Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.



290 UNIT 3 MACROECONOMICS: INSTITUTIONS
A Fingertip Fortune:
Dineh Mohajer
(1973“)

It might be hard to believe that
a multimillion dollar business
started in a bathroom, but that™s
exactly where Dineh Mohajer™s
Hard Candy cosmetics company
was born.
The year was 1995. Fed up with
women across the country, eager
a life of hard study as a pre-med nail polish, and called the line
to stay in style, ordered bottles
student, the 22-year-old Mohajer Hard Candy. The striking colors
of the nail polish. Within six
recalls making a conscious decision proved so popular that the bou-
months, Hard Candy was grossing
to make a change. “I used to stare tique couldn™t keep Hard Candy
more than $70,000 a month.
out the window,” she said, “and in stock. Mohajer took a loan
Within a year, annual sales had
think, ˜I wonder what the civilians from her parents and went into
topped $10 million.
are doing out there?™ So that sum- business full time. It was the start
The fashion industry, by defini-
mer I told myself, this is my last of something big.
tion, is volatile: what™s “in” today
summer of real life. I™m rebelling!
RAPID SUCCESS is likely to be “out” tomorrow, so
I™m not going to do it!”
the long-term fortunes of Hard
The colors Mohajer chose for
HARD CANDY Candy are hard to predict. But
her nail polishes, with hip names
there can be no doubt that it has
Mohajer took a job at a Los like “Tantrum,” “Greed,” and
proved a multimillion dollar,
Angeles boutique. One night, she “Dork,” were bold and hard-edged,
overnight success, born in the
decided she needed nail polish to unlike the more conservative col-
bathroom of a young woman who
match a pair of sky-blue sandals. ors available from the big cosmet-
parlayed her love of fashion into a
In her bathroom, she applied her ics companies. They proved a hit
big business.
knowledge of chemistry from her with young, fashion-conscious
pre-med classes to mix up some women in Los Angeles. Hard
nail polish. The unusual color was Candy became the new, cool
Examining the Profile
a hit with her friends, so Mohajer, makeup among trend-setters, and
1. Identifying Cause and Effect What
at the urging of her sister Pooheh, its popularity was reported in
factors made Hard Candy successful?
took it to the boutique owner, national fashion magazines like
who agreed to sell it. Mohajer Vogue, Elle, Teen, and Seventeen. 2. For Further Research Conduct
mixed up several more colors of Tens of thousands of young research to determine Hard Candy™s
current condition. Report on its market
share and immediate prospects.

CHAPTER 11: MONEY AND BANKING 291
Early Banking and Monetary
Standards
Main Idea Key Terms
Although the monetary standard has changed monetary standard, state bank, legal tender, United
throughout American history, an inconvertible fiat States note, national bank, National Bank note,
money standard is used today. national currency, gold certificate, silver certificate,
Treasury coin note, gold standard, inconvertible fiat
Reading Strategy money standard
Graphic Organizer As you read the section, complete
Objectives
a time line similar to the one below by listing major
events in American monetary history in the appropri- After studying this section, you will be able to:
ART TO COME:
ate spaces. 1. Explain the history of privately issued bank notes.
Art
2. Describe an inconvertible money standard.
ID
1860 1880 1900 1920 1940
Applying Economic Concepts
Money Supply Managing the money supply is a diffi-
cult task. Read to see how we use different methods
1886 1900 1934
1862
to keep the dollar strong.




T
he week after the article in the cover story was
Cover Stor y published, the Swiss adopted a new constitu-
tion”and abandoned the gold standard.
Fortunately, there are other ways to keep the money
Swiss Set to Abandon supply sound so that the economy functions
Gold Standard oto smoothly.
Ph A monetary standard”the mechanism designed to
always
Switzerland has ID and keep the money supply portable, durable, divisible,
try
been regarded as a coun and limited in supply”helps with this task. The United
. It
that “understands” gold States has had several monetary standards in its history.
ggest
owns the world™s fifth bi
nks
gold reserves, its big ba
gold
still operate their own Privately Issued Bank Notes
iss
refineries, and the Sw
y still During the Revolutionary War, nearly 250
franc is the last currenc
One-ounce gold bar million Continental dollars were printed.
tied to gold.
d
However, this weeken After the Revolution, Continental currency was
ed to do what would
iss electorate is expect worthless, and people did not trust the government
the Sw
de ago”abandon the
en unthinkable a deca
have be to issue anything except coin. Accordingly, Article 1,
is still set at 142.9
ndard. . . . [I]n law gold
gold sta Section 8, of the United States Constitution states:
nce.
Swiss francs per troy ou
legal link between the
e decision to sever the The Congress shall have the power
Th
inder that [gold] has lost
franc and gold, is a rem To coin money, regulate the value thereof, and of
Swiss
cheer leaders. . . .
one of its biggest official foreign coin, and fix the standard of weights and
(London) April 16, 1999 measures;
”The Financial Times


292
had about 100 state banks”banks
Monetary Standards
that received their charter to operate
from a state government.
State banks issued their own cur-
rency by printing their notes at local
printing shops. The banks then put
these notes in circulation with the
assurance that people could
exchange them for gold or silver if
they ever lost faith in the bank or its
currency.

