Money is no longer convertible into gold (because the supply of gold is too unstable). The pronouncement of legal tender does not assure that a currency will be accepted. The acceptance of money rests in the mutual trust of people of acceptance by others and in the trust that the value of money will be preserved. Preserving the money value depends entirely on its relative scarcity and the control of money supply (which is the purpose of monetary policy).
The value of money does not come from any weight of precious metal, but from the amount of goods or services a dollar can buy: it is the purchasing power of money. For instance, in the late 18th century, the French assignat had to be discontinued because it never caught on as a form of money (i.e. people did not accept it as money), in spite of all the official pronouncements by the French government at the time.
Review Quiz available at end of next chapter.
- Give a definition of money. List its functions. Explain what backs money.
- Carefully breakdown each measure of money stock into its components. Identify which quality of money is guiding the money stock breakdown.
- Why is managing money supply so important? Which, supply or demand for money, can best be controlled?
- Explain the various components of demand for money. Draw a graph showing demand and supply of money, and use it to show how monetary policy can control money.
- Review the structure of the banking industry in the United States. Pinpoint the central role of the Fed. Show how its control is implemented. Comment on the nature and functions of the regional Federal Reserve Banks.