The Development of Money in the United States

          The two basic components of money supply in the United States are physical (coin and currency) money and deposit money. A review of the development of money in the United States will help us understand the characteristics of money today, as well as how U.S money performs the three functions of money listed.

Functions of Money

          Money is anything generally accepted as a means of paying for goods and services and for paying off debts. For something to serve successfully as money, it must be: easily divisible, so that exchanges can take place in small or large quantities; relatively inexpensive to store and transfer; and reasonable stable in value over time. Money must perform three basic functions. Money must serve as a "medium of exchange, " store of value, " and "standard of value".
          Money was first developed to serve as a medium of exchange to facilitate transactions. Primitive economies consisted largely of self-sufficient units or groups that lived by means of hunting, fishing, and simple agriculture. There was little need or occasion to exchange goods or services. As economies became more developed, however, the process of exchange became important. Some individuals specialized, to a degree at least, in herding sheep, raising grain, or making gold as metalsmith. To aid exchange of goods for goods, called barter, tables of relative values were developed from past experience. For example, a table might show the number of furs, measures of grain, or amount of cloth agreed to equal one now. This arrangement eased exchanges, but the process still had many serious drawbacks. For example, if a person had a cow and wanted to trade it for some nuts and furs, he or she would need for a simpler means of exchange led to the development of money, with its relatively low storage and transfer costs, to be used as a medium of exchange.

Savings-Investment Process

The savings-investment process involves the direct or indirect transfer of individual savings to business firms in exchange for their securities. Of course, a broader view of the savings-investment process would include the exchange of pooled individual savings for financial claims in the form of mortgage and other loans to individuals wanting to buy houses or make other purchase and hold debt securities issued by governmental units.

The Monetary System

          The monetary system is responsible for carrying out the financial functions of creating and transferring money. Money is needed to conduct day-to-day activities, facilitate the capital investment process, and support economic growth. To understand the monetary system requires a basic understanding of the savings investment process involving the flow of funds from individual server to businesses that want to invest in investors, buildings, and equipment.

Financial Management

Businesses seek to raise additional funds to finance investment in inventories, equipment, and buildings needed to support growth in sales. Bank loans are important financing sources along with the proceeds from the issuance of new debt and equity securities.