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Money and the Federal Reserve System

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barterThe direct exchange of one good for another good, rather than for money

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What is the problem with barter?

It requires a coincidence of wants

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moneyAnything that serves as a medium of exchange, unit of account, and store of value

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advantage of money

simplifies and therefore increases market transactions

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functions of money• Medium of exchange• Unit of account• Store of value

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medium of exchangewidely accepted in exchange for goods and services

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unit of account (standard of value)

provide a common measurement of value of goods and services

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store of value ability of money to hold value over time

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Are credit cards money?No, credit cards fail to meet the store-of-value criterion and are therefore not money

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What are other properties of money?

Money must be …• portable• divisible• uniform• acceptable

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Is our money backed by gold or silver?

No, our paper money was exchangeable for gold until 1934, and in 1963 Congress removed the right to exchange $1 bills for silver

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fiat moneyMoney accepted by law and not because of redeemability or intrinsic value

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What makes our dollar bills fiat money?

All our bills claim that “This note is legal tender for all debts public and private”

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legal tenderLegally dollar bills cannot be refused as payment for a debt

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currencyMoney, including coins and paper money

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the Federal Reserve System

The 12 central banks that service banks and other financial institutions within each of the Federal Reserve districts

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Ben BernankeChairman of the Board of Governors of the Fed

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What does a federal reserve bank do?

• Controls the money supply• Clears checks• Supervises and regulates banks• Maintains and circulates currency• Protects consumers• Maintains federal government

checking accounts and gold

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What is the Federal Deposit Insurance

Corporation?The FDIC is a government agency established in 1933 to insure commercial bank deposits up to a specified limit