Money and the Banking Industry

By: Andrea Neal


Money is a current medium of exchange in the form of coins and banknotes; coins and banknotes collectively. Money has 3 uses: it is used as a medium of exchange, a unit of account, and a store of value. It also has 6 main characteristics: generally acceptable, easily counted and measured, durable, convenient, easily controlled, and inexpensive to produce.

Money cont...

Money is also always backed by something and this consists of the material having some sort of value in itself. This is the source of money's value. In previous societies, commodities such as salt and cattle have been used as commodity money. In the United States today, our money is backed by the fiat system: a mindset of Americans in the belief that a dollar is worth a dollar.

History of Banking

The role of the First Bank of the United States in 1791 was to establish financial order, establish credit, and resolve the issue of fiat currency. A few years later in 1832, when the bank of 1811 lost its charter, President Andrew Jackson vetoed the renewal of the charter in order to rid the Second Bank of the United States all together. This didn't go over well and the bank was renewed under the laws of Pennsylvania in 1836.

History of Banking Cont...

Later on, in 1913 the Federal Reserve system was established and it is still in use today. This is the main bank of the United States and it is used today to conduct the nation's monetary policy, supervise and regulate banks, maintain financial stability, and last provides financial services to different parts of the US. A part of this system is the FDIC. The FDIC is the Federal Deposit Insurance Corporation and was created in 1933 during the Great Depression. It served to prevent another catastrophic downfall, by allowing them to intervene when necessary. It is still in use today.


Economists today measure the money supply in one of two ways. M1 or M2. M1 is the measurement of the money supply that includes only fiat money and demand deposits such as checking accounts. M2 consists of fiat money, demand deposits, and near money. Currently, the US money supply is 4,028,362. This means that that much money was in circulation in the US during the month of September 2015. This all ties into banks and the way money is measured. Banks provide services to help our needs such as:

  • Checking and Savings Accounts
  • Retirement Accounts
  • Mortgages
  • Credit Cards
  • Alternative Investments – such as mutual funds and other securities
  • Financial Management
  • Safe Deposit (a box inside a vault in a bank to keep important papers or valuables) services
  • Various types of consumer loans

On the other hand, banks are also in the game to make a profit. They make a profit through the amount of interest they collect on loans. When a loan is given to an individual, an interest amount is tied onto that loan in which they make what they give back as well as extra for providing the loan in the first place.

There are also different institutions in which deposits, loans and insurance all come into play.

Depositary Institutions- accept and manage deposits and make loans

Contractual Institutions- insurance companies and pension funds.

All of these different terms can be exchanged through paper money, bank slips, in person, or online. The online portion of banking has taken the world by storm. Online banking provides consumers with a convenient method of conducting bank business from the comfort and security of their own devices- something individuals today take advantage of due to the developments of technology in recent years.