Criterion 12: Money and Banking

Money facilitates trade. If we have a generally accepted medium of payment, we avoid having to barter our goods. Money, therefore, is a natural market phenomenon resulting from man's search for maximum gain at minimum cost. Banking is also a market phenomenon. People use financial intermediaries to safeguard funds and more efficiently make loans. An economics text should clearly explain the role of money and financial institutions, including the meaning and function of "interest."

Government activity in the monetary and banking systems must be addressed, including

  • fiat money (paper dollars) versus commodity-backed money (gold and silver);

  • the Federal Reserve System and how it regulates the monetary system;

  • inflation;

  • deposit insurance; and

  • government allocation of credit.

A discussion of the 1980s savings and loan bailout ought to be included, explaining the background of this crisis in some detail. In 1980, the federal government raised the amount of deposits it would insure from $40,000 to $100,000 and granted S & L officials greater freedom to make a variety of investments. At the same time, it continued the harmful policy of charging well-managed institutions the same insurance premiums that it charged poorly managed ones. This was a prescription for disaster. An economics text that explains the S & L crisis as purely the fault of the marketplace needs to examine the facts in a more balanced manner.