Abuses in Banking
At first, most banks printed only
the amount of currency they could
reasonably back with their gold and
silver reserves. Others, however, were
not as honest and became known as
wildcat banks”fraudulent banks that
printed large amounts of currency in
remote areas to make the redemption
Fiat Money The paper money in our economy is “fiat” money: of their currency difficult. These
it is money partly because government says it is money. What
banks got their name from people
part of the Constitution gives Congress the right to coin
who claimed that you had to be a
money?
wildcat to get to them.

To provide for the punishment of counterfeiting the
Problems With Currency
securities and current coin of the United States; . . .
Even when banks were honest, problems with
To make all laws which shall be necessary and proper for
the currency arose. First, each bank issued its own
carrying into execution the foregoing powers, and all other
currency in different sizes, colors, and denomina-
powers vested by this Constitution in the government of the
tions. As a result, hundreds of different kinds of
United States, or in any department or officer thereof.
notes could be in circulation in any given city.
Article 1, Section 10, further states:
Second, because a bank could print more money
No State shall . . . coin money; emit bills of credit; whenever it wanted, the temptation to issue too
make anything but gold and silver coin a tender in pay- many notes always existed. Third, counterfeiting
ment of debts. . . . became a major problem. With so many different
types of notes in circulation, many counterfeiters
Because of these clauses, the federal government
did not even bother to copy other notes. Instead,
did not print paper currency until the Civil War.
they just made up new notes.
Instead, the paper money supply was left for pri-
By the Civil War, the United States had more
vate banks to produce.
than 1,600 banks issuing more than 10,000 kinds of
paper currency. Each bank was supposed to have
Growth of State Banking backing in the form of gold or silver, but this was sel-
dom the case. As a result, when people tried to buy
Banks in the colonial period were allowed to
something, merchants would often check their notes
issue their own paper money, a practice not pro-
against the latest listing of good and bad currencies
hibited by the new Constitution. As a result, bank-
before deciding which ones to accept in payment.
ing grew in popularity, and by 1811 the country

CHAPTER 11: MONEY AND BANKING 293
The Greenback Standard Greenbacks
When the Civil War erupted, both the Union and
By the 1850s, the paper currency component
the Confederacy needed to raise enormous sums to
of the money supply was badly in need of
finance the war. Congress tried to borrow money by
overhaul. Politically powerful local bankers, how-
selling bonds, but this did not raise as much money
ever, resisted change until an event came along that
as the federal government needed. As a result,
was to change banking forever in America”the
Congress decided to print paper currency for the
Civil War.
first time since the Constitution was adopted.


ECONOMICS
Figure 11.1
AT A GLANCE
AT A GLANCE

The 50 State Quarter Program
The First Five Quarters:



The 10-Year Release Schedule:
Year States Year States Year States Year States
1999 Delaware 2002 Tennessee 2005 California 2008 Oklahoma
Pennsylvania Ohio Minnesota New Mexico
New Jersey Louisiana Oregon Arizona
Georgia Indiana Kansas Alaska
Connecticut Mississippi West Virginia Hawaii
2000 Massachusetts 2003 Illinois 2006 Nevada
Maryland Alabama Nebraska
South Carolina Maine Colorado
New Hampshire Missouri North Dakota
Virginia Arkansas South Dakota
2001 New York 2004 Michigan 2007 Montana
North Carolina Florida Washington
Rhode Island Texas Idaho
Vermont Iowa Wyoming
Kentucky Wisconsin Utah


Using Charts The United States Mint is introducing 50 new quarters over a 10-year period to
celebrate individual states™ histories and traditions. In what order are the quarters being
released?


294 UNIT 3 MACROECONOMICS: INSTITUTIONS
In 1861, Congress authorized the printing of
$60 million of demand notes. Although these
notes had no gold or silver backing, they were
declared legal tender”fiat currency that must be
accepted in payment for debts. These new federal Student Web Activity Visit the Economics: Principles
demand notes were soon dubbed greenbacks and Practices Web site at epp.glencoe.com and click
because both sides of the notes were printed with on Chapter 11”Student Web Activities for an activity
on the new dollar coin.
green ink to distinguish them from the state notes
already in circulation.
In 1862, Congress passed the Legal Tender Act,
authorizing the Union government to print $150
Finally, in 1865 the federal government forced state
million of United States notes, a new federal fiat
banks to join the National Banking System by plac-
currency that also had no gold or silver backing.
ing a 10 percent tax on all privately issued bank
These new notes were also called greenbacks, and
notes. Because state-chartered banks could not afford
they accounted for half of the currency in circula-
the tax, they withdrew their notes, leaving only the
tion by 1863. Meanwhile, the Confederacy did
greenbacks and national currency in circulation.
essentially the same thing by printing large
As a result of the need to finance the Civil War,
amounts of paper money to finance its war efforts.
the makeup of the money paper supply shifted
from being entirely privately-issued to being
entirely publicly-issued.
National Currency
As the war dragged on, people feared that green-
Gold Certificates
backs”like the Continental dollars used to finance
The removal of more than 10,000 different sizes
the Revolutionary War”might also become worth-
and denominations of state bank notes simplified
less. When the greenbacks did lose some of their
the currency system. Before long, however, new
value, people avoided using them, forcing
types of federal currency appeared.
Congress to find another way to finance the war.
In 1863, the government issued gold certificates”
The solution was to create a National Banking
paper currency backed by gold placed on deposit
System (NBS) made up of national banks”privately
with the United States Treasury. At first, these certifi-
owned banks that received their operating charters
cates were printed in large denominations for banks
from the federal government. These banks issued
to use when settling differences with each other at the
National Bank notes or national currency, paper
end of the business day. In 1882, the government
currency of uniform appearance that was backed by
began printing gold certificates in smaller denomina-
United States government bonds. The government
tions for public use.
hoped that rigorous bank inspections and other
high standards would give people confidence in the
new NBS and its currency.
Silver Certificates
This backing made the currency seem more
In 1886, the government introduced silver
secure to the public. It also generated a new
certificates”paper currency backed by silver dol-
demand for war bonds because any group that
lars and bullion placed on reserve with the
wanted to set up a national bank had to first pur-
Treasury. Silver certificates were modeled after the
chase government bonds as part of the requirement
highly popular gold certificates, but they were
to get the national charter. The bonds were then
really designed to prop up sagging silver prices for
put on deposit with the United States Treasury as
western silver miners.
backing against the currency.
At the time, the government was already minting
Initially, few state-chartered banks joined the sys-
silver dollars. However, silver dollars were bulky and
tem because it was easier for them to print their
inconvenient to use, so the act was amended in 1886
money at a local printer than to join the NBS.

