CIA4U0 Analyzing Current Economic Issues Chapter 11: Money & Banking Topic 1: The Role of Money in an Economy P 245-248

Role of Money in an Economy Topic Overview Introduction/History of Money The Evolution of Currency Commodities Coin Paper Origins of Banking and Money Creation Central Banks Bank Deposit Money

Role of Money in an Economy Introduction An economy is all about demand Acting on our demand (the ability to afford something) requires money 4 major developments: Creation of currency Banks (priests and goldsmiths) as storehouses for gold and silver coin Creation of deposits Development of Central Banks & Monetary Policy

Role of Money in an Economy Introduction Money was not “invented” Part of the evolution of a society Necessary to go from a small local economy to a large widely spread economy Medium of exchange to replace the barter system

Role of Money in an Economy Introduction Early trade was done through barter Trade goods for goods Requires a “double coincidence of wants” Works for small quantities but not large Cattle was one of the earliest forms of cash Goods can perish/lose value Also needed a way of paying people for “service”

Role of Money in an Economy Evolution of Currency Money-anything of value Anything that is acceptable in purchasing goods or settling debts Commodities Physical objects that have value Cattle, oxen, wheat, shells, salt and whiskey Before coins, gold, silver and copper were used (lumps, jewelry and then ingots)

Role of Money in an Economy Evolution of Currency Coinage First “minted” coins produced by the Lydians in the 7th century BC Popularized by the Greeks Started the custom of printing the ruler’s face on coins (Alexander the Great) First signs of assigning value that was greater than the true value

Role of Money in an Economy Evolution of Currency Paper Receipts developed by the Chinese in the 7th century AD In Europe, churches were the bankers People left money at churches for safekeeping and they would issue receipts Paper with underlying value 13th C, Italian merchants took over the role

Role of Money in an Economy Evolution of Currency Paper Until 1600s, you couldn’t just use a receipt Receipts could be used to transfer ownership of coin from one to another To actually buy something you had to go to the merchant banker and get your coin 1600’s saw the first real paper money English goldsmiths introduced paper money that could be used to buy things

Role of Money in an Economy Origins of Banking & Money Creation People usually didn’t take possession of all of their coin (held by goldsmiths) Took receipts/paper money instead, leaving the gold coins to pile up Goldsmith lent the coins to others for a profit, secured by property Hence the “loan”

Role of Money in an Economy Origins of Banking & Money Creation Goldsmiths gave out another receipt to represent the value of the loan Now had two outstanding receipts for the same coins Creation of Fractional Reserve Banking—only a fraction of the total amount of money deposited for safekeeping actually needed to be kept in reserve

Role of Money in an Economy Origins of Banking & Money Creation Central Banks Many banks emerged based on the Fractional Reserve Banking One problem-in times of war or poor harvest, everyone wanted their coin Many banks went bankrupt and people lost all of their money There were also many problems with using coin and paper money

Role of Money in an Economy Origins of Banking & Money Creation Central Banks England set up one of the first Central Banks in 1694, Canada in 1934, most countries now have one Print money Guarantee its value Standardized format/design Regulate banking Fraud prevention

Role of Money in an Economy Origins of Banking & Money Creation Gold Standard Notes A nation’s currency that is backed by gold bars (ended in the 1930’s) Fiat Money Money that is declared “legal tender” by a country and so has value (no other reason) Bank Deposit Money All non-paper money issued by banks (loans)