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The first banks organized in this country had very little to offer except a place to store money and valuables in vaults. There was no insurance to cover losses when banks were robbed. Before there were banks, individuals used a type of trade called barter. Barter is simply exchanging goods for goods or services.It eventually became increasingly difficult to use barter, because individual needs became greater.

One individual might trade with another individual, but need to trade again and again to get what was needed.

At different times during history, even when barter was being practiced, individuals created tokens to use as representative value.

These tokens were known as FIAT money. (see below)

Fiat money might have been rocks, molded metal, shells, hides, or whatever was available in the country at the time.

It was however, recognized as being acceptable for exchanging goods. Eventually, standards were set that allowed a coin system to develop.

The early Greek culture even used this type of trade.

Coins were the standard for trade, and each coin had a specific value that was set by the government. Coins had intrinsic value because of their metal content.

Let us consider a problem of a person in a barter or fiat money economy who has wheat for sale and needs to buy bread.

The only option for this person is to find someone who needs the wheat, perhaps a baker.

Money as a Medium of Exchange

The most important function of money is that it serves as a medium of exchange.

With money, the problem of the person who has wheat to sell and wants to buy bread is solved.

The wheat can be sold for money and the money can be used to buy the bread.

The money will also be accepted for buying, clothes, gas for your car, a ticket to the big game, or anything else.

The use of money allows freedom of choice.

Money as a Standard of Value

Another function of money is that it serves as a standard of value.

The monetary unit of a country - the dollar, the franc, the mark and so on - serves as a unit in which the value of all goods and services can be measured and expressed.

In this way, the value of a good or a service can be shown as a price.

Money as a Storehouse of Value

A third function of money is that it serves a storehouse of value.

This means that people can save their money, or generalized purchasing power, for future use.

They know that it will be accepted at any time in exchange for goods and services.

However, money is not always an efficient storehouse of value.

In times of rising prices, the value or purchasing power of money falls.

But money is not the only available storehouse of value. Anything of value can be used.

For example, stocks and bonds, may provide income through dividends and interest.

However, the value of the stocks and bonds may drop so dramatically that a person would lose all of their money.

This is what happened in the 1920s that led to the Stock Market crash of 1929.

In the 1920s there were few rules governing the buying and selling of stocks.

Two very strong regulations - the margin requirement and the reserve requirement - did not exist then, and this caused a great hardship on the nation.

The margin requirement is the amount of money (percent of the total purchase price) that must be paid when stock is purchased.

The margin requirement is set by the Federal Reserve.

It changes as financial conditions warrant.

The reserve requirement is another tool used by the Federal Reserve to regulate banks. The reserve requirement is the amount of money a bank must keep in its vaults at all times. This amount is a percentage of total deposits, versus the bank's assets and liabilities.

During the 1920s and 1930s, banks really had a difficult time because of the Stock Market crash and the economic conditions of the country.

Up until that time, business grew substantially, fortunes were being made, but there were very few laws to protect anyone.

If there could be one single cause of the stock market crash and the bank failure of 1929, it would most likely be the lack of a margin requirement.

During the time of the crash, stock was being bought and sold rapidly and in large amounts with no actual money being paid or held.

The stock exchanges were changing ownership of stocks rapidly, but these transactions were basically transfers of paper and were not backed by money.

At the time of the bank failure in 1929, there were more people at the banks demanding to withdraw their money than the bank had on deposit to pay them. This caused wide-scale panic, frustration, havoc, and anger.

Today, there are federal rules by which the bank will not allow immediate withdrawal of large amounts without a notice of a specific number of days or hours.

This is so the bank will not immediately pay out all of the money in its reserve account. The bank is required to hold a certain percentage of its assets in reserve.

With proper notice, the bank can obtain the money from its bank - the Federal Reserve Bank.

A bank, just like any other business organization, must file to be incorporated, and must meet the requirements of the Federal Reserve System.

A bank operates as a service to individuals and businesses by offering a place to deposit money, maintain savings accounts, safe deposit boxes for storing valuables, and many other services.

A bank accepts money from individuals and businesses, and in turn, provides a service for paying creditors.

The old method for doing this was to give the customer a checkbook.

A checking account is a convenience.

Money in a checking account is called a demand deposit.

Demand deposits do not usually earn interest, and the customer can demand payment immediately.

Another popular service of banks is to offer a place to save money.

This means money is deposited in the banks and a set amount of earnings, or interest, is paid to the customer while the money is in the bank.

