Money in America Money is used to buy goods or services a

Money in America
   Money is anything that is in general use in the purchase of goods and services and in the discharge of debts.  Money may also be defined as an evidence of debt owed by society.  The money supply in the United States consists of currency (paper money), coins, and demand deposit (checking accounts). Currency and coins are government-created money, whereas demand deposits are bank-created money. Of these three components of our money supply, demand deposits are by far the most important. Most of our money supply is invisible, intangible, and abstract.
   The two most important inherent attributes that money must possess in a modern credit economy are acceptability and stability.  In earlier times in the evolution of money and monetary institutions in the United States, the attributes of divisibility, portability, and visibility were important.  The two legal attributes of "legal tender" and "standard money" are not of as much importance today as in the past.
   The four functions that money often performs are standard of value; medium of exchange; store of value; and standard of deferred payment. In a modern specialized economy and, most especially, are the most important of these.
   Although it is agreed that the value of money has fallen in the United States over time, there are three in part conflicting theories of value that have been advanced to explain this phenomenon; the commodity, quantity, and income theories. Most economists today espouse either the second or more typically, the third of these.  Any money can retain its value as long as its issuance is limited; it need not have a commodity backing. Inflation or rising prices have been explained by demand and/or supply theories in recent years, although historically the former has been thought to provide the more satisfactory explanation.
   Our presently circulating coins are credit money or token money in that the market value of metal in the coins is worth less than the face (or mint) value of the coins.  Gresham’s
   Law—i.e. , bad money tends to drive out good money—explains why coins with a greater market value than mint value cease circulating. Most of the paper money in the United States consists of Federal Reserve notes;  the remaining minor types of paper money are called treasury currency. Demand deposits are bankcreated money, the supply of which is limited to any single bank by the amount of its total legal reserves. If it lends more than the amount of its excess reserves it would have an adverse clearing balance.
   Modern fractional reserve banking grew out of the experiences of early goldsmiths who found that 100 percent reserves were not needed with a reserve requirement ratio of say 20 percent, the banking system as a whole could expand its demand deposits in a 5: 1 ratio to its reserves.  A monopoly bank could operate as does the entire banking system, since being the only bank it is, in effect, the entire banking system. If some money leaks out of the banking system, its coefficient of credit expansion is reduced from the 5: 1 ratio indicated above.
   The Federal Reserve, or Fed, is a central bank whose prime function is to monitor and control the nation’s money supply and credit through monetary policy in the attempt to stifle inflation, promote economic growth with high employment, and help with the sale of government bounds.  It is not clear that the Fed has always understood its powers and purposes.  It has had much more success in helping with the sale of government bonds and in performing its service functions than in promoting growth and maintaining stability. The Fed’s three main quantitative weapons, in order of importance, are open market operations; discount rate policy; and changes in legal reserve requirements. It has at times had some moderate success in using some qualitative controls as well.
   Now, you have 2 minutes to check your notes, and then complete the gap-filling task on Answer Sheet One in ten minutes.