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

2. 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?

3. 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

4. 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?

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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
Niall Ferguson is a professor of History at Harvard University.
© Brenda Spotton Visano 2016

11. © 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

12. © Brenda Spotton Visano 2016
Is Bitcoin Money?
What is Bitcoin? (2 minutes)
The Future of Money (Neha Narula) (16 minutes)
Paul Kemp-Robertson (2013) “Bitcoin. Sweat. Tide. Meet the future of branded currency.” (11 minutes)
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

13. 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
© Brenda Spotton Visano 2016