CHAPTER 11: MONEY AND BANKING 295
to allow silver dollars to be used as backing for the want to convert all of their currency into gold at
new silver certificates. This appeased both the silver the same time. Consequently, it is usually suffi-
miners and the public who wanted an alternative to cient to maintain the appearance of having enough
the generally unwanted silver dollars. gold to back the paper money.


Disadvantages of a Gold Standard
Treasury Coin Notes
One disadvantage of a gold standard is that the
In 1890, the federal government printed the
gold stock may not grow fast enough to support a
fifth, and last, type of paper currency issued before
growing economy. If new gold supplies cannot be
the banking system was overhauled in 1913. The
found, the money supply may not be able to
currency came in the form of Treasury coin notes”
expand, thereby restricting economic growth.
paper currency issued by the Treasury that was
A second disadvantage is that people may sud-
redeemable in both gold and silver. The law was
denly decide to convert their currency into gold,
repealed in 1893, and further issues of Treasury
thereby draining the government™s gold reserves.
coin notes were ended.
This can easily happen if a government is trying to
maintain the appearance of having enough gold”
when in fact it does not.
The Gold Standard Third, we know that the price of gold is likely to
change dramatically over time if it is not fixed. For
In 1900, Congress passed the Gold Standard
example, in Chapter 6 we saw that the price of gold
Act, fixing the price of gold at $20.67 an
fell from $850 an ounce in 1980 to $280 in early
ounce. For the first time, the United States was on
1999. This means that any government that tries to
a gold standard”a monetary standard under which
“fix” the price of gold by buying and selling unlim-
the basic currency unit is equal to, and can be
ited amounts at an official price will face”and must
exchanged for, a specific amount of gold.
triumph over”tremendous market pressures.
The Gold Standard Act did not affect the type of
Finally, there is always the political risk of failure.
currency people used. People continued to use the
A government that announces an official price for
same greenbacks, National bank notes, gold certifi-
gold looks ineffective and foolish if it cannot carry
cates, silver certificates, and Treasury coin notes as
out its intentions. When the Swiss abandoned the
they did before. The difference was that these notes
gold standard, for example, the “official” price of an
could now be exchanged for gold at the Treasury at
ounce of gold was 142.9 Swiss francs”or about $95.
any time.
Clearly no one was going to sell gold to the Swiss at
that price. Nor were the Swiss willing to sell their
gold on the open market at that price.
Advantages of a Gold Standard
A gold standard has two major advantages. First,
some people feel more secure about their money if
they know it can be converted into gold.
Second, it is supposed to prevent the govern-
ment from printing too much paper currency. In
theory, the government promises to print only as Why do dimes, quarters, and
Why the Notches?
much currency as can be backed by, or exchanged half-dollars have notched or reeded edges while
into, gold. This keeps the currency relatively scarce pennies and nickels don™t? The United States Mint
and helps to maintain its value. notched the edges of coins containing gold and sil-
ver to hinder people from shaving off quantities of
In reality, the United States never did have
the precious metals. Since pennies and nickels con-
enough gold to back all of its currency. This is nor-
tain cheaper metal, they have no notches.
mally the case whenever a country goes on a gold
standard because it is unlikely that everyone will

296 UNIT 3 MACROECONOMICS: INSTITUTIONS
Third, most countries are reluctant to surrender
control of their macroeconomic policy to foreigners.
WHY ISN™T THERE JUST Suppose Spain™s 20 percent unemployment rate

ONE CURRENCY? demands urgent attention in the form of lower
interest rates, yet Portugal™s higher inflation rate
makes the authorities nervous about easier money.
Some frustrated American tourists who try to
If Spain and Portugal shared a currency, they would
communicate in foreign lands by screaming
have to share policy prescriptions. That would be
English words at a hundred decibels may wish
like two patients in a doctor™s waiting room agree-
that everyone just spoke English and used the
ing to the same medication, even though they suf-
dollar. Wouldn™t that make it easier for interna-
fered from different ailments.
tional trade? There would be no more standing in
line at the bank window waiting for the teller to ”From Here to Economy by Todd G. Buchholz,
Dutton, 1995
exchange currencies and take a cut off the top.
That might work well”except for three things.
First, most people like their currency. The depictions
on paper money and coins reinforce national icons
Critical Thinking
and symbols. Why would the Brits want to trade in
Queen Elizabeth™s noble chin for George 1. Analyzing Information Why does the writer
Washington™s wooden-toothed grimace? Second, believe countries will not accept a common
currency?
national currencies allow countries to manage their
own banking system (though they cannot insulate 2. Drawing Conclusions Read to find out
themselves from the policies of trading partners). about the euro. Is the writer™s argument
that nations will not accept using the same
currency valid? Why or why not?




