Introduction to Finance

fi at money
because the government decreed the notes to be “legal tender” 
representative full-bodied 
money 
paper money fully backed 
by a precious metal
fi at money 
paper money 
proclaimed to be legal tender by the 
government for making payments 
and discharging public and private 
debts
FIGURE 2.4
Examples of Representative Full-Bodied and Fiat U.S. Paper Currency
Representative Full-Bodied Paper Currency
[Face value and silver metal “backing” were equal when the bill was issued]
Fiat Paper Currency
[No “backing” with silver (or other precious metal) deposits]
Federal Reserve Note (small size issued 1929–present)
[U.S. government states on each note: “This note is legal tender for all debts, public and private”]
Silver Certificate (small size issued 1929–63)
[exchangeable for silver dollars or silver bullion equal to face amount]

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2.5 Development of Money in the United States
31
for purposes of making payments and discharging public and private debts. Of course, the 
copper-nickel–clad, or token, coins of today are also fi at money because their metal content 
values are less than their face values.
The reliance on the use of fi at money can be problematic. First, fi at money generally 
becomes worthless if the issuing government fails. As an example, Confederate currency was 
issued during the U.S. Civil War. However, when the Confederacy lost the war, this fi at money 
became worthless. Second, since there is no required backing in gold or silver, it is relatively 
easy to issue more and more fi at money. Issuing too much money can, in turn, lead to rising 
prices and a lack of confi dence in the government. An eff ective monetary system with a strong 
central bank and prudent policy makers are needed when a fi nancial system relies on fi at 
money to carry out its transactions.
Several major changes in Federal Reserve Notes have taken place over time. In 1929, the 
size of the notes was reduced about 30 percent, from large notes (7.42 inches by 3.13 inches) 
to small notes (6.14 inches by 2.61 inches). This change made production less expensive and 
made it easier to handle and less costly to store and transfer paper money. 
Figure 2.5
shows 
the old and current design of the $20 U.S. Federal Reserve Note. The “small portrait” $20 note 
is shown in the top portion of the fi gure. 
ETHICAL
When it comes to money, how individuals “behave” ranges from exhibiting high 
ethical standards down to deceit, fraud, and counterfeiting. How you acquire and deal with 
money aff ects your reputation. Individuals who work hard, follow the law, and treat other 
individuals they are involved with in money transactions fairly and honestly are able to fi nd 
success, accumulate wealth, and build high-quality reputations. However, probably almost