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CIA4U0 Analyzing Current Economic Issues

CIA4U0 Analyzing Current Economic Issues. Chapter 11: Money & Banking Topic 1: The Role of Money in an Economy P 245-248. 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

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CIA4U0 Analyzing Current Economic Issues

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  1. CIA4U0Analyzing Current Economic Issues Chapter 11: Money & Banking Topic 1: The Role of Money in an Economy P 245-248

  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)

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