Abandoning the Gold Standard who had filed a disclosure had no choice but to sur-
render their gold holdings. Others simply ignored
The gold standard remained in force until the
the government and kept their gold. Regardless, the
Depression of the 1930s when banks began to fail
United States went off the gold standard in 1934
in record numbers. Because of the uncertain times,
when it confiscated gold from private citizens.
and because people felt safer holding gold rather
than paper currency, they began to cash in their
dollars for gold. Foreign governments with large
The Inconvertible Fiat
holdings of dollars began to do the same thing.
The federal government feared it could not con-
Money Standard
tinue to back the money supply with gold, so on
Since 1934 the United States has been on an
August 28, 1933, President Franklin D. Roosevelt
inconvertible fiat money standard”a mone-
declared a national emergency. As part of the emer-
tary standard under which the fiat money supply can-
gency, the government decreed that anyone hold-
not be converted into gold or silver by its citizens.
ing more than $100 worth of gold or gold
certificates must file a disclosure form with the
United States Treasury.
A Managed Money Supply
Several months later, the Gold Reserve Act of
The money supply of the United States, like
1934 was passed, which required citizens, banks,
those of other major industrialized countries in the
and businesses to turn their gold and gold certifi-
world, is a managed money supply. In other words,
cates over to the United States government. Those

CHAPTER 11: MONEY AND BANKING 297
the government or its designated agent controls the money is portable. Currency is lightweight, conven-
quantity, composition, and even the quality of the ient, and can be easily transferred from one person
money supply. to another. The same applies to the use of checks.
This task is somewhat easier now that a single Modern money is reasonably durable. Metallic
currency issued by the Federal Reserve System has coins last about 20 years under normal use. Paper
replaced the multiple currencies that appeared after currency also is reasonably durable, with a $1 bill
the Civil War. National currency and Treasury coin lasting about 18 months in circulation. Even the
notes were withdrawn from circulation in the 1930s, introduction of the new Sacagawea dollar coin is
and gold certificates were confiscated in 1934. The part of an attempt to make the money supply more
last issue of United States notes (greenbacks) took durable by replacing low-denomination currency
place in 1968. Silver certificates were also retired, with coins.
and the government stopped redeeming them for sil- Modern money is divisible. The penny, which is
ver dollars in 1968. Americans have been allowed to the smallest denomination of coin, is small enough
own gold and silver certificates since 1975, but nei- for almost any purchase. In addition, checks can be
ther is officially part of the money supply. written for the exact amount.
Today, the tangible component of modern money If anything, modern money has an uneven track
consists of coins and Federal Reserve notes. record when it comes to limited availability and sta-
Intangible components consists of traveler™s checks bility in value. The money supply often grew at a
along with checking and savings accounts. How well rate of 10 to 12 percent a year in the early 1970s,
these substances function as money depends on how which contributed greatly to the inflation of the
well the four characteristics of money are satisfied. period. It slowed considerably after that, contribut-
ing to the period of relative price stability in the
1990s.
Characteristics of Modern Money In the end, the money supply can be managed,
Although money has changed in shape, kind, and price stability can be maintained”but only if
and size over the years, modern money shares the the government and monetary authorities have the
same characteristics of early money. Modern political courage to do so.




Understanding Key Terms 6. Describe the inconvertible fiat money stan-
1. Main Idea What is the purpose of a monetary dard that the United States uses.
standard?
Applying Economic Concepts
2. Key Terms Define monetary standard, state 7. Money Supply Suppose that Federal Reserve
bank, legal tender, United States note, notes did not exist to serve as “legal tender.”
national bank, National Bank note, national What else could be done to establish a suit-
currency, gold certificate, silver certificate, able money supply?
Treasury coin note, gold standard, inconvert-
ible fiat money standard.
3. Explain how privately issued bank notes
became part of the money supply. 8. Making Comparisons Some experts have
4. List the five major currencies in use after the proposed a return to the gold standard.
Explain why you think this may or may not
Civil War.
be a good idea.
5. Identify the advantages and disadvantages of
a gold standard. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.



298 UNIT 3 MACROECONOMICS: INSTITUTIONS
Developing Multimedia Presentations
Your economics teacher has assigned a presentation about how banks oper-
ate. You want to develop a presentation that really holds your classmates™
attention. How do you go about it?


