money and banking evolution of money. functions of money barter economy –moneyless economy that...
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Money and Banking
Evolution of Money
Functions of Money
• Barter Economy– Moneyless economy that relies on
trade – Hindered b/c some products offered
may be undesirable
• Life is simpler in an economy WITH money
Three Functions
• Medium of Exchange:– Accepted by all parties as payments
for goods and services – Gold, silver, salt
• Measure of Value – Common denominator that can be
used to express worth in terms that most individuals understand
– Price Tag : dollar and cents
• Store of Value – Property that allows purchasing
power to be saved until needed – Goods and services can be
converted into money – Enables a period of time to pass
between earning and spending an income
Three Functions
Money in Early Society
• Use of money was developed in ancient times– Made life easier
• Commodity money:– Money that has an alternative use as an
economic good or commodity
• Fiat money– Money by government decree– Coins, dollar bill – Served as money b/c government said they
were money
Money in Colonial America
• Tobacco and wampum once accepted currencies
• States passed laws to print paper currency – Backed by local banks with gold and silver
• American revolution – Continental dollars (w/o gold and silver
backing) ; worthless at end of the war
• Colonies used – Specie, gold and silver coins (limited in
supply) – Worth more
Origins of the Dollar
• Spanish Peso – Formed in Mexico from silver – Ships became victims of Caribbean
pirates – Known as “pieces of eight”
•Divided into 8 sub parts known as bits
– Talers = name of Austrian money
• Franklin and Hamilton liked how talers sounded (dollars)
• Dollar– Basic monetary unit (or standard unit
of currency)– Divided into tenths (different form the
peso)
Origins of the Dollar: Franklin and Hamilton
Characteristics of Money
• Must be portable – Easily transferred from one person to
another
• Must be durable – Lasts when handled or store for long
periods
• Must be divisible – Facilitate all transactions
• Must be limited in supply – Retain its value
Early Banking and Monetary Standards
Privately Issued Bank notes
• Monetary standard – The mechanism designed to keep
money supply portable, durable, divisible and limited in supply
• Continental currency was worthless – Only trusted coins – Congress has the power to coin money;
prevented states from “coining” money – Private banks printed paper money
Growth of State Banking
• 1811 the nation had 100 state banks – Banks that receive a charter to
operate from a state government – Exchange paper notes for gold and
silver
Abuses in Banking
• Banks only printed amount of currency they could back with gold and silver
• Wildcat banks (dishonest/fraudulent banks) – Printed larger amounts of currency
in remote areas– Made redemption of currency
difficult
Problems with Currency • First, each bank issued its own currency
– Different color, size, denominations – 100’s different notes
• Second, bank could print money whenever it wanted – Issue too many notes
• Third, counterfeiting became a major problem – Just made their own up
• By Civil war, 1600 banks issued 10,000 different kinds of currency
• Merchants were worried about backing of money
The Greenback Standard
• Civil War Congress authorized (1861) printing of $60 million of demand notes – Did not have gold and silver to backing – Government declared them legal
tender
• 1862: new federal currency – Called Greenbacks b/c of green ink – Did not have gold and silver backing
National Currency
• People feared greenbacks and avoided using them
• NC: Paper currency of uniform appearance that was backed by United States government bonds
• Congress created the National Banking System (NBS) – Banks privately owned but chartered by
the Federal Government – Issues national bank notes – Backed by US bonds – State banks withdrew their notes
• 1863: Fed Gov’t issued gold certificates backed by gold – At first they were printed in large
denominations for banks
• 1886: issued silver certificates – Printed in smaller denominations
for public use
National Currency
• Gold certificates: paper currency backed by gold placed on deposit with the United States Treasury
• Silver certificates: paper currency backed by silver dollars and bullion placed on reserve with the treasury
• Treasury Coin notes: paper currency issued by the Treasury that was redeemable in both gold and silver
National Currency
Gold Standard
•Defined as the dollar being worth a set amount of gold. Gold certificates could be exchanged for an equivalent amount of gold.
• 1900: Congressed passed – Basic unit = dollar – Equivalent to specific amount of gold – Did not change the use of
greenbacks or notes– Americans could exchange them for
gold
• Remained in effect until the Great Depression
Gold Standard
Gold Standard
• Advantages – Security Americans
felt about their money
– It prevents the government from printing too much paper currency
• Disadvantages – Gold stock may not
grow fast enough to support a growing economy
– People may decide to convert their paper money to gold
– Price of gold will respond to the market and lose substantial value
– Political risk of failure
Abandoning the Gold Standard
• Gold Reserve Act of 1934: Removed the U.S. from the Gold Standard
• We moved to Managed Money Supply, using an inconvertible fiat money standard
• Fiat Money (legal tender): anything the government decrees is valuable
The Inconvertible Fiat Money Standard
• 1934: US has been on an inconvertible fiat money standard – Money standard under which the fiat
money supply cannot be converted into gold or silver by its citizens
• Money supply of the US is managed by the Federal Government
Characteristics of Modern Money
• Tangible component of modern money– Coins – Federal Reserve notes
• Intangible component – Traveler’s checks – checking accounts – Savings accounts
•Portable •Durable •Divisible
Characteristics of Modern Money