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Money and Banking Evolution of Money
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Functions of Money Barter Economy
Moneyless economy that relies on trade Hindered b/c some products offered may be undesirable Life is simpler in an economy WITH money
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Three Functions Medium of Exchange: Measure of Value
Accepted by all parties as payments for goods and services Gold, silver, salt Measure of Value Common denominator that can be used to express worth in terms that most individuals understand Price Tag : dollar and cents
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Three Functions Store of Value
Property that allows purchasing power to be saved until needed Goods and services can be converted into money Enables a period of time to pass between earning and spending an income
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Money in Early Society Use of money was developed in ancient times
Made life easier Commodity money: Money that has an alternative use as an economic good or commodity Fiat money Money by government decree Coins, dollar bill Served as money b/c government said they were money
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Money in Colonial America
Tobacco and wampum once accepted currencies States passed laws to print paper currency Backed by local banks with gold and silver American revolution Continental dollars (w/o gold and silver backing) ; worthless at end of the war Colonies used Specie, gold and silver coins (limited in supply) Worth more
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Origins of the Dollar Spanish Peso
Formed in Mexico from silver Ships became victims of Caribbean pirates Known as “pieces of eight” Divided into 8 sub parts known as bits Talers = name of Austrian money Franklin and Hamilton liked how talers sounded (dollars)
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Origins of the Dollar: Franklin and Hamilton
Basic monetary unit (or standard unit of currency) Divided into tenths (different form the peso)
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Characteristics of Money
Must be portable Easily transferred from one person to another Must be durable Lasts when handled or store for long periods Must be divisible Facilitate all transactions Must be limited in supply Retain its value
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Early Banking and Monetary Standards
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Privately Issued Bank notes
Monetary standard The mechanism designed to keep money supply portable, durable, divisible and limited in supply Continental currency was worthless Only trusted coins Congress has the power to coin money; prevented states from “coining” money Private banks printed paper money
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Growth of State Banking
1811 the nation had 100 state banks Banks that receive a charter to operate from a state government Exchange paper notes for gold and silver
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Abuses in Banking Banks only printed amount of currency they could back with gold and silver Wildcat banks (dishonest/fraudulent banks) Printed larger amounts of currency in remote areas Made redemption of currency difficult
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Problems with Currency
First, each bank issued its own currency Different color, size, denominations 100’s different notes Second, bank could print money whenever it wanted Issue too many notes Third, counterfeiting became a major problem Just made their own up By Civil war, 1600 banks issued 10,000 different kinds of currency Merchants were worried about backing of money
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The Greenback Standard
Civil War Congress authorized (1861) printing of $60 million of demand notes Did not have gold and silver to backing Government declared them legal tender 1862: new federal currency Called Greenbacks b/c of green ink Did not have gold and silver backing
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National Currency People feared greenbacks and avoided using them
NC: Paper currency of uniform appearance that was backed by United States government bonds Congress created the National Banking System (NBS) Banks privately owned but chartered by the Federal Government Issues national bank notes Backed by US bonds State banks withdrew their notes
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National Currency 1863: Fed Gov’t issued gold certificates backed by gold At first they were printed in large denominations for banks 1886: issued silver certificates Printed in smaller denominations for public use
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National Currency Gold certificates: paper currency backed by gold placed on deposit with the United States Treasury Silver certificates: paper currency backed by silver dollars and bullion placed on reserve with the treasury Treasury Coin notes: paper currency issued by the Treasury that was redeemable in both gold and silver
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Gold Standard Defined as the dollar being worth a set amount of gold. Gold certificates could be exchanged for an equivalent amount of gold.
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Gold Standard 1900: Congressed passed
Basic unit = dollar Equivalent to specific amount of gold Did not change the use of greenbacks or notes Americans could exchange them for gold Remained in effect until the Great Depression
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Gold Standard Advantages Disadvantages
Security Americans felt about their money It prevents the government from printing too much paper currency Disadvantages Gold stock may not grow fast enough to support a growing economy People may decide to convert their paper money to gold Price of gold will respond to the market and lose substantial value Political risk of failure
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Abandoning the Gold Standard
Gold Reserve Act of 1934: Removed the U.S. from the Gold Standard We moved to Managed Money Supply, using an inconvertible fiat money standard Fiat Money (legal tender): anything the government decrees is valuable
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The Inconvertible Fiat Money Standard
1934: US has been on an inconvertible fiat money standard Money standard under which the fiat money supply cannot be converted into gold or silver by its citizens Money supply of the US is managed by the Federal Government
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Characteristics of Modern Money
Tangible component of modern money Coins Federal Reserve notes Intangible component Traveler’s checks checking accounts Savings accounts
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Characteristics of Modern Money
Portable Durable Divisible
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