Learning the Skill
A multimedia presentation
involves using several types of
media, including photographs,
videos, or sound recordings. The
equipment can range from simple
cassette players, to overhead
projectors, to VCRs, to computers,
and beyond.
Multimedia, as it relates to
computer technology, is the
combination of text, video, audio,
and animation in an interactive
computer program. You need
certain tools to create multimedia
presentations on a computer,
including computer graphics tools
and draw programs, animation
programs, and authoring systems
Various equipment that can be used in
that tie everything together. Your
multimedia presentations
computer manual will tell you
which tools your computer can
support.
2. Which kinds of media equipment are available at my
school or local library?
Practicing the Skill
3. What types of media can I create to enhance my
Plan and create a multimedia presentation on a
presentation?
topic found in the chapter, such as the development
of money in colonial America. List three or four
4. Which of the media forms does my computer
major ideas you would like to cover. Then think
support?
about how multimedia resources could enhance your
presentation. Use the following questions as a guide
when planning your presentation.
1. Which forms of media do I want to include? Choose an economist from the twentieth century
Video? Sound? Animation? Photographs? and create a multimedia presentation about his or
Graphics? her theories. Use as many multimedia materials as
possible, and share your presentation with the
members of your class.
The Development of
Modern Banking
Main Idea bank, demand deposit account (DDA), thrift institu-
The Federal Reserve System serves the monetary tion, mutual savings bank (MSB), savings bank, NOW
needs of the federal government and controls the accounts, savings and loan association (S&L), credit
monetary system. union, share draft account, deregulation, creditor

Reading Strategy
Objectives
Graphic Organizer As you read the section, complete
After studying this section, you will be able to:
a graphic organizer similar to the one below by list-
1. Relate the effects of Depression-era bank failures
ing at least threeART TO depository institutions.
kinds of COME:
on deposit insurance creation.
2. Identify three other forms of depository institutions.
Art ID and description
3. Describe the reasons for the S&L crisis in the 1980s.
Institutions


Applying Economic Concepts
Demand Deposit Accounts You may think that check-
Key Terms ing accounts are pretty useful. Read to find out how
they replaced the carrying of large amounts of cash
Federal Reserve System, central bank, Federal Reserve
to make life easier for everyone.
note, run on the bank, bank holiday, commercial




B
anks fulfill two distinct needs. They provide
Cover Stor y a safe place for people to deposit their
money, and they lend excess funds to indi-
g
Suspicious Internet Bankin
viduals and businesses temporarily in need of cash.
This can only happen if the nation has a strong
cial
banks are offering finan
Today more and more banking system.
of
While the vast majority
rvices via the Internet.
se ate, the
these are entirely legitim
scrupu-
sad fact is that a few un
Revising the Banking System
vantage
lous people may take ad
Internet
of the anonymity of the In 1863, the federal government strength-
. . [W]e
to perpetuate fraud. . ened the financial system by passing the
ms you
[the FDIC] offer two ite National Banking Act. It set up a system of
termin-
may find helpful in de
nationally chartered and inspected banks. Yet
sites.
ing . . . suspicious Web
problems persisted as financial crises and reces-
able
[The first is a] search
More banks go online. database [that] will help you sions marked the next half century. Each crisis led
r and
n has a legitimate charte to calls for reform, but when the crisis ended, the
determine if an institutio
protests faded away. Finally, when consumer and
.
is a member of the FDIC n
alert financial institutio commercial credit dried up during the panic of
[The second is a] special opera-
unauthorized banking 1907, the need for reform could no longer be
letter . . . pertaining to
....
tions currently identified ignored. The government set up a commission to
”FDIC, June 10, 1999 formulate a plan for a new system.

300
The Federal Reserve System between 1880 and 1921. Although some consoli-
dation occurred between 1921 and 1929, the bank-
Reform came in 1913 when Congress created ing industry was overextended when the Great
the Federal Reserve System, or Fed, as the Depression began in 1929.
nation™s first true central bank. A central bank is a As Figure 11.2 shows, the number of bank fail-
bank that can lend to other banks in times of need. ures during the 1930s was staggering. At the start
To ensure membership in the Fed, all national of the Depression, about 25,500 banks existed”
banks were required, and all state-chartered banks none of which had deposit insurance for their cus-
were eligible, to become “members””or part own- tomers. As a result, concern about the safety of
ers”of the Fed. Because the Fed was organized as a bank deposits often caused a run on the bank”a
corporation, any bank that joined had to purchase rush by depositors to withdraw their funds from a
shares of stock in the system, just as a private bank before it failed. This made the situation even
individual purchases shares in a regular corpora- worse and caused more banks to fail.
tion. As a result, privately-owned banks own the To ease the situation, on March 5, 1933,
Federal Reserve System, not the government. President Roosevelt announced a bank holiday”a
Despite its private ownership, the Fed is publicly brief period during which every bank in the coun-
controlled. The president appoints, subject to con- try was required to close. Several days later, after
gressional approval, the Fed™s Board of Governors Congress passed legislation that strengthened
and its chairperson. banking, most banks were allowed to reopen. The
Finally, Federal Reserve notes”paper currency Great Depression took its toll, however, and by
issued by the Fed that eventually replaced all other 1934 more than 10,000 banks had closed or
types of federal currency”were added to the money merged with stronger partners.
supply. Federal Reserve notes were backed by gold
when first issued in 1914, but became inconvertible
Federal Deposit Insurance
fiat money after 1934.
When banks failed during the Depression,
Banking During the Great Depression depositors lost almost all their savings. The
Banking Act of 1933, also known as the Glass-
Despite the reforms many banks were only mar-
Steagall Act, was passed to strengthen the banking
ginally sound during the 1920s. Part of the reason
industry. The act also created the Federal Deposit
was the over-expansion in banking that took place

Banks




Purposes From early times on, banks provided safe storage facilities, interest payments on deposits,
money transfers, and loans. What is the purpose of the Federal Deposit Insurance Corporation?


