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Money & Banking Overview

In a Nutshell

Almost all societies have developed some form of money to simplify commercial transactions. Some have used commodities with inherent value like gold, salt... or even whiskey. Others have used paper money as a stand-in for the valuable goods that backed it up. And still others have used a form of money that had value just because the government said that it did.

But whatever the form of money used, it generally served the same three functions. It served as a medium of exchange, a unit of accounting, and a store of value.

Americans have used several types of money over the course of their history. Until the late eighteenth century, foreign currency and coin was used to complete transactions. For the first half of the nineteenth century, bank notes issued by individual private banks were a critical part of the nation’s money supply. Later in that century, the United States joined other nations on an international gold standard. Today, our money is fiat money—it has value because the federal government says it has value.

The role of banks has similarly evolved over the course of American history. Today, they play a critical role not just in holding our money, but in facilitating our financial transactions and actually creating more money for investors and consumers. Since 1913, the Federal Reserve System, chartered by the federal government and governed by persons appointed by the United States president, has supervised America’s banks and the nation’s money supply. The “Fed” is the nation’s most important financial institution, and the chairman of the Fed exercises as much, if not more, influence over the economy than the president.

Why Should I Care?

Let’s admit it, we like money. Sure, if you listen to the radio you'll hear that all you need is love, you can’t buy me love, and mo' money means mo' problems. But whether you are a gold digger, a honey who's making money, or a happy idiot struggling for the legal tender, whether you’re working nine to five or day to day for little money, just tips for pay, we live in a material world and money makes the world go around. The best things in life may be free, but most of us would rather be rich . . . and sit and grin, and let the money roll right in.

(Pop quiz: how many song lyrics did you catch in that paragraph?)

Back to the matter at hand: do we really understand money? What actually defines money? Are there different types? What type of money is used in America? Does our money have anything to do with gold? Do we need banks? Do banks do anything more than hold our money for us? And who keeps an eye on the banks?

If you really love your money, you ought to try to understand it. So read on and show your love.

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