In early times, people managed to get along without money. They would trade one thing for another. This type of trade is called “barter.” People never knew for sure the worth of their items; they were worthless if the other party didn’t need them. Items were also bulky and measurement inaccurate.
Money has a number of uses in our economy. Money is a medium of exchange. It is something that can be exchanged or traded for goods and services. Money is a measure of value. Americans use money as a measure of what things are worth. The value of things in terms of money is their price. Money is also used as a means of storing up wealth and measuring the amount one person owes another.
Money in different forms and values is used all over the world today. But all money has four common features. Money must be easy to carry and take up little space; it must be based upon units that are easily multiplied and divided; it must be durable; and it must be made in a standard form and guaranteed by a nation’s government. With these conditions met, people will accept money in exchange for goods and services.
American money, or “currency,” comes in the form of both paper and metal coin. We consider these forms “legal tender,” meaning that we accept them as payment for goods, services, and debts. Another form of money is checkbook money. Checks are among the most commonly used forms of money. They are different in that the government does not back up a check’s worth. Checks are guaranteed by the “drawer,” the person who writes the check. Checks are written orders to the bank to pay a sum of money to the person named on the check, the “payee.” Checks are not considered legal tender and therefore do not have to be accepted an payment for goods and services.
Money has another important role in our economy. Credit is based upon money. Credit is a promise to pay later for goods or services received now. Credit is based upon the creditor’s, or lender’s, faith that the debtor will be willing and able to repay the loan with interest. Credit extends the amount of money in use, and uses “future” money. Money is of little value unless it is used in an economy. The flow or circulation of money through our economy stimulates it and increases growth. Money is received by workers who then spend it on goods and services, or who may also save some in a bank account. The bank uses this money to make loans to businesses and individuals. This way, both money spent and money saved continues to circulate.
Banking began when people realized the need to keep their money in a safe place. In most communities there was at least one man who kept his wealth well guarded. That man was the goldsmith. Before long his neighbors asked if he would keep their money in his safe. Eventually more and more people wanted this protection and soon he began to charge a small fee for this service. It soon followed that people who needed money began to ask the goldsmith for a loan. They had to sign a paper saying when the money would be repaid. They also promised to pay interest, an additional sum for the use of the money. Signing a paper promising to repay the loan was not enough of a guarantee; the borrower had to promise to give the lender his property if the borrower didn’t pay on time. Property used to guarantee that a loan will be repaid is called “collateral.” These and other practices started by early moneylenders later developed into modern banking.
Banks may be characterized in two different ways, by the source of their charters, and by the kind of business they carry on. There are “national banks” which are chartered and supervised by the federal government. And there are state banks which are chartered and supervised by the state government. Most banks fall into one of two categories according to the business they handle: commercial banks, and savings and loan associations.
Commercial banks and trust companies specialize in making loans. It is the interest from these loans which supports the bank. These banks handle checking accounts for businesses and individuals. They will usually also have savings departments and trust departments. Trust departments help people and businesses manage their property and invest their money wisely. Savings banks accept a person’s savings and pay interest to him for the use of the funds. The bank then uses this money to make loans and to invest in stocks and bonds. Only recently have some savings institutions offered checking accounts to their customers.
The banking activities in America are greatly influenced by the Federal Reserve System, created in 1913 by Congress “to maintain sound banking conditions and an adequate supply of credit at reasonable cost for use in commerce, industry, and agriculture.” All national banks are required to be members and some state banks are members, although they are not required to join.
The United States is divided into twelve Federal Reserve Districts. There is one Federal Reserve Bank in each district. The district bank is run as a business corporation. All of its stock is owned by banks in the district. The Federal Reserve Banks have no financial dealings with private individuals or businesses. In other words, the Federal Reserve Bank is a bankers’ bank.
The Federal Reserve Banks serve two main purposes. First, they handle the national government’s banking needs. The Secretary of the Treasury deposits the funds of the United States in these banks. The Secretary then writes checks on these accounts, just as an individual would. These banks also sell government bonds. The Federal Reserve System is also in charge of putting United States currency into circulation. Secondly, member banks must deposit a part of their reserve funds in the local district bank. When they need more money, the members may withdraw some of their reserves to build up their cash on hand.
Supervision of the twelve Federal Reserve Banks is in the hands of the Federal Reserve Board of Governors. There are seven members, appointed by the President, and approved by the Senate for a fourteen-year term. The Board decides how much credit and loans most banks can give.
The Board, by stating the amount a member has to set aside in reserve, affects that member’s ability to lend money. By increasing the amount in reserve, they decrease the amount available to lend. This would be reflected in higher interest rates to discourage borrowing. In this way, the Federal Reserve System influences banking and the use of credit in the United States.
Class Activities for Section II
1.
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Have the students explain the following terms: economy, free market, free competition, capital, capitalism, profit, monopoly, legal monopoly, dividends.
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2.
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Discuss how free competition influences prices.
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3.
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What does “laissex-faire” mean economically?
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4.
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How does the government “referee” our economy?
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5.
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Draw and fill in the following chart:
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(figure available in print form)
6.
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List the reasons you would rather own common stock, preferred stock, or bonds.
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7.
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Have the students list business activities of government and list the services they provide. (A) Transit lines: transportation (B) Public schools: education (C) TVA: hydroelectric production (D) FDIC: insurance (E) Parks: recreation (F) Small Business Administration: loans (G) Government hospitals (VA): health care
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8.
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Draw a comparison between a command economy and our own.
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Class Activities for Section III
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Have the students explain the following terms: GNP, rent, mass production, mass marketing, machine tools, standard parts, division of labor, transportation, wholesaler, consumer, charge accounts, credit rating.
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2.
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Visit a museum and find early examples of American machinery. What do they tell you about the production methods used and the power source?
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3.
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Have the students list and explain the significance of each of the four factors of production.
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4.
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Have the students list the four types of economic activities and name a business as an example of each.
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A.
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Basic production: (Examples will vary)
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B.
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Manufacturing:
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C.
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Distribution:
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D.
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Services:
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5.
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Have the students section off the main industrial areas of the U.S.
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6.
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Compile a list of local organizations to aid consumers.
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7.
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Discuss the rules for wise buying.
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Class Activities for Section IV
1.
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Discuss the advantages of money over barter.
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2.
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Have the students explain these terms: barter, medium of exchange, measure of value, bullion, legal tender, credit, checkbook money loans, discounting, demand deposit, time deposit.
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3.
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Draw a chart showing how currency flows through our economy.
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4.
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Discuss: What would life be like without money? How would trade go on?
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5.
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Explain the role our government plays in our money system.
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6.
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How do banks obtain their money?
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7.
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Go to a bank and speak to a loan officer, and apply for and renew a loan.
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8.
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Draw on a map of the U.S. the twelve Federal Reserve Districts, showing where each district bank is located.
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