CHAPTER 11: MONEY AND BANKING 301
Figure 11.2


Number of State and National Banks
35,000
1929 About 25,000
1921 More than 31,000
banks exist when the
state and national banks
30,000 Depression starts.
exist in the country.
State Banks
National Banks
Banks, Total 1985 Wave
25,000 of bank mergers
begins.
1934 Five years after
20,000 the Depression begins,
approximately 14,100
banks remain.
15,000


10,000 1865 The number of
national banks increases
dramatically as the 10%
tax takes effect.
5,000


0
1791 1865 1921 1934 2000

Source: Federal Deposit Insurance Corporation and Historical Statistics of the United States, Colonial Times to 1970




Using Graphs The number of banks in the United States grew rapidly
after 1880 and peaked in 1921. A period of mergers and consolidations
took place from 1921 to 1929, after which the Great Depression took its
Visit epp.glencoe.com and click on
toll. The number of banks remained relatively constant from 1933 to
Textbook Updates”Chapter 1 for
1985, when another wave of mergers took place. What can you infer
an update of the data.
about the ratio of state banks to national banks?



Insurance Corporation (FDIC) to insure customer created, people worried less about the safety of
deposits in the event of a bank failure. The initial their deposits, reducing the number of runs on a
coverage was only $2,500 per account, but it has bank.
since been increased to a maximum of $100,000 Today, protection provided by the FDIC goes
for one person at one bank. far beyond deposit insurance. As you read in the
The insurance did little for those who lost their cover story, the FDIC aggressively pursues ways to
savings before 1934, but it has provided a sense of protect consumers against fraudulent banks”even
security in banking ever since. After the FDIC was those not insured by the FDIC.

302 UNIT 3 MACROECONOMICS: INSTITUTIONS
Other Depository Institutions Even so, savings banks had a powerful influence.
In 1972, the Consumer™s Savings Bank of
Most of the early U.S. banks were commercial Worcester, Massachusetts introduced Negotiable
banks”banks that catered to the interests of Order of Withdrawal, or NOW accounts, a type of
business and commerce. They had the power to checking account that pays interest. Because com-
issue checking accounts. Checking accounts are also mercial banks held most checking accounts at the
called demand deposit accounts (DDAs)”accounts time, they strongly opposed NOW accounts.
whose funds could be removed by simply writing a NOW accounts proved popular, however, and they
check without prior approval from the depository were offered nationwide after 1980.
institution. Other financial institutions, called thrift
institutions, or thrifts, accepted the deposits of
Savings and Loan Associations
small investors but did not have DDAs until the
Another type of financial institution is the savings
mid-1970s.
and loan association (S&L)”a depository institution
that invests the majority of its funds in home mort-
Savings Banks gages. S&Ls began as cooperative clubs for home-
builders in the 1800s. The association™s members
One of the oldest thrift institutions in the
promised to deposit a certain sum regularly into the
United States is the mutual savings bank (MSB), a
association. Members then took turns borrowing
depositor-owned financial organization operated
money to build a home.
only for the benefit of its depositors. Later, many
Later, in the 1930s, the Federal Home Loan
MSBs decided to sell stock to raise additional
Bank Board was created to supervise and regulate
financial capital. These institutions then became
individual savings and loan associations. The
savings banks because they were no longer mutu-
Federal Savings and Loan Insurance Corporation
ally owned by depositors.
(FSLIC), a federal government agency like the
Mutual savings banks got their start in the late
FDIC that serves commercial bankers, was also cre-
1700s. At that time, commercial banks were not
ated to insure savings and loan deposits.
interested in the accounts of small wage earners.
Savings banks emerged to fill that need and
became very popular with consumers. Credit Unions
By the mid-1800s, commercial banks, along
A fourth type of depository institution is the credit
with the savings and loan associations, began to
union”a nonprofit service cooperative that is owned
compete more heavily with the savings banks. As
by, and operated for, the benefit of its members.
a result, savings banks did not spread beyond
Costs are generally low because a sponsor such as the
their foothold in the industrial northeast and the
members™ place of employment often provides man-
Pacific northwest.
agement, clerical help, and office facilities.
Because most credit unions are organized
around an employer, contributions generally are
deducted directly from a worker™s paycheck. More
INFOBYTE recently, share draft accounts”or interest-earning
checking accounts issued by credit unions”were
introduced to compete with NOW accounts.
Interest Rates Interest rates represent the time
value of money. In other words, a dollar today is
Crisis and Reform in the 1980s
worth more than a dollar one year from now. To
compensate investors for the risks of investment,
Because of the massive banking failures dur-
interest rates must take into account inflation,
ing the Great Depression, financial institu-
liquidity, credit, and other risks.
tions were closely regulated from 1933 through the
1970s. The regulations even applied to maximum

