HISTORY OF MONEY

Mrs. Eskra

OBJECTIVES:What will you learn?

• The three functions of money:– Medium of exchange– Store of value– Unit of account

• The problems with barter• Use of commodities as money– Which commodities meet the three functions of

money most efficiently.

What is Money?We tend to think of money as bills, coins, checks, etc.But is this what money has always involved?

Broadly, money is anything that lets us get what we want.

Three Functions of Money

Money serves as:

1) A Medium of Exchange2) A Store of Value3) A Unit of Account

MEDIUM OF EXCHANGE

An item used as an intermediary in non-barter based trade;

facilitates trade.

Medium of Exchange

When I go to the grocery store and use my debit card to pay for my groceries, it is acting as a medium of exchange.

– It is an acceptable form of payment to trade for what I want.

STORE OF VALUE

An item having a recognized value that can be stored and retrieved.

Store of Value

When I am not using my money to purchase the things I need, I store some of it in my savings account.

– I know that it will retain its value, and I can access it later.

UNIT OF ACCOUNT

An item used in financial transactions and record keeping.

A standard unit that provides a consistent way of quoting prices.

Unit of Account

Because the dollar is our current form of currency that is accepted as a way to pay for items, things are quoted in terms of dollars.

– This provides a way for us to compare the value of things.

Barter

Before money, people bartered for what they needed.

Barter = exchanging one item for another.

Barter

This man is trying to buy a newspaper subscription with chickens (1874).

Barter has worked in many economies throughout history.

But it can be really inconvenient.

Problems with Barter

• “Double coincidence of wants”– I need a haircut, but I have no money.– I can offer my tutoring services.– Problem: I need to find a hairdresser who is

willing to accept economics tutoring as payment.

My tutoring services are probably not a great medium of exchange in most cases.

Shift to Commodity Monies

• Because of the time wasted trying to find someone who has what you want and also wants what you have, people began trading commodities.

Commodities – items that have value in and of themselves because they are useful and are therefore easily traded.

Examples of Commodity Money

• Salt • Shells• Large stones• Cigarettes and alcohol• Barley • Cocoa beans• Gold, silver, copper

Which are a good medium of exchange? What about a

store of value?

More Efficient Commodities

• The better commodities were portable, durable, and divisible. – Many people might value large stones, but they

are not easy to carry around nor easy to divide.– Something like milk spoils quickly, so does not

serve as a good store of value.– Gold and jewels

easy to transport and do not spoil.

More Efficient Commodities

• As many people began using gold as a medium of exchange, it then serves the third purpose of money: a unit of account.

People could cite “prices” of items in terms of gold.

Gold as Money

• Why gold?– Unlike other commodities, like salt or cotton,

gold does not have much practical value. – However, it is:

• Easy to transport • Divisible• Durable • Difficult to replicate

When people cannot easily replicate something, it has relatively stable value over time.

Gold as Money

• Gold, then, met the three functions of money and became the most common medium of exchange.

How safe would it be to carry around and store large amounts of gold at

home?

Intermediaries

• Banks began to emerge as intermediaries:

– People could store their gold safely.

– They could then write “checks” on their deposits without having to physically remove the gold from the bank.

Paper Money: Gold Certificates

• Banks began to print paper money– Represented a designated amount of gold – This is when gold became a representative

form of money.

– This paper money was even easier to trade than gold itself.

What we call “liquidity.”

Paper Money: Gold Certificates

What gave these “gold certificates” value?

People believed that they could convert them to actual gold.

Paper Money: Gold Certificates

• Banks were able to make loans and earn interest.– When people deposited money into an account,

banks would pay them interest.

– Banks then used these deposits to make other loans, charging higher interest than they paid to depositors.

Revenue for banks

The Gold Standard

• Throughout the 1800s, people could exchange paper money for either gold or silver.

– Known as a bimetallic system

– Although gold was much more common

The Gold Standard

• 1900 – The Gold Standard Act – Signed by President McKinley – Made gold the only thing that could be redeemed for

paper money.– Defined a dollar as about 1/20 ounce of gold

This 1928 dollar states that the U.S. Treasury will present gold to the bearer of the note.

Early Notes

1882 gold certificate

Thomas Hart Benton pictured

Early Notes

1882 note

Alexander Hamiltonpictured

Early Notes

1900 note

Andrew Jackson pictured

Early Notes

1934 note

Benjamin Franklinpictured

The Gold Standard: Great Depression

• When the stock market crashed, investors began trading in gold and other commodities.

– Caused the price of gold to rise– People started trading in dollars for gold

Hoarding of gold (distrust in banks)

The Gold Standard:Great Depression

• FDR outlawed private ownership of gold

– Ordered people to bring back their gold to the Federal Reserve in exchange for dollars

to prevent hoarding

– Suspended the Gold Standard

The Gold Standard:After World War II

• FDR also increased the price of gold to $35 per ounce.– One dollar = 1/35 ounce of gold – No longer redeemable for gold, though.

• The end of the Great Depression meant countries could go back to a modified type of gold standard.

Most countries ended up valuing their currencies based on the U.S. dollar since the U.S. owned most of the gold in the world at the time.

The End of the Gold Standard

• As countries recovered from WWII – especially Germany and Japan – U.S. share of economic output began to drop and so did its gold stock.– Negative balance of payment, increasing debt,

and inflation In an effort to stabilize the U.S. economy, Nixon ended the convertibility between U.S. dollars and gold.