The Evolution of Money And Monetary Standards

Money A barter economy is moneyless and relies solely on trade. A barter economy is moneyless and relies solely on trade. We use money. What purpose does it serve? We use money. What purpose does it serve? Medium of Exchange: accepted by all parties as payment Measure of Value: used to express wealth in terms most understand Store of Value: purchasing power is saved until needed

Types of Money Commodity money: has an alternative use as an economic good (tobacco, tea leaves, etc.) Commodity money: has an alternative use as an economic good (tobacco, tea leaves, etc.) Fiat money: money by government decree Fiat money: money by government decree

Interesting Tid-bits Specie: gold or silver coins – used in Colonial America Specie: gold or silver coins – used in Colonial America Franklin and Hamilton decided to make the dollar the monetary unit and divided it into tenths Franklin and Hamilton decided to make the dollar the monetary unit and divided it into tenths

What makes money successful? Portable Portable Durable Durable Divisible Divisible Limited Limited

Monetary Standard Mechanism designed to keep money supply portable, durable, divisible, and limited in supply Mechanism designed to keep money supply portable, durable, divisible, and limited in supply

A little history lesson … After the Revolutionary War, the Fed issued coins and state banks issued paper currency – both could be exchanged for gold or silver if necessary. After the Revolutionary War, the Fed issued coins and state banks issued paper currency – both could be exchanged for gold or silver if necessary. By the Civil War, there were >1600 banks and >10,000 kinds of currency. By the Civil War, there were >1600 banks and >10,000 kinds of currency.

During the Civil War In 1861 Congress authorized the printing of $60 million of demand notes In 1861 Congress authorized the printing of $60 million of demand notes Had no gold or silver backing but declared legal tender Had no gold or silver backing but declared legal tender Worried that would work the same way at Continentals did Worried that would work the same way at Continentals did

National Banking System Trust was lost during the Civil War so the National Banking System was created. Trust was lost during the Civil War so the National Banking System was created. National banks issued national currency that was back by government bonds. National banks issued national currency that was back by government bonds. In 1865, the federal government forced state banks to join by placing a 10% tax on privately issued bank notes. In 1865, the federal government forced state banks to join by placing a 10% tax on privately issued bank notes.

A little timeline 1863 – gold certificates (paper currency backed by gold) 1863 – gold certificates (paper currency backed by gold) 1878 – silver certificates 1878 – silver certificates 1890 – Treasury coin notes (backed by both) 1890 – Treasury coin notes (backed by both) 1900 – Congress passed Gold Standard Act – fixed price of gold at $20.67 an ounce which allowed notes to be exchanged for gold 1900 – Congress passed Gold Standard Act – fixed price of gold at $20.67 an ounce which allowed notes to be exchanged for gold

Gold Standard Advantages: more secure feeling, prevent government from printing too much money Advantages: more secure feeling, prevent government from printing too much money Disadvantages: gold stock could not grow fast enough to support the economy, price of gold changes over time Disadvantages: gold stock could not grow fast enough to support the economy, price of gold changes over time

Failure Failed in 1930s – Why? Failed in 1930s – Why? Gold Reserve Act of 1934 – turn in gold and gold certificates Gold Reserve Act of 1934 – turn in gold and gold certificates

So what do we have now? Inconvertible fiat monetary standard: Inconvertible fiat monetary standard: Inconvertible - can’t exchange it for gold or silver Inconvertible - can’t exchange it for gold or silver Fiat – money because the government says so Fiat – money because the government says so