Money – Its Origin & Its Importance ECO 285 – 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.

The main functions of money The functions money serves: medium of exchange. unit of account. store of value. std. of deferred value. Need money serve all these functions? To be money, the object must serve as a final means of payment.

To be money, the object must be redeemable on demand at face value. What isn’t money? Wealth is not money. Income is not money. A credit card is not money. What about . . . Stored value cards? Electronic money? “Local” currencies? To be money, the object must be redeemable on demand at face value.

History Favorable characteristics How do we get to paper? portable, durable, recognizable, scarce, commodity wheat, shells, precious metals Yap stone wheels How do we get to paper? commodity, representative (“note”), fiat U.S. and the “gold standard”: 1879-1933/1971 Deciding on denominations and coins vs. paper. Evolution to e-money.

The Continental Story June, 1775 – 2 million Spanish dollars in bills of credit authorized. “A wagon load of money will scarcely purchase a wagon load of provisions”. 12 colonies pledged to redeem from 1779 to 1782. Total money supply est. at 12 million Spanish dollars. End of 1775 – 6 million Continentals issued. End of 1779 – 242 million issued!! [26C=$1] British added counterfeits. End of 1781, 168C = $1.

Measurement How? - Liquidity of financial assets. M1 = [Coins and] currency in circulation (C) + “transactions deposits” (D) + TC M2 = M1 + (time deposits)S + MMMFIndividual Liquidity – How fast, at full market value an asset can be converted into a means of payment. Cash – perfectly liquid Diamond ring – not liquid Money – only interested in financial assets

The Monetary Base Monetary Base (MB) = C + bank reserves (R) Federal Reserve has perfect control over MB: Prints currency. All reserves are currency or deposits at the Fed. The Federal Reserve has less control over M1, M2. MB plays a role in the government’s budget: G = T + Bonds + MB

Monetary Data: M1, Checking & Currency Feb. 2016 $3.1 tr. $1.75 tr. $1.35 tr.

Monetary Data – M2 Jan. 2016 $12.33 tr. Sept. 1, 2008 $7.75 tr.

Monetary Data - MB Jan. 2016 $3.65 tr. July 30, 2008 $877 b.

Money – Its Origin & Its Importance ECO 285 – Dr. Dennis Foster

Yap Stone Wheels