CHAPTER 11: MONEY AND BANKING 303
rates of interest that could be paid on checking and Third, all depository institutions could borrow
savings accounts, as well as to restrictions on how from the Federal Reserve System in times of need,
and to whom the institutions could lend their funds. a privilege previously reserved for commercial
By the late 1970s, most financial institutions were banks. In return, all depository institutions were
calling for relief from federal regulations. When required to set aside a larger part of their cus-
Ronald Reagan was elected president in 1980, the tomers™ deposits in the form of reserves.
political climate changed, allowing deregulation”
the removal or relaxation of government restrictions
The Savings and Loan Crisis
on business.
Deregulation reduced the differences between An S&L crisis unfolded slowly but surely during
competing financial institutions. First, the require- the 1980s. In 1980 the United States had 4,600
ment that set maximum interest rates on savings S&Ls. By mid-1988, bankruptcies and mergers
accounts was phased out. This action eliminated reduced the number to about 3,000. By the early
the advantage that savings banks and S&Ls had 1990s, fewer than 2,000 institutions survived.
over commercial banks when it came to paying Deregulation was one of the reasons for the cri-
higher interest rates on savings accounts. sis. Savings and loan institutions were used to hav-
Second, NOW accounts could be offered on a ing the government set their interest rates and
nationwide basis by any type of financial institution. determine what types of loans they could make.
This provision eliminated the advantage that com- Most S&Ls, therefore, were not well prepared to
mercial banks had with their check-issuing powers. face real competition in the marketplace.
Another problem was high interest rates. Most
S&Ls made long-term, low-interest loans to home-
owners in the early 1970s. When interest rates
reached record levels in the early 1980s, S&Ls ended
up paying more on funds deposited with them than
Bank Teller they earned on the loans they already made.
A third problem was the relatively small capital
When you go to a bank, a bank reserves kept by the S&Ls to absorb bad loans”
teller often handles your money. reserves about half the size that commercial banks
The bank teller™s job is to process a kept. This meant that several bad loans could force
customer™s transactions.
an S&L to go out of business, rather than be
absorbed by the capital accounts.
The Work
Deregulation also resulted in fewer federal inspec-
Bank tellers handle a wide range
tors to make sure the rules and regulations were fol-
of banking transactions, including
lowed. As a result, a few institutions were able to
cashing checks, accepting deposits
engage in fraud on a scale seldom seen before.
and loan payments, and process-
ing withdrawals. Bank tellers may
sell savings bonds and traveler™s checks, and handle for-
Reforming the Thrift Industry
eign currencies or commercial accounts. They are trained
to explain the various types of accounts and financial The Financial Institutions Reform, Recovery, and
services the bank offers.
Enforcement Act (FIRREA) was passed in 1989.
This act abolished the independence of the savings
Qualifications
and loan industry and is regarded as the most sig-
Tellers need an aptitude for using computers, and they
nificant financial legislation since the Depression.
must be quick, accurate, and honest. Good numerical,
Many S&Ls were profitable during the crisis.
clerical, and communication skills are a must. A bank
These institutions were allowed to continue opera-
teller™s job is an entry-level position. After a few years, a
tions, and many even kept the words savings and loan
bank teller can be promoted to be a personal banker or
association in their titles. Others, however, chose to
into a management position.

304 UNIT 3 MACROECONOMICS: INSTITUTIONS
change their name to distance themselves from the without adequate collateral, others fail to keep
crisis that had tarnished so many reputations. expenses under control, and still others may be vic-
Even so, the cost of the thrift crisis to taxpayers tims of a weak economy. The reforms instituted as
was enormous, amounting about $300 billion. This a result of the S&L crisis, however, have made all
amounted to approximately $1,200 for every man, financial institutions safer.
woman, and child in America.
Change in the 1990s
Dealing With Failed Banks The 1980s were so turbulent that caution
Bank failures were also a problem in the 1980s. became the watchword of the 1990s. The thrift cri-
If a bank is in danger of collapse, the FDIC can sis was largely over, and the surviving financial
seize the bank and either sell it to a stronger one or institutions adopted more conservative lending
liquidate it and pay off the depositors. The forced policies, which helped them return to profitability.
sale or liquidation is done in secrecy to prevent Along with stronger federal regulations, all
panic withdrawals and to prevent shareholders financial institutions were required to strengthen
from selling their worthless stock to unsuspecting their capital reserves. The FDIC, as we saw in the
investors. cover story, even provides innovative ways to help
Either way, depositors have little to fear because the public discover and prevent abuses by fraudu-
they are covered up to the $100,000 FDIC insur- lent financial institutions.
ance limit. If an account has more than this, the Two trends that emerged at the beginning of the
depositor may go to court as a creditor”a person decade were in full swing by the end of the century.
or institution to whom money is owed”and sue One was the improving health of all financial insti-
the bank™s owners to recover the rest. tutions. The second was the continued erosion of his-
Banks fail for many reasons, but poor manage- torical differences among the commercial banks,
ment is the primary cause. Some banks make loans savings banks, S&Ls, and credit unions.




Checking for Understanding Applying Economic Concepts
1. Main Idea Why was the Federal Reserve 7. Demand Deposit Accounts Adam Smith
System created? argued that a competitive economy functions
best when everyone pursues his or her own
2. Define Federal Reserve System, central bank,
best interests. Explain how the self-interest of
run on the bank, bank holiday, commercial
state-chartered banks in 1865 led to the
bank, demand deposit account (DDA), thrift
development of demand deposit accounts.
institution, mutual savings bank (MSB), savings
bank, NOW accounts, savings and loan associ-
ation (S&L), credit union, share draft accounts,
deregulation, creditor.
3. Explain why the National Banking System was 8. Drawing Conclusions The FDIC insures
created. deposits up to $100,000. What would you
4. Explain why deposit insurance developed in do if you had $400,000 you wanted to
deposit and insure?
the 1930s.
9. Summarizing Information What is a
5. Identify three depository institutions.
demand deposit account?
6. Describe four factors contributing to the S&L
crisis. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.


