Topic 3A&B: Money Course Director: Prof. Brenda Spotton Visano AP/ECON 3430 3.0 A MONETARY ECONOMICS I: FINANCIAL MARKETS AND INSTITUTIONS Fall 2016 Topic 3A&B: Money Course Director: Prof. Brenda Spotton Visano © Brenda Spotton Visano 2016

Medium of Exchange Session 3A Characteristics of a “thing” as an Effective Medium of Exchange – expanded The Value of a Medium of Exchange – its Price, its Value in Exchange, its Value in the Economy (relationship to the real economy) Assumptions in Rock Example Canadian Measure (Definition) of Payments Media Money as Credit and Trust Session 3B Is the crypto-currency Bitcoin medium of exchange money?

Characteristics of a Usable Payments Medium Common and accessible Stable value in exchange (related to inflation rate?) Transportable Divisible Recognizable Resistance to counterfeiting Widely accepted – when trusted to be valuable in exchange Relatively low cost of production Accepted in final payment Q: How would you order the above in terms of importance? © Brenda Spotton Visano 2016

What is the value of a medium of exchange? What are the benefits of a “medium of exchange”? What is purchasing power? What is inflation? How are payments media and economic activity related? Does a payments medium create value?

Rock Example of Payments Medium Illustrated link between real economy and payments medium how medium of exchange can improve on barter under conditions used to derive characteristics of a good medium of exchange; (one) source of inflation is over-supply of payments medium (rocks), consistent with mainstream view of the value of “money” as an payments medium © Brenda Spotton Visano 2016

Assumptions in Rock Example subsistence economy (produce to consume, no saving or investment); more consumption was preferred to less; if you produced it, you owned it (private property rights) ability and willingness to work determined consumption all cooperated (no cheating, no policing needed) self-interest may not deliver public benefits – there is a “social” or “public” value of a medium of exchange © Brenda Spotton Visano 2016

Mainstream View of Money (repeat slide from 2B) Money is a medium of exchange and a unit of value arising out of the need to trade goods and services at a point in time Consistent with Milton Friedman’s “helicopter money” explanation of inflation Underlies Bank of Canada’s principal view of money as a means of payment and the growth of money as the source of inflation © Brenda Spotton Visano 2016

What serves as Media of Exchange in Canada? = Currency (coins and notes) + Chequable account balances = M1+ Debit cards versus bank account balances? Why are credit cards excluded? Why do we trust currency as a means of payment or accept it as final payment? Is currency backed by anything of use-value? What is “fiat currency”? What is the relationship between currency and chequable account balances? © Brenda Spotton Visano 2016

Chequable Deposit Account Balances Issued by banks and other regulated Financial Institutions in exchange for Currency deposited Loan extended to a borrower = 7 x amount of currency in circulation Convertible on demand, at par into currency Accepted as final means of payment Transferable by cheque or debit transaction Is virtual (ledger entries) only; there is nothing tangible © Brenda Spotton Visano 2016

Money as Credit and Trust Niall Ferguson (2009) The importance of money and credit as a measure of trust. (21 min) The Ascent of Money http://www.pbs.org/wnet/ascentofmoney/featured/watch-the-two-hour-the-ascent-of-money/24/ Niall Ferguson is a professor of History at Harvard University. http://www.niallferguson.com/ © Brenda Spotton Visano 2016

© Brenda Spotton Visano 2016 What is Money? Money is something that functions as a medium of exchange – as a final payment for goods or services? Something that has the characteristics of a medium of exchange? something we trust to hold value in exchange over time (store of value)? credit (e.g., chequable deposits issued in payment of a loan from a bank to a borrower)? something sanctioned or at least declared to be money by a government institution? © Brenda Spotton Visano 2016

© Brenda Spotton Visano 2016 Is Bitcoin Money? What is Bitcoin? (2 minutes) https://www.youtube.com/watch?v=Um63OQz3bjo The Future of Money (Neha Narula) (16 minutes) http://www.ted.com/talks/neha_narula_the_future_of_money Paul Kemp-Robertson (2013) “Bitcoin. Sweat. Tide. Meet the future of branded currency.” (11 minutes) https://www.ted.com/talks/paul_kemp_robertson_bitcoin_sweat_tide_meet_the_future_of_branded_currency#t-630581 Neha Narula is director of research at the Digital Currency Initiative, a part of the Massachusetts Institute of Technology Media Lab where she teaches courses and leads cryptocurrency and blockchain research. Prior to joining MIT, Narula was a senior software engineer at Google. © Brenda Spotton Visano 2016

Emerging Payments Systems Further Learning (i.e., not required) The End of Cash? A 50 minute BBC podcast with Michael Kimani, Dave Birch, Brett Scott, and Lana Swartz moderated by Owen Bennett Jones http://www.bbc.co.uk/programmes/p045wgdl © Brenda Spotton Visano 2016