ECO 285 – Spring 2014 – Dr. D. Foster ECO 285 Money & Banking Basics

What is Money? Money is what money does. medium of exchange –Serves as a medium of exchange. Arises in a market setting … –Direct exchange –Direct exchange (barter) gives way to … –Indirect exchange Goods serve as mediums of exchange. When we settle down to one = money.

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.

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?

What isn’t money? Wealth is not money. Income is not money. A credit card is not money. A credit card is not money. What about... Stored value cards? Electronic money? Electronic money? “Local” currencies?“Local” currencies? Note that money unit is some weight of … Pound sterling – a pound of silver. Dollar – an ounce of silver. POW camp & cigarettes as money.cigarettes

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

The G-man The state can’t invent money. Mint coins to create standards of purity. –Revenue source. [Seignorage] –Beware of “debasing.” Bank issued “notes” as money. U.S. government - “greenbacks.” Gold standard to 1933/1971. Created Federal Reserve in 1913.

The Continental Story June, 1775 – 2 million Spanish dollars in bills of credit authorized. 12 colonies pledged to redeem from 1779 to Total money supply est. at 12 million Spanish dollars. End of 1775 – 6 million Continentals issued. End of 1779 – 242 million issued!! [1Sp$=26C$] British added counterfeits. End of 1781, 1Sp$ = 168C$.

ECO 285 – Spring 2014 – Dr. D. Foster ECO 285 Money & Banking Basics

Yap Stone Wheels