Banking Fundamentals: Money Systems and Regulations
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How Does a Bank Become Established?
Starting a bank involves a long organization process that could take a year or more, and permission from at least two regulatory authorities. Extensive information about the organizer(s), the business plan, senior management team, finances, capital adequacy, risk management infrastructure, and other relevant factors must be provided to the appropriate authorities.
How Can Commodity Money Provide a Measure of Value?
Commodity money provides a measure to value other goods and services. One service might be worth one pound of tobacco, while another service might be worth more or less.
What Is a State-Chartered Bank?
A chartered bank is a financial institution whose primary roles are to accept and safeguard monetary deposits from individuals and organizations, as well as to lend money out.
Why Is It Important for Money to Be Divisible?
Divisibility is necessary so that change can be made and prices can be flexible.
Why Did Money Replace the Barter System?
In a barter economy, a buyer must find a seller in search of the exact goods that he or she has to offer. The money system is universally acceptable.
How Did the Fed Strengthen the National Banking System?
The government hoped that rigorous bank inspections and other high standards would give people confidence in the new banking system and its currency.
Qualifications for Money
For something to be used as money, it must possess the following characteristics:
- Divisibility
- Durability
- Portability
- Recognition
- General acceptance
- Stability
Establishing a Gold Standard
The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold.
National vs. Central Banks
These institutions are chartered by different governments. A national bank is chartered by the national government, while a state bank is chartered by the state government.
Why Was the National Banking System Developed?
- A desire for a deeper market for U.S. bonds.
- A desire to see the collapse of state free banking systems.