The Evolution of Money

Barter Economy “”Mutual Coincidence of Wants

Functions of Money Medium of Exchange Measure of Value Store of Value Accepted by ‘all’ in payment of goods and services Measure of Value Provides a way to compare the worth of one product to another Store of Value Can be saved until needed

Commodity Money Can be used to settle debts or consumed Musket Balls Compressed Tea Leaves Gun Powder

FIAT MONEY Money by Government Decree Porpoise Teeth Wampum

PAPER MONEY Originated by 17th Century England Goldsmith Became a safe place to store gold Depositor receipts served as the first paper money Goldsmiths issued more receipts than gold held in reserve causing a liquidity problem.

The First U.S. Paper Currency Individuals and Banks began printing their own paper money Backed by Gold or Silver (Commodity Money) Continental Dollars were issued to finance the Revolutionary War Not backed by Gold or Silver (Fiat Money Printed by the Continental Congress

Backed by Gold Fiat Money Continental Currency Massachusetts State First US Currency

Specie Most desirable form of money – Limited in supply

ORIGINS OF THE DOLLAR George Washington commissions Benjamin Franklin and Alexander Hamilton to establish money supply To eliminate the Peso from circulation Pesos were used in Triangular Trade Most Common Currency used in the U.S. in 1789

Rum Silver Pesos Molasses

Characteristics of Money Portable Durable Divisible Limited in Supply

MONETARY STANDARD Tool or mechanism used to keep the money supply portable, durable, divisible and limited in supply Article 1,Section 8 – gave Congress the power to coin money Article 1, Section 10 – Prohibited states from coining money (did not prohibit state banks from issuing paper money)

State Banks Received charter from State Government Issued paper currency that was backed by either gold or silver More notes issued than could be backed with gold or silver Each bank’s currency varied in size, color and denominations 1,600 banks with 10,000 kinds of paper money by the Civil War Era Counterfeiting was widespread as a result

Civil War and the Greenback Bonds to raise money for war was insufficient Congress prints paper money - $60 million Not backed by silver or gold Declared legal tender – fiat currency Must be accepted as payment for debts Greenback – green ink to distinguish from state notes

GREENBACK #2 Legal Tender Act (1862)– Union government prints $150 million United States Notes

CONFEDERACY CURRENCY To finance Civil War

National Currency Established Lost confidence in Greenbacks Congress created the National Banking System (NBS) National Banks chartered by Congress Required to purchase government bonds Issued National Bank notes or national currency backed by U.S. Government Bonds Uniform Appearance State Banks join or pay 10% tax on their notes Rigorous bank inspections

NATIONAL BANK NOTES National Currency Eventually squeezed out all privately issued (state) bank notes from circulation.

1863 Gold Certificates Backed by Gold – In Large denominations Original Purpose – End of Day Balancing Transactions between Banks In 1882 smaller denominations printed for public use

SILVER CERTIFICATES Introduced in 1886 Backed by Silver Dollars and Bullion (Too Bulky) Placed on reserve with the U.S. Treasury Increased demand and price for silver

Treasury Coin Notes Redeemable in both gold and silver Issued in 1890 Last paper currency until 1913 Law Repealed in 1893

The GOLD STANDARD 1900 Gold Standard Act Made possible by huge discovery of gold South Africa and Klondike region of Canada $20.67 an ounce All current notes could be redeemed for gold at the U.S. Treasury

The Gold Standard Advantages Disadvantages Security Gave the impression that paper currency was limited to the amount of gold on deposit with the Treasury Increase in stock of gold was insufficient to meet growing economy More paper currency was printed than gold to back it up Price of gold did not stay fixed at $20.67 an ounce

The Great Depression (1930) People cash in dollars for gold Gold felt safer 1934 – U.S. confiscated gold from private citizens and went off the Gold Standard

Inconvertible Fiat Money Standard 1934 – New Monetary Standard Government controls quantity, composition and quality of money supply National Currency and Treasury Coin Notes withdrawn from circulation in 1934 Federal Reserve Notes issued

Characteristics of Modern Money Portable – lightweight and transferrable -Cybercurrency, smart cards, electronic money Transfer velocity/instantaneous transfer/low cost/reduced fees Durable – Metal currency lasts 20 years/$1 bill lasts 18 mos. Divisible – pennies, checks, cybermoney, etc. Limited Availability - perception Stable Value - questionnable

THE FEDERAL RESERVE SYSTEM First Central Bank Issued Federal Reserve Notes Privately owned by banks who bought shares Publicly controlled President appoints Board of Governors and Chair

FDIC Federal Deposit Insurance Corporation Created by Glass-Steagall Act/The Banking Act of 1933 Insure customer’s deposit in case of bank failure Provide sense of security Reduced runs on the banks