Money placed in savings accounts is called a time deposit because this money is not payable on demand like checks.

At specific periods of the year - usually in June or December - the depositor is paid the interest on the amount of money in savings.

As a result of the bank failures during the Great Depression, Congress established the Federal Deposit Insurance Corporation in 1933.

The purpose of this federal agency is to protect the money people have put in the banks.

The Federal Reserve System was created in 1913, and serves as the central banking system of the United States.

It is responsible for controlling the nation's money supply and maintaining the value of the nation's currency. Occasionally the Federal Reserve stimulates borrowing and spending by decreasing the discount rate to banks.

The headquarters for the Federal Reserve System is Washington, D. C., where it is under the supervision and direction of a Board of Governors.

The Board of Governors is made up of seven members, appointed by the President and approved by the Senate.

The current chairman of the Federal Reserve is Alan Greenspan.

To understand the organization, function, and purpose of the Federal Reserve Bank, study this exhibit carefully.

We have now reached the electronic age, and although checks are still widely used, they are being replaced by electronic banking.

An individual or company with a computer, software, and a modem may pay an electronic banking company to transfer funds to different locations for them.

The servicing company then communicates electronically with the individual's bank to tell it to transfer funds to the person or company requested.

While money is deposited in an interest bearing account, the bank uses the money to make loans to other people.

That is why the bank pays interest.

They are paying the customer for the privilege of using the customer's money.

There are other types of businesses or institutions which accept deposits and pay the depositor for being able to use their money.

Look at these examples.

Every time an individual saves or invests money with a bank, buys securities, or invests in another type of savings product, the person is creating capital.

In order for an economy or business to grow and expand, the general public must have more than it needs to exist and be willing to put money into investments or savings.

Since the early 1970s, the United States has been progressing into what is now know as " the cashless society."

The concept of using credit cards has been developed and used during this century.

Businesses that accept credit cards for goods and services must pay a percentage to the member bank that manages the credit card.

For this reason, people who purchase goods and services with a credit card are charged a percentage for the convenience of using the credit card.

The customer does not see this charge because it is added to the price of the product.

In order for a money system to work, it must have three things:

1. a recognizable money item

2. a store of value to that represents the money item

3. the money item must be acceptable by everyone

All American paper money is printed at the Bureau of Printing and Engraving in Washington, D. C.

Even though there have been numerous attempts to counterfeit (illegally produce money), none have been totally successful.

This is because of the unusual paper content and the mixture of the inks used in printing money.

No one individual knows the complete formula used for either of these processes.

All paper money is imprinted with the words "legal tender."

This means that it has to be accepted for payment of debts and obligations.

Paper money enters circulation through a member bank. For this reason, all bills have a district number and the corresponding letter printed on their face.

Look at a dollar bill. Can you determine where it entered circulation?

The average life of a dollar bill is about twelve months. When bills reach a certain point of wear and tear, they are removed from circulation and destroyed. The serial number is never used again.

All bills have a serial number. Each serial number is different, so no two bills have the same number.

On the face of the bill is the name of the Secretary of Treasury and the name of the individual who heads the Department of the Treasury.

It is illegal to duplicate or deface money.

The agency that insures deposits in member banks is the Federal Deposit Insurance Company (FDIC). The FDIC is regulated by the Federal Reserve System.

How Banks Create Money.

By making loans, commercial banks can actually create money.

To understand this process, let us assume that you have been offered a very good part-time job.

The job requires that you have your own car.

You have found exactly the model you want for $3,000.

However, you do not have $3,000, so you go to a bank and ask for a loan. Banks have loan officers who process loan applications. You make sure you are getting the best deal by comparing rates at several banks.

The loan officer will want to be sure that the car is worth more than $3,000.

A bank may loan you $3,000 if the car is actually worth $3,500 or more.

The loan officer will want to be certain that you will be able to repay the loan.

You will be asked questions about your income, expenses, and debts. You may also be asked to provide references from your employer, your teacher, or a family friend.

If the loan officer agrees to the loan, you will probably be asked to sign a promissory note - a promise to pay - for $3,000.

This shows that $3,000 has been deposited in your account.

You will also have to pay interest as part of the loan.

You will now take the $3,000 and give it to the auto dealer when you purchase your car.

The car dealer will take the money and put some of into the bank, to pay the expenses of the company.

The bank will use this money to make other loans to people for their wants and needs.

In this way the money will be continually created and distributed throughout the economy.

SUMMARY

This concludes our discussion of money and banking.

Please watch the news sources for information on the Federal Reserve System.