The Evolution, Functions and Characteristics of Money

AP Economics
Barter Economy-moneyless
economy that relies on trade or
Problemsproducts some people offer are not
always acceptable or easy to
divide for payment
Benefits“mutual coincidence of wants”
when two people want exactly what
the other has and are willing to
trade what they have for it
 Early
Societies developed forms of protomoney which were commodities that everyone
agreed to accept in trade
 Examples:
Aztecs-Cacao Beans (aka cocoa beans)
Colonists- Tobacco leaves, animal hides
China, India, Thailand, and West Africa-Cowrie shells
 If
we did not have U.S. currency today,
what do you feel we as a society could
trade as proto-money?
Commodity Money- money that has an
alternative use as an economic good, or
Fiat Money- money by governmental
 Both
fiat money and
commodity money were
used in the original
thirteen colonies.
• Commodity money in
America was used to settle
debts, make purchases, or
for personal consumption
• In Massachusetts the local
government gave wampum
shells a monetary value
Early paper money was
backed by gold or silver
deposits, served as currency
for immediate area
States printed money in form
of tax anticipation notes
which were used to pay
salaries, buy supplies and
meet other expenditures until
they received taxes and
redeemed the notes
1775 Continental Congress
printed money that was not
backed by gold or silver
Specie- money in the form of gold or silver
 Most desirable form of money because
of mineral content, and limited supply
 1776 there was $12million dollars worth
of coin vs. $ 500 million in paper money
Portability- can be easily transferred from one person to another, and
makes the exchange of money for products easier
Durable- does not deteriorate when handled and can be easily
Divisible- should be able to be broken down into smaller units so that
people can use only as much as needed for a transaction
Limited Supply- can not have to much of something because then it
becomes worthless
Portabilitylight weight, convenient, easily transferable
DurableCoins tend to last over 20 years, and paper
currency lasts 18 months in circulation before
being replaced
DivisiblePenny is small enough for almost all purchases,
and can write checks for exact amounts
Limited Supply/StabilityFluctuates, grew at a rate of 10-12 percent a
year in 1970’s, but for the most part there is a
stable and limited supply
Medium of Exchange- money or
other substance generally
accepted as payment for goods
or services
Measure of Value- function of
money that allows it to serve as
a common way to express value
ex. Price Tags
Store of Value- allows people to
preserve value for future use
This allows a period of time to pass
between earning and spending an
M1- component of the money
supply relating to money’s role
as a medium of exchange
• Currency (Coins and Paper
• All checkable deposits (travelers
checks, DDAs/ checking account)
M2- component of the money
supply relating to money’s role
as a store of value
• Savings (savings deposit & money
market deposit account)
• Small time deposits (6 mo. CD)
• Money market funds (mutual
Prior Knowledge – what back’s today’s currency
in the U.S.?
 It is not gold and silver!- Today, the GDP helps
back our money & its relative scarcity (this is
why counterfeiting currency is a federal
offense for a fine of up to $250,000 and a
prison sentence of up to twenty years for the
counterfeiting of U.S. obligations and
securities (and no you can’t pay in
counterfeited money you made)
 The FDIC backs our deposits today up to
$250,000 (M1 / M2)