The Evolution of Money

Barter Economy“”Mutual Coincidence of Wants

Functions of Money• Medium of Exchange– Accepted by ‘all’ in payment of goods and services

• Measure of Value– Provides a way to compare the worth of one

product to another

• Store of Value– Can be saved until needed

Commodity Money• Can be used to settle debts or consumed

CompressedTea Leaves

Musket Balls

Gun Powder

FIAT MONEY• Money by Government Decree

Wampum

PorpoiseTeeth

PAPER MONEY• Originated by 17th Century England Goldsmith– Became a safe place to store gold– Depositor receipts served as the first paper money– Goldsmiths issued more receipts than gold held in

reserve causing a liquidity problem.

The First U.S. Paper Currency

• Individuals and Banks began printing their own paper money– Backed by Gold or Silver (Commodity Money)

• Continental Dollars were issued to finance the Revolutionary War– Not backed by Gold or Silver (Fiat Money– Printed by the Continental Congress

Backed by Gold Fiat Money

Massachusetts State First US Currency

Continental Currency

SpecieMost desirable form of money – Limited in supply

ORIGINS OF THE DOLLAR• George Washington commissions Benjamin

Franklin and Alexander Hamilton to establish money supply

• To eliminate the Peso from circulation

• Pesos were used in Triangular Trade – Most Common Currency used in the U.S. in 1789

Characteristics of Money

• Portable

• Durable

• Divisible

• Limited in Supply

MONETARY STANDARD

• Tool or mechanism used to keep the money supply portable, durable, divisible and limited in supply

• Article 1,Section 8 – gave Congress the power to coin money

• Article 1, Section 10 – Prohibited states from coining money (did not prohibit state banks from issuing paper money)

State Banks

• Received charter from State Government• Issued paper currency that was backed by

either gold or silver• More notes issued than could be backed with

gold or silver• Each bank’s currency varied in size, color and

denominations• 1,600 banks with 10,000 kinds of paper money

by the Civil War Era• Counterfeiting was widespread as a result

Civil War and the Greenback• Bonds to raise money for war was

insufficient• Congress prints paper money - $60 million– Not backed by silver or gold– Declared legal tender – fiat currency– Must be accepted as payment for debts– Greenback – green ink to distinguish from state

notes

GREENBACK #2• Legal Tender Act (1862)– Union government

prints $150 million United States Notes

CONFEDERACY CURRENCY

• To finance Civil War

National Currency Established• Lost confidence in Greenbacks• Congress created the National

Banking System (NBS)–National Banks chartered by Congress• Required to purchase government bonds– Issued National Bank notes or national

currency backed by U.S. Government Bonds–Uniform Appearance

• State Banks join or pay 10% tax on their notes• Rigorous bank inspections

NATIONAL BANK NOTES

• National Currency• Eventually squeezed out all privately issued

(state) bank notes from circulation.

1863 Gold Certificates

• Backed by Gold – In Large denominations• Original Purpose – End of Day Balancing

Transactions between Banks• In 1882 smaller denominations printed for public

use

SILVER CERTIFICATES• Introduced in 1886• Backed by Silver Dollars and Bullion (Too Bulky)– Placed on reserve with the U.S. Treasury

• Increased demand and price for silver

Treasury Coin Notes

• Redeemable in both gold and silver• Issued in 1890• Last paper currency until 1913• Law Repealed in 1893

The GOLD STANDARD

• 1900 Gold Standard Act

• Made possible by huge discovery of gold– South Africa and Klondike region of Canada

• $20.67 an ounce

• All current notes could be redeemed for gold at the U.S. Treasury

The Gold Standard

Advantages• Security• Gave the impression that

paper currency was limited to the amount of gold on deposit with the Treasury

Disadvantages• Increase in stock of gold

was insufficient to meet growing economy

• More paper currency was printed than gold to back it up

• Price of gold did not stay fixed at $20.67 an ounce

The Great Depression (1930)

• People cash in dollars for gold

• Gold felt safer

• 1934 – U.S. confiscated gold from private citizens and went off the Gold Standard

Inconvertible Fiat Money Standard• 1934 – New Monetary Standard• Government controls quantity, composition and

quality of money supply• National Currency and Treasury Coin Notes

withdrawn from circulation in 1934• Federal Reserve Notes issued

Characteristics of Modern Money

• Portable – lightweight and transferrable-Cybercurrency, smart cards, electronic money • Transfer velocity/instantaneous transfer/low

cost/reduced fees

• Durable – Metal currency lasts 20 years/$1 bill lasts 18 mos.

• Divisible – pennies, checks, cybermoney, etc.• Limited Availability - perception• Stable Value - questionnable

THE FEDERAL RESERVE SYSTEM

• First Central Bank• Issued Federal Reserve Notes• Privately owned by banks who bought shares• Publicly controlled– President appoints Board of Governors and Chair

FDIC

• Federal Deposit Insurance Corporation• Created by Glass-Steagall Act/The Banking Act

of 1933• Insure customer’s deposit in case of bank

failure• Provide sense of security• Reduced runs on the banks