Money – Its Origin
& Its Importance
ECO 285 – Dr. Dennis Foster
Backstory – The “Austrian” School
Menger
(Principles of Economics)
Böhm-Bawerk
(Capital & Interest)
Mises
(Theory of Money & Credit; Human Action)
Hayek
(Individualism & Economic Order)
(The Road to Serfdom)
Rothbard
(Man, Economy & State)
(The Mystery of Banking)
The Origins of Money
Arises in a market setting …
– Direct exchange (barter) gives way to …
– Indirect exchange
• Goods serve as mediums of exchange.
• When we settle down to one = money.
– Characteristics:
• Portable, store of value, relatively scarce, divisible,
widely used, easily recognized.
• If available, gold and silver.
Money solves problems …
• Double coincidence of wants
– Allows for specialization of labor.
• Indivisibilities
– Even with barter, discrete units may
still be difficult.
• Calculation of profit and loss
– Business formation is possible.
– Division of labor  Economic growth
 Rising living standards.
Is Money “Invented” by the State?
• No.
– Even with the idea, it is difficult to image
how a king could create the institution of money.
– Governments have long been involved w/money.
• Minting (income=seignorage) & debasing.
• Issue unbacked claims to money – FR Notes.
• Supplant the market money – FR Notes.
• Note that money unit is some weight of …
• Pound sterling – a pound of silver.
• Dollar – an ounce of silver.
• POW camp & cigarettes as money.
The main functions of money
The functions money serves:
–
–
–
–
medium of exchange.
unit of account.
store of value.
std. of deferred value.
Need money serve all these functions?
To be money, the object must serve
as a final means of payment.
What isn’t money?
Wealth is not money.
Income is not money.
A credit card is not money.
What about . . .
• Stored value cards?
• Electronic money?
• “Local” currencies?
To be money, the object
must be redeemable on
demand at face value.
History
Favorable characteristics
– portable, durable, recognizable, scarce, commodity
– wheat, shells, precious metals
– Yap stone wheels
How do we get to paper?
–
–
–
–
commodity, representative, fiat
U.S. and the “gold standard.”
Deciding on denominations and coins vs. paper.
Evolution to e-money.
The G-man
Mint coins to create standards of purity.
– Revenue source.
[Seignorage]
– Beware of “debasing.”
Bank issued “notes” as money.
U.S. government - “greenbacks.”
Gold standard - 1879 to 1933/1971.
Created Federal Reserve in 1913.
The Continental Story
June, 1775 – 2 million Spanish
dollars in bills of credit authorized.
“A wagon load of money will scarcely
purchase a wagon load of provisions”.
12 colonies pledged to redeem from 1779 to 1782.
Total money supply est. at 12 million Spanish dollars.
End of 1775 – 6 million Continentals issued.
End of 1779 – 242 million issued!! [26C=$1]
British added counterfeits.
End of 1781, 168C = $1.
Measurement
How? - Liquidity of financial assets.
Liquidity – How fast, at full market value an asset
can be converted into a means of payment.
Cash – perfectly liquid
Diamond ring – not liquid
Money – only interested in financial assets
M1 = [Coins and] currency in circulation (C)
+ “transactions deposits” (D) + TC
M2 = M1 + (time deposits)S + MMMFIndividual
The Monetary Base
Monetary Base (MB) = C + bank reserves (R)
Federal Reserve has perfect control over MB:
– Prints currency.
– All reserves are currency or deposits at the Fed.
The Federal Reserve has less control over M1, M2.
MB plays a role in the government’s budget:
G = T + Bonds + MB
Monetary Data – M1
Feb. 16,
2015
$2.99 tr.
July 2,
2008
$1.4 tr.
Monetary Data – M2
Feb. 16,
2015
$11.8 tr.
Sept. 1,
2008
$7.75 tr.
Monetary Data – Travelers Checks
Monetary Data - Currency
Feb. 16,
2015
$1.27 tr.
Monetary Data - Checking
Feb. 16,
2015
$1.71 tr.
Monetary Data - MB
Feb. 18,
2015
$3.88 tr.
July 30,
2008
$877 b.
Money – Its Origin
& Its Importance
ECO 285 – Dr. Dennis Foster
Yap Stone Wheels