Money and Banking Industry

Money, History of Banking, and Banking Today


  • Money is a current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.
  • Medium of exchange, Unit of account, Store of value
  • Durability, Portability, Divisibility, Uniformity, Limited Supply, And Acceptablility
  • Commodity Money, Fiat money, Representative Money
  • monetary base, which equals: all reserves held by banks and all currency in circulation, A given amount of the monetary base allows for the creation of a multiple amount of money. As we shall see in the next section, the Fed uses its policy tools to alter the amount of money in the base, and thus the money supply.

    The next part of the determination of the money supply is the process of transforming the monetary base into the money supply. Through the multiple deposit expansion described above, where money is deposited, loaned, and redeposited into the banking system, the money supply is determined. By definition, the money supply equals: Money supply = (Monetary base) x (Money multiplier) and Change in the Money supply = (Change in the Monetary base) x (Money multiplier)

History of Banking

  • Bank of the United States was established in 1791 to serve as a repository for federal funds and as the government’s fiscal agent. Although it was well managed and profitable, critics charged that the First Bank’s fiscal caution was constraining economic development
  • its charter was not renewed in 1811. The Second Bank was formed five years later, bringing renewed controversy despite the U.S. Supreme Court’s support of its power. President Andrew Jackson removed all federal funds from the bank after his reelection in 1832, and it ceased operations as a national institution after its charter expired in 1836.
  • The central bank of the United States. The Fed, as it is commonly called, regulates the U.S. monetary and financial system. The Federal Reserve System is composed of a central governmental agency in Washington, D.C. (the Board of Governors) and twelve regional Federal Reserve Banks in major cities throughout the United States, Today the Fed is privately owned, publicly controlled, central bank of the United States. The Fed issues paper currency known as Federal Reserve Notes, the most visible part of our money supply.

Banking Today

  • Money Supply- All the money available in the United States economy, M1- Represents money that people can gain access to easily and immediately to pay for goods and services, Direct conversion into money, Depositing money into checking accounts is a major part of M1, M2- Consists of all the assets in M1 plus several additional assets, Savings accounts represents the major part of M2.

  • Multi-city / Payable at Par (PAP) cheque facility, anywhere banking facility, trade services, phone banking facility, internet banking facility, credit card, debit/ATM card, mobile banking and Real Time Gross Settlement (RTGS).
  • It all ties back to the fundamental way banks make money: Banks use depositors' money to make loans. The amount of interest the banks collect on the loans is greater than the amount of interest they pay to customers with savings accounts—and the difference is the banks' profit.
  • Depositary institutions – deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies; Contractual institutions – insurance companies and pension funds.
  • Automatic Banking- (ATM's) are computers that customers can use to deposit money, withdraw cash, and obtain account information, Debit Cards- They are used to withdraw money, Home Banking- Is using the internet to transfer money to a different accounts, check account balance and pay bills, Automatic Clearing Houses- They allow customers to pay bills with out writing checks, Stored Value Cards- Similar to debit cards. These cards are embedded with either magnetic strips or computer chips with account balance information.