1. The Evolution, Functions and Characteristics of Money
AP Economics

2. The Evolution of Money
Barter Economy-moneyless economy that relies on trade or barter
Problems-
products some people offer are not always acceptable or easy to divide for payment
Benefits-
“mutual coincidence of wants” when two people want exactly what the other has and are willing to trade what they have for it

3. Early Money
Early Societies developed forms of proto-money which were commodities that everyone agreed to accept in trade
Examples:
Aztecs-Cacao Beans (aka cocoa beans)
Norwegians-Butter
Colonists- Tobacco leaves, animal hides
China, India, Thailand, and West Africa-Cowrie shells

4. What would you trade?
If we did not have U.S. currency today, what do you feel we as a society could trade as proto-money?

5. Money in Primitive Societies
Commodity Money- money that has an alternative use as an economic good, or commodity Fiat Money- money by governmental decree

6. Money in Colonial America
Both fiat money and commodity money were used in the original thirteen colonies.
Commodity money in America was used to settle debts, make purchases, or for personal consumption
In Massachusetts the local government gave wampum shells a monetary value

7. Early Paper Currency
Early paper money was backed by gold or silver deposits, served as currency for immediate area
States printed money in form of tax anticipation notes which were used to pay salaries, buy supplies and meet other expenditures until they received taxes and redeemed the notes
1775 Continental Congress printed money that was not backed by gold or silver
Issues??

8. Specie in the Colonies
Specie- money in the form of gold or silver coins
Most desirable form of money because of mineral content, and limited supply
1776 there was $12million dollars worth of coin vs. $ 500 million in paper money

9. The Four Characteristics of Money
Portability- can be easily transferred from one person to another, and makes the exchange of money for products easier
Durable- does not deteriorate when handled and can be easily replaced
Divisible- should be able to be broken down into smaller units so that people can use only as much as needed for a transaction
Limited Supply- can not have to much of something because then it becomes worthless

10. So does our money meet all the necessary requirements?
Portability-
light weight, convenient, easily transferable
Durable-
Coins tend to last over 20 years, and paper currency lasts 18 months in circulation before being replaced
Divisible-
Penny is small enough for almost all purchases, and can write checks for exact amounts
Limited Supply/Stability-
Fluctuates, grew at a rate of percent a year in 1970’s, but for the most part there is a stable and limited supply

11. Which of these items meet the four characteristics of money?

12. Functions of Money
Medium of Exchange- money or other substance generally accepted as payment for goods or services
Measure of Value- function of money that allows it to serve as a common way to express value ex. Price Tags
Store of Value- allows people to preserve value for future use
This allows a period of time to pass between earning and spending an income

13. Different Definitions for the Money Supply
M1- component of the money supply relating to money’s role as a medium of exchange
Currency (Coins and Paper Money)
All checkable deposits (travelers checks, DDAs/ checking account)
M2- component of the money supply relating to money’s role as a store of value
Savings (savings deposit & money market deposit account)
Small time deposits (6 mo. CD)
Money market funds (mutual fund)

14. Today’s Money
Prior Knowledge – what back’s today’s currency in the U.S.?
It is not gold and silver!- Today, the GDP helps back our money & its relative scarcity (this is why counterfeiting currency is a federal offense for a fine of up to $250,000 and a prison sentence of up to twenty years for the counterfeiting of U.S. obligations and securities (and no you can’t pay in counterfeited money you made)
The FDIC backs our deposits today up to $250,000 (M1 / M2)