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

2. 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

3. 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

4. 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

5. 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”

6. 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)

7. 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

8. 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

9. 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

10. 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”

11. 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

12. 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

13. 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

14. 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)