The facts behind cold, hard cash
"How does money get made?" asked Sydney Gale, 8, a rising third-grader at Robert Crown School in Wauconda.
What is money? Money is something of value that we use to purchase things, like American Girl dolls or Gameboy games.
Dr. Michael Miller, associate professor of economics at DePaul University in Chicago, said there are three things money can do. "Money can be used to trade for stuff we want to buy." Money keeps the same value all the time, Dr. Miller explained. "Money has to be worth the same amount day after day, and at every place in the country. We call this money as a store of value." Money is available in common units, Dr. Miller said. "If Joe has $25, and Lakshmi has $50, then we know that Lakshmi has twice as much money as Joe."
The amount of money being used tells experts at the Federal Reserve Bank - the central U.S. bank - how much money needs to be distributed to banks. "Our current money supply for the whole country is about $1.3 trillion, of which $760 billion is in the form of paper money and currency, and all the rest is some form of checking account," Dr. Miller said.
What are checks? A check is a special sheet of paper used to pay for items, like toys at the store. When someone writes a check, they are promising that the amount of money shown on the paper check is available in their checking account. The check you write to a store is sent to your bank. The bank deducts that money from your account and pays the store. This process can take less than a minute or up to three days.
People also use credit cards to pay for things. "Using a credit card is not the same as using money," Dr. Miller said. "Using a credit card is trading a liability, the promise to pay the credit card bill in the future, for an asset, like the purchase of a Gameboy game."
When you use a credit card, the credit card company pays for the items you purchase. The company sends you a monthly bill listing all the items purchased using your credit card. You must pay the entire bill or an extra charge, called interest, will be added. So if you don't pay the bill each month, interest could drive the price of a $25 Gameboy game to $30 or even higher, depending on how long you take to pay the bill.
What if people are using more cash than checks? The Federal Reserve Bank lets the U.S. Mint know it's time to print more cash and make coins.
Sometimes people need to borrow money. Maybe they want to buy an expensive item, like a house, and the cost is so high that it's unlikely they'd have the cash to make the payment. "If the kind of money people need is checking account money, then the banks can 'make' more money by lending people money and putting the money into the checking account. The banking system has very strict rules on who can borrow money and how much they can borrow at any one time. This way the money supply is kept under control," Dr. Miller said.
People who study purchasing trends and make predictions about money and banking are called economists. "Economists, who study the allocation of our limited resources among the many wants of the people, help the Federal Reserve, and banks, make predictions about how much money will be needed by the public," Dr. Miller said. Many different businesses depend on economists to help place a value on items to be sold or to forecast item sales.
For more information
The Wauconda Area Library suggests these titles on money:
"How Money Is Made," by Patricia Armentrout
"The Young Investor," by Katherine R. Bateman
"The Kids' Money Book," by Jamie Kyle McGillian
"The Kids' Everything Money Book," by Diane Mayr
"Ultimate Kids' Money Book," by Randy Verougstraete