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ECO 285 Money & Banking Basics

ECO 285 Money & Banking Basics. What is Money?. Money is what money does. Serves as a medium of exchange . Arises in a market setting … Direct exchange (barter) gives way to … Indirect exchange Goods serve as mediums of exchange. When we settle down to one = money.

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ECO 285 Money & Banking Basics

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  1. ECO 285Money & BankingBasics ECO 285 – Spring 2014 – Dr. D. Foster

  2. What is Money? • Money is what money does. • Serves as a medium of exchange. • Arises in a market setting … • Direct exchange (barter) gives way to … • Indirect exchange • Goods serve as mediums of exchange. • When we settle down to one = money.

  3. Money solves problems … • Double coincidence of wants • Allows for specialization of labor. • Indivisibilities • Even with barter, discrete units may still be difficult. • Calculation of profit and loss. • Business formation is possible. • Division of labor  Economic growth  Rising living standards.

  4. The main functions of money • The functions money serves: • medium of exchange. • unit of account. • store of value. • std. of deferred value. • Need money serve all these functions?

  5. What isn’t money? Wealth is not money. Income is not money. A credit card is not money. • Note that money unit is some weight of … • Pound sterling – a pound of silver. • Dollar – an ounce of silver. • POW camp & cigarettes as money. • What about . . . • Stored value cards? • Electronic money? • “Local” currencies?

  6. History • Favorable characteristics • portable, durable, recognizable, scarce, commodity • wheat, shells, precious metals • Yap stone wheels • How do we get to paper? • commodity, representative, fiat • U.S. and the “gold standard.” • Deciding on denominations and coins vs. paper. • Evolution to e-money.

  7. The G-man • The state can’t invent money. • Mint coins to create standards of purity. • Revenue source.[Seignorage] • Beware of “debasing.” • Bank issued “notes” as money. • U.S. government - “greenbacks.” • Gold standard - 1879 to 1933/1971. • Created Federal Reserve in 1913.

  8. The Continental Story • June, 1775 – 2 million Spanish dollars in bills of credit authorized. • 12 colonies pledged to redeem from 1779 to 1782. • Total money supply est. at 12 million Spanish dollars. • End of 1775 – 6 million Continentals issued. • End of 1779 – 242 million issued!! [1Sp$=26C$] • British added counterfeits. • End of 1781, 1Sp$ = 168C$.

  9. ECO 285Money & BankingBasics ECO 285 – Spring 2014 – Dr. D. Foster

  10. Yap Stone Wheels

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