Introduction to Finance

individual net worth 
sum of an 
individual’s money, real assets, and 
fi nancial assets less the individual’s 
debt obligations

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C H A PT E R 2 Money and the Monetary System
2.5
Development of Money 
in the United States
The two basic components of money supply in the United States are physical (coin and cur-
rency) 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 well U.S. money 
performs the three functions of money.
Physical Money (Coin and Paper Currency)
The fi rst function of “successful” money is that it serves as a medium of exchange. Physical 
money is the coin and paper currency used to purchase goods and services and to settle debts. 
We will fi rst examine how U.S. coins have changed in terms of their precious metal (gold and 
silver) content over time. Then, we will examine how U.S. paper currency has changed in 
terms of both its physical characteristics and “backing” with precious metals.
U.S. Coins 
While barter was undoubtedly important in early American history, the gov-
ernment moved swiftly toward a monetary system based on precious metals that would serve 
as an effi
cient medium of exchange. During much of the seventeenth and eighteenth centuries, 
the American colonies relied primarily on the Spanish dollar to conduct business transac-
tions.
2
In 1785, the word 
dollar
was adopted by the U.S. Congress as the standard monetary 
unit, or standard of value. The fi rst monetary act in the United States, passed in 1792, provided 
for a 
bimetallic standard
based on both gold and silver. The dollar was defi ned in both grains 
of pure silver and grains of pure gold. All gold and silver coins were to be