Money $ Money $ Money What is money? Anything that performs these functions: –A medium of exchange –A unit of account –A store of value

Medium of Exchange Anything used to determine value during the exchange of goods and services Money makes these transactions easier The alternative is barter

Unit of Account Allows us to compare the values of goods and services

Store of Value Keeps its value over a period of time What threatens this? –Inflation

Types of Money Commodity Money –Something that is used as a medium of exchange that has value in its own right (gold, silver, cigarettes) Representative Money –Commodity backed money –A bank note redeemable for a commodity (gold or silver) Fiat Money –Something that has value because government says that it has value

Types of Money What type of money is today’s U.S. dollar? Fiat Money

Measuring the Money Supply M1 Money Supply (most liquid) Includes currency in circulation, coins, travelers checks, and checkable/demand deposits (checking accts) **About 50/50 Currency and coins to Deposits

Measuring the Money Supply M2 Money Supply Includes M1 and “near moneys” -- savings deposits (savings accounts) and other interest bearing accounts like CD’s M1 is about 20% of M2

The Goldsmiths and the Origins of Paper Money Goldsmiths provided a place of storage for an individual’s gold and silver They would charge a fee for this service They would issue a receipt to the owner of the specie (gold and silver)

The Goldsmiths and the Origins of Paper Money Receipts then began to be exchanged for goods and services Why? The receipts were accepted as a medium of exchange Voila! The first paper money!

The Goldsmiths and the Origins of Paper Money Then some shrewd Goldsmith realized he could issue receipts in excess of the amount of gold he had. Why? They rarely had to exchange receipts for gold! Voila! The first bank loan!