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CIA4U0 Analyzing Current Economic Issues Chapter 11: Money & Banking Topic 1: The Role of Money in an Economy P 245-248.

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Presentation on theme: "CIA4U0 Analyzing Current Economic Issues Chapter 11: Money & Banking Topic 1: The Role of Money in an Economy P 245-248."— Presentation transcript:

1 CIA4U0 Analyzing Current Economic Issues Chapter 11: Money & Banking Topic 1: The Role of Money in an Economy P 245-248

2 Role of Money in an Economy Topic Overview Introduction/History of Money The Evolution of Currency Commodities Coin Paper Origins of Banking and Money Creation Central Banks Bank Deposit Money

3 Role of Money in an Economy Introduction An economy is all about demand Acting on our demand (the ability to afford something) requires money 4 major developments: Creation of currency Banks (priests and goldsmiths) as storehouses for gold and silver coin Creation of deposits Development of Central Banks & Monetary Policy

4 Role of Money in an Economy Introduction Money was not invented Part of the evolution of a society Necessary to go from a small local economy to a large widely spread economy Medium of exchange to replace the barter system

5 Role of Money in an Economy Introduction Early trade was done through barter Trade goods for goods Requires a double coincidence of wants Works for small quantities but not large Cattle was one of the earliest forms of cash Goods can perish/lose value Also needed a way of paying people for service

6 Role of Money in an Economy Evolution of Currency Money-anything of value Anything that is acceptable in purchasing goods or settling debts Commodities Physical objects that have value Cattle, oxen, wheat, shells, salt and whiskey Before coins, gold, silver and copper were used (lumps, jewelry and then ingots)

7 Role of Money in an Economy Evolution of Currency Coinage First minted coins produced by the Lydians in the 7 th century BC Popularized by the Greeks Started the custom of printing the rulers face on coins (Alexander the Great) First signs of assigning value that was greater than the true value

8 Role of Money in an Economy Evolution of Currency Paper Receipts developed by the Chinese in the 7 th century AD In Europe, churches were the bankers People left money at churches for safekeeping and they would issue receipts Paper with underlying value 13 th C, Italian merchants took over the role

9 Role of Money in an Economy Evolution of Currency Paper Until 1600s, you couldnt just use a receipt Receipts could be used to transfer ownership of coin from one to another To actually buy something you had to go to the merchant banker and get your coin 1600s saw the first real paper money English goldsmiths introduced paper money that could be used to buy things

10 Role of Money in an Economy Origins of Banking & Money Creation People usually didnt take possession of all of their coin (held by goldsmiths) Took receipts/paper money instead, leaving the gold coins to pile up Goldsmith lent the coins to others for a profit, secured by property Hence the loan

11 Role of Money in an Economy Origins of Banking & Money Creation Goldsmiths gave out another receipt to represent the value of the loan Now had two outstanding receipts for the same coins Creation of Fractional Reserve Banking only a fraction of the total amount of money deposited for safekeeping actually needed to be kept in reserve

12 Role of Money in an Economy Origins of Banking & Money Creation Central Banks Many banks emerged based on the Fractional Reserve Banking One problem-in times of war or poor harvest, everyone wanted their coin Many banks went bankrupt and people lost all of their money There were also many problems with using coin and paper money

13 Role of Money in an Economy Origins of Banking & Money Creation Central Banks England set up one of the first Central Banks in 1694, Canada in 1934, most countries now have one Print money Guarantee its value Standardized format/design Regulate banking Fraud prevention

14 Role of Money in an Economy Origins of Banking & Money Creation Gold Standard Notes A nations currency that is backed by gold bars (ended in the 1930s) Fiat Money Money that is declared legal tender by a country and so has value (no other reason) Bank Deposit Money All non-paper money issued by banks (loans)


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