CHAPTER 11: MONEY AND BANKING 305
JULY 19, 1999
Newsclip
as Yahoo! or even
Technology now exists for businesses to
America Online, will
bill their customers over the Internet and
become centers of bill
for the customers to return payment over
payment and, in turn,
the Internet. Bankers are hoping that this
siphon off existing
electronic billing will allow banks to con- bank businesses. . . .
tinue managing money for companies. Banks have their
advantages. They can
offer customers simul-
taneous access to their
The Battle To Be Your bills and their money. Banks have long relation-
ships with billers, such as utilities and retailers,

Online Bill and centuries of experience in protecting
people™s money. . . .
Big banks also are worried that technology
Collector companies offering bill presentment could mus-
cle into one of their fastest-growing businesses”
managing cash for big companies. After all,
Every year, American business sends out 29
distributing and collecting bills is a close cousin
billion bills. And by any measure, the exercise
to cash management. . . .
isn™t much fun. For companies, printing, pro-
At this point, predicting how the industry will
cessing and posting a typical consumer bill runs
shake out is premature. Banks and technology
about 90¢. . . .
companies already have formed several alliances
But for banks trying to make it on the
aimed a[t] delivering bills on the Net. More
Internet, bills are cool. Bankers see bills as sure-
combinations are likely. What™s clear, though, is
fire eyeball-grabbers in an environment where
the banks know they are running out of time to
it™s tough to command consumer attention”and
get their Internet billing act together.
a key to protecting their existing business man-
aging cash for big companies. Increasingly, ”Reprinted from July 19, 1999 issue of Business Week, by special
banks are battling high-tech competitors for con- permission, copyright © 1999 by The McGraw-Hill Companies, Inc.

trol of Internet billing, or electronic-bill present-
ment, as it is called. . . .
The question is who will become the bill
Examining the Newsclip
collector on the Net. Bankers reckon that if they
can turn their Web sites into mail- 1. Making Comparisons What are some
boxes for electronic bills, they advantages that banks can offer customers
can become key entry points on compared to Internet companies?
the Net”portals even. That 2. Analyzing Information Why are banks
would enable them to sell other concerned that Internet companies will
financial services online. The become bill payment centers?
fear is that existing portals, such

306 UNIT 3 MACROECONOMICS: INSTITUTIONS
Section 1 • After 1934 Americans could not convert dollars into
gold.
The Evolution of Money (pages 285“290) • Today, most governments manage their currencies
with respect to quality, size, composition, and avail-
• Money is any substance that serves as a medium of
ability. Most modern money functions well as a
exchange, a measure of value, and a store of value.
medium of exchange and is portable, durable, divisi-
• Commodity money, wampum, specie, and paper ble, and reasonably stable in value.
currency were used extensively in colonial America.
• The Continental Congress issued large amounts of
Continental dollars to finance the American
Section 3
Revolution, but excessive issue made the money
worthless by the end of the war.
The Development of Modern
• The U.S. dollar was based on the Spanish peso,
Banking (pages 300“305)
which was imported from the West Indies.
• •
All successful monies have portability, durability, The National Banking System brought uniformity to
divisibility, and limited availability. banking. National banks also issued their own cur-
rency known as National Bank notes. State-chartered
banks that chose not to join gave up printing cur-
Section 2 rency in favor of demand deposit accounts.
• The Federal Reserve System (Fed) was established in
Early Banking and Monetary 1913, giving the country a true central bank. All
national banks were required to join the Fed, and all
Standards (pages 292“298) state banks were also invited to join.
• From the American Revolution to 1861, paper cur-
• Despite the Fed, massive banking failures occurred
rency was issued by state-chartered, privately owned during the Great Depression.
banks. The federal government issued coins but no
• Other depository
paper currency.
institutions”mutual
• The variety of private notes eventually made the savings banks, credit
money supply difficult to use, and fraudulent wildcat unions, and savings
banks often abused the privilege of printing currency. and loan associa-
• The government sold bonds and then printed tions”appeared to
greenbacks to finance the Civil War. cater to the small
investor ignored by
• In 1863 the National Banking System was set up to
commercial banks.
strengthen the banking system and to generate new

demand for government bonds. Later, other federal Deregulation, high
currencies became popular, including gold certificates, interest rates, inadequate financial reserves, and
silver certificates, and Treasury coin notes. fraud reduced the numbers of S&Ls by half in the
1980s.
• The gold standard was adopted in 1900, which

made all currencies, including Federal Reserve The financial crisis was largely over by the end of the
notes, convertible into gold on demand. However, decade, and the 1990s saw the continued growth of
the country left the gold standard in 1934 because similarities between commercial banks, savings
gold stocks ran low during the Great Depression. banks, and S&Ls.


CHAPTER 11: MONEY AND BANKING 307
Reviewing the Facts
Section 1 (pages 285“290)
1. List the three functions of money.
Self-Check Quiz Visit the Economics: Principles
2. Describe five types of early money.
and Practices Web site at epp.glencoe.com and
click on Chapter 11”Self-Check Quizzes to pre-
3. List the four characteristics that give money its
pare for the chapter test.
value.

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