Before we jump into banks, let’s start with what they are funded by: money.

Money serves three functions:

Unit of Account

Allows people to value goods and services. For example, prices are expressed in dollar terms.

Means of Payment

Allows people to pay for goods and services.

Includes a “no questions asked” feature (as in, money is accepted in exchange for goods and services without the need to explain its value or prove its worth).

Store of Value

Allows people to save their earnings until they wish to spend them.

Factors like inflation affect how well money holds its value.

Currently, the currency of the United States takes the form of dollar-denominated notes and coins, better known as cash.

In the United States, money takes multiple forms:

  • Central bank money comes in the form of physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve.
  • Commercial bank money is the digital form of money that is most commonly used by the public. Commercial bank money is held in accounts at commercial banks.
  • Nonbank money is digital money held as balances at nonbank financial service providers (examples include Venmo and PayPal). These firms typically conduct balance transfers on their own books using a range of technologies, including mobile apps.

Money and Inflation Explained | Feducation

For additional info on how changes in the money supply affect the economy, watch the video from the Federal Reserve Bank of St. Louis “Feducation” campaign.

YouTube player
Module Quiz

Module Quiz

1. Which of the following is not one of the three main functions of money?
2. True or False: In the United States, commercial bank money is the type of money most commonly used by the public.