Money – Its Origin & Its Importance ECO 473 – Dr. Dennis Foster

Backstory – The “Austrian” School Böhm-Bawerk (Capital & Interest) Menger (Principles of Economics) 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.

Money – Its Origin & Its Importance ECO 473 – Dr. Dennis Foster

Present Values and Interest Rates $1 today is worth more than $1 tomorrow Present Value (PV) shows the “discounted” value of future $ today. $X in n years = $X/(1+i)n today You get $1000 in 9 years; i=7%. What is PV? You get $1000 in 4 years and $2000 in 6 years; i=5%. PV? You get $3000 in each of the next 8 years; i=4.5%. PV? +/- issue $1000/(1.079) = $543.93 … FV=1000, i=7, n=9, pmt=0, calc. PV=… $1000/(1.054) + $2000/(1.056) = $822.70 + $1492.43 = $2315.13 $3000/(1.0451) + … + $3000/(1.0458) = $19,788 … FV=0, i=4.5, n=8, pmt=$3000, calc. PV=… 7