Evolution of Money

• Barter Economy
– Moneyless economy that relies on trade
– Hindered b/c some products offered may be undesirable
• Life is simpler in an economy WITH money

• Medium of Exchange:
– Accepted by all parties as payments for goods and services
– Gold, silver, salt
• Measure of Value
– Common denominator that can be used to express worth in terms that most individuals understand
– Price Tag : dollar and cents

• Store of Value
– Property that allows purchasing power to be saved until needed
– Goods and services can be converted into money
– Enables a period of time to pass between earning and spending an income

• Use of money was developed in ancient times
– Made life easier
• Commodity money:
– Money that has an alternative use as an economic good or commodity
• Fiat money
– Money by government decree
– Coins, dollar bill
– Served as money b/c government said they were money

• Tobacco and wampum once accepted currencies
• States passed laws to print paper currency
– Backed by local banks with gold and silver
• American revolution
– Continental dollars (w/o gold and silver backing)
; worthless at end of the war
• Colonies used
– Specie, gold and silver coins (limited in supply)
– Worth more

• Spanish Peso
– Formed in Mexico from silver
– Ships became victims of Caribbean pirates
– Known as “pieces of eight”
• Divided into 8 sub parts known as bits
– Talers = name of Austrian money
• Franklin and Hamilton liked how talers sounded (dollars)

Origins of the Dollar: Franklin and Hamilton
• Dollar
– Basic monetary unit (or standard unit of currency)
– Divided into tenths (different form the peso)

• Must be portable
– Easily transferred from one person to another
• Must be durable
– Lasts when handled or store for long periods
• Must be divisible
– Facilitate all transactions
• Must be limited in supply
– Retain its value

• Monetary standard
– The mechanism designed to keep money supply portable, durable, divisible and limited in supply
• Continental currency was worthless
– Only trusted coins
– Congress has the power to coin money; prevented states from “coining” money
– Private banks printed paper money

• 1811 the nation had 100 state banks
– Banks that receive a charter to operate from a state government
– Exchange paper notes for gold and silver

• Banks only printed amount of currency they could back with gold and silver
• Wildcat banks (dishonest/fraudulent banks)
– Printed larger amounts of currency in remote areas
– Made redemption of currency difficult

• First, each bank issued its own currency
– Different color, size, denominations
– 100’s different notes
• Second, bank could print money whenever it wanted
– Issue too many notes
• Third, counterfeiting became a major problem
– Just made their own up
• By Civil war, 1600 banks issued 10,000 different kinds of currency
• Merchants were worried about backing of money

• Civil War Congress authorized (1861) printing of $60 million of demand notes
– Did not have gold and silver to backing
– Government declared them legal tender
• 1862: new federal currency
– Called Greenbacks b/c of green ink
– Did not have gold and silver backing

• People feared greenbacks and avoided using them
• NC: Paper currency of uniform appearance that was backed by United States government bonds
• Congress created the National Banking
System (NBS)
– Banks privately owned but chartered by the
Federal Government
– Issues national bank notes
– Backed by US bonds
– State banks withdrew their notes

• 1863: Fed Gov’t issued gold certificates backed by gold
– At first they were printed in large denominations for banks
• 1886: issued silver certificates
– Printed in smaller denominations for public use

• Gold certificates: paper currency backed by gold placed on deposit with the United States Treasury
• Silver certificates: paper currency backed by silver dollars and bullion placed on reserve with the treasury
• Treasury Coin notes: paper currency issued by the Treasury that was redeemable in both gold and silver

• Defined as the dollar being worth a set amount of gold.
Gold certificates could be exchanged for an equivalent amount of gold.

• 1900: Congressed passed
– Basic unit = dollar
– Equivalent to specific amount of gold
– Did not change the use of greenbacks or notes
– Americans could exchange them for gold
• Remained in effect until the Great
Depression

• Advantages
– Security Americans felt about their money
– It prevents the government from printing too much paper currency
• Disadvantages
– Gold stock may not grow fast enough to support a growing economy
– People may decide to convert their paper money to gold
– Price of gold will respond to the market and lose substantial value
– Political risk of failure

Abandoning the Gold Standard
• Gold Reserve Act of 1934: Removed the U.S. from the Gold Standard
• We moved to Managed Money Supply, using an inconvertible fiat money standard
• Fiat Money (legal tender): anything the government decrees is valuable

The Inconvertible Fiat Money
Standard
• 1934: US has been on an inconvertible fiat money standard
– Money standard under which the fiat money supply cannot be converted into gold or silver by its citizens
• Money supply of the US is managed by the Federal Government

Characteristics of Modern
Money
• Tangible component of modern money
– Coins
– Federal Reserve notes
• Intangible component
– Traveler’s checks
– checking accounts
– Savings accounts

Characteristics of Modern
Money