The best things in life are free But you can give them to the birds and bees I need money (that's what I want) That's what I want (that's what I want) Your love gives me such a thrill But your love don't pay my bills I need money (that's what I want) That's what I want (that's what I want) Money don't get everything, it's true But what it don't get, I can't use I need money (that's what I want) That's what I want (that's what I want)

“…That’s What I Want!” Introduction to Money, Banking and Monetary Policy

The Evolution of Currency Currency (aka money) – anything generally acceptable by society for purchasing goods or settling debts

1. Commodities as Money Commodity: an item used as currency that has value/usefulness in and of itself ?

About 5000 yrs. Ago…

Ingots: “Worth its weight in gold”

2. Coinage as Money Minting begins in Turkey/Greece 7th C. BCE Coins used to represent weight of grain on scales BUT coins are not used as commodities themselves (ie. not melted down & put to other uses)

Why the Heads?

3. Paper as Money First developed in China in 7th C. CE

History of Money Re-Cap 1. Commodity Money (aka Barter, Double Coincidence of Wants problem) 2. Metal by Weight 3. Coinage 4. Paper

Europe adopts paper money 7th-11th C. CE (aka the “Dark Ages” = insecure) Coinage deposited for safekeeping in monasteries

monks issue paper receipt for deposited gold/silver/copper coinage receipt then given by “owner” to transfer ownership of the coinage receipt can then be redeemed at the monastery for the coinage

The “Merchant Princes” 13th C. Italy condottieri take over money deposit power first “merchant bankers”

The Origins of Banking Traveling merchants deposit coinage in local goldsmiths’ “vaults” paper receipts issued (“promissory note”)

“As good as gold” 17th C. paper receipts accepted as possessing monetary value (they are currency) Paper currency used for purchases and given as change without needing to be immediately (or ever) redeemed in gold/silver coinage

Enter the Goldsmiths… realize that few depositors ever withdrew all of their deposited coinage at one time – “excess” coinage piling up in vaults goldsmiths could safely “loan” out some of the excess coinage to others – amount of loan recorded in book Interest could be charged on the loan or collateral demanded as security for loan borrowers rarely took full value of their loan with them either – often took paper receipts instead, leaving more excess coinage to be loaned out again

Result? a) more paper “money”/value was in circulation than there was gold to cover it: coinage+paper currency+loan accounts > actual amt. of coinage/gold in vaults b) goldsmiths had, in effect, created “more” money (purchasing power) in the form of paper currency circulating throughout economy

Fractional Reserve Banking Only a small fraction of the total money deposited actually needed to be physically kept in the bank’s vault (in “reserve”) Rest could be loaned out to circulate through economy, spreading/increasing number of transactions – “economic growth”, “money velocity”

BUT what if…? … everyone who deposited their money or had paper receipts for it wanted it ALL back in GOLD (“hard currency”) at the SAME TIME ???

Financial Collapse Financial crises (war, poor harvest, etc.) cause a “run on the banks” Banks unable to pay off all holders’ notes – fractional reserves used up Banks forced to close and declare bankruptcy Some depositors lose all of their money

Bank collapses occurred frequently in 19th and early 20th Centuries 1867: 51 banks in Canada by 1900: 17 had failed Demand for federal governments to establish “central” banks to regulate the issue of coins and paper money

Central Banking 1934: Bank of Canada created Purposes: regulate private banks, provide security for depositors, issue a national currency

The “Gold Standard” Before 1930’s, most national currencies were convertible back to gold on demand Great Depression undermines people’s faith in paper money – governments fear bankruptcy if people want all paper converted back to gold governments abandon the gold standard for their currencies

“Fiat Money” Money is to be accepted not because it can be converted into gold but because governments declare it to be the only “legal tender” and MUST be accepted for payments

So… value of nation’s currency now rests on the confidence of the people in the relative strength of their economy and faith in the government’s stability (remember Zimbabwe?) value of currency now “floats” relative to its strength when compared to other national currencies/economies AND to the laws of supply and demand in currency markets