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What is Money?. "When it's a question of money, everybody is of the same religion." Voltaire. Functions of Money. Store of Value Medium of Exchange Unit of Account. Various Types of Money. Commodity Money Convertible Paper Fiat Money Demand Deposits Electronic Money. Commodity Money.

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What is money

What is Money?

"When it's a question of money, everybody is of the same religion." Voltaire

Functions of money
Functions of Money

  • Store of Value

  • Medium of Exchange

  • Unit of Account

Various types of money
Various Types of Money

  • Commodity Money

  • Convertible Paper

  • Fiat Money

  • Demand Deposits

  • Electronic Money

Commodity money
Commodity Money

  • A good that has an alternative use beside that of being money

  • It is accepted because the holder knows he can exchange it later

Commodity money1
Commodity Money

  • Useful Characteristics of Commodity Money

    • Durable

    • Divisible or Maleable

    • Scarce

    • Easily Standardized

    • Easily Transported

    • Widely Accepted

Commodity money2
Commodity Money

  • Examples of Commodity Money

    • Precious Metals (gold, silver, etc.)

    • Barley (ancient Mesopotamia)

    • Salt (ancient Rome, North Africa)

    • Tobacco leaves (Colonial Virginia)

    • Cigarettes, Canned Mackrel (prisons)

    • Wheat Flour (rural USA)

    • Large Stones (Isle of Yap)

Salt as money
Salt as Money

  • Pliny the Elder stated as an aside in his Natural History's discussion of sea water, that "[I]n Rome. . .the soldier's pay was originally salt and the word salary derives from it. . ." Plinius Naturalis Historia XXXI.

Commodity money3
Commodity Money

  • Uniform weights are a useful in dealing with commodity monies

  • The names of many currencies and measures of value derive from weight measures

Commodity money4
Commodity Money

  • Pound Sterling - Saxon coin minted in 775 with 240 sterlings weighing a pound. Originally large payments were made in "pounds of sterling."

  • Lira - Unit of currency originally issued by Charlemagne and based on a pound (libra) of silver. Still used in Turkey.

Commodity money coins
Commodity Money - Coins

Lydian electrum coins

Commodity money coins1
Commodity Money - Coins

Spanish milled dollar

“Pieces of Eight”

Commodity money coins2
Commodity Money - Coins

Silver Thaler from

St. Joachimsthal

First produced in 1519

Commodity money coins3
Commodity Money - Coins

Silver “Liberty” Dollar, first US coin issued

Banking with commodity money
Banking with Commodity Money

Little more than storage of the commodity

Convertible paper
Convertible Paper

  • Paper claim on some amount of a commodity money

  • Can be converted on demand into gold or silver, for example

  • More convenient for transport

  • Indirect evidence of usage of “drafts” in Babylon, Egypt Greece & Rome.

Convertible paper1
Convertible Paper

  • Genoese bankers 12th & 13th centuries

    • The first [bills of exchange] for which definite evidence exists was a contract issued in Genoa in 1156 to enable two brothers who had borrowed 115 Genoese pounds to reimburse the bank’s agents in Constantinople by paying them 460 bezants one month after their arrival.

Convertible paper2
Convertible Paper

“1000 cash” bill from the Ming dynasty in China.

Issued in 1374 by the Imperial Treasury.

Convertible paper3
Convertible Paper

1720 English Exchequer Bill. These bills were interest-bearing, however they could be used to pay taxes and could be redeemed at the Bank of England. Endorsements on the back indicate that they circulated among the general public as money.

Convertible paper4
Convertible Paper

1860 two-dollar note. Prior to 1914 most paper currency circulating in the US was issued by private banks

Convertible paper5
Convertible Paper

1935 one-dollar silver certificate. This note was issued by the US Treasury and was redeemable for a fixed amount of silver.

Banking with convertible paper
Banking with Convertible Paper

Invention of Fractional Reserve Banking

Bank exchanges banknotes for gold or silver coins (specie)

Bank keeps only a small portion of the specie as reserves and loans the rest out to earn interest

Banking with convertible paper1
Banking with Convertible Paper



Banknotes ($100)

  • Specie ($15)

  • Loans ($85)

Banking with convertible paper2
Banking with Convertible Paper

Banking system creates money by loaning, receiving deposits, and reloaning

Banks are susceptible to bank runs

Fiat money
Fiat Money

  • Money that circulates “by command”

  • It is not explicitly backed by any commodity.

Fiat money1
Fiat Money

“Continentals” were issued by the Continental Congress to finance the Revolutionary War. They were redeemable for gold, but only at a future date.

Fiat money2
Fiat Money

“Greenbacks” were issued by the US Treasury to finance the Civil War. They were not redeemable for gold.

Fiat money3
Fiat Money

Greenbacks could be used by the US government to pay its debts, but the government would not accept them as payment.

Fiat money4
Fiat Money

February 1923 100,000 mark note.

Checkable deposit money
Checkable Deposit Money

  • Demand Deposit Accounts

  • Other Checkable Deposits

    • NOW (Negotiable Order of Withdrawal)

    • Credit Union Share Drafts

  • Checkable deposit usage expanded rapidly in the US after 1914 when it became illegal for US banks to issue private banknotes.

Checkable deposits
Checkable Deposits

1665 request to pay £25 15s from an account held with Morris & Clayton, “Scriveners in Cornhill”.

Banking with checkable deposits
Banking with Checkable Deposits

Bank exchanges checkable deposits for fiat money

Bank keeps only a small portion of in the form of reserves and loans the rest out to earn interest

Banking with checkable deposits1
Banking with Checkable Deposits



Checking Accounts ($100)

  • Cash ($5)

  • CB Deposits ($10)

  • Loans ($85)

Historical episodes
Historical Episodes

  • ???? – 1871 Bimetallic Standard

  • 1871 – 1913 Classic Gold Standard

  • 1913 – 1945 Interwar Float

  • 1945 – 1973 Bretton Woods

  • 1973 – now Float

Measuring money
Measuring Money

  • Use Monetary Aggregates

    • Monetary Base (M0)

    • M1

    • M2

Monetary aggregates
Monetary Aggregates

  • Monetary Base

    • Currency in circulation

    • Reserves of Commercial Banks

      • Vault Cash

      • Deposits in the Central Banking System

      • less adjustments for float

Us monetary aggregates
US Monetary Aggregates

  • Monetary Base (June 16, 2010)

  • $2006.2 billion

    • Currency - $880.0 billion

    • Bank Reserves - $1101.6

      • Vault Cash – $52.3

      • Deposits at Fed – $1063.3

Monetary aggregates1
Monetary Aggregates

  • M1

    • Currency in circulation

    • Traveler’s Checks

    • Demand Deposits (Banks)

    • Other Checkable Deposits

Monetary aggregates2
Monetary Aggregates

  • M2

    • M1

    • Small Time Deposits

    • Savings Deposits

    • Retail Money Funds

      • Repurchase Agreements

      • Money Market Deposit Accounts

      • Money Market Mutual Funds

      • Etc.

Money in korea
Money in Korea

  • Cash

  • Checks and Bills

  • Funds Transfers (backed by bank accounts)

    • Giro, ITF, CD/ATM, Internet banking, Telebanking

  • Payment Cards

    • M/S vs IC

  • Stored-value Cards