FIN 30220: Macroeconomic Analysis Money, Output, and Prices
What is Money? • ANY commodity that satisfies three basic properties can be called money • Unit of Account • Store of Value • Medium of exchange “I can’t define it, but I know it when I see it!” Throughout history, many different commodities have been used as money
Before there was money as we know it, there was barter. Certain commodities developed into money Roman soldiers were paid in rations of salt – “salarium argentum” is the precursor to the British word “salary” Early US settlers used deer hides – hence the origin of our modern term for currency: "bucks”. The ancient Aztecs used cacao beans Cowrie shells were commonly used as currency in India, China, Thailand and parts of Africa. Ever heard the expression “shelling out”
Precious metals soon became the dominant medium of exchange The ancient Egyptians developed a system for making payments with weighed amounts of precious metal, which were weighed on a balance with stone weights (below).
The first coins were created by the Greeks around 600BC. Specifically, by the Lydian king Croessus. These coins were pure metal and were stamped by the king to as a verification of weight and purity (as well as some free advertising!) The Greeks were avid traders. Greek commerce caused the spread of coinage around the region
Alexander the Great's expansion across 3 continents (300BC) was due in part by his ability to pay his armies with coins and keep them loyal. He minted and held huge supplies of silver coins. Sources estimate that at the peak of his empire Alexander paid out one thousand pounds of coins per day!!
The Empire of Alexander the Great Spread coinage throughout much of the known world Can you guess who this is? Persia 80-77BC India 120BC Egypt. 80-77BC
The spread of the roman empire (120AD) brought coins to Europe and England This is know as the “coin that killed Caesar”. Julius Caesar put his image on the coin and declared himself “dictator for life”. Unfortunate for him, his life ended a few weeks later The money changers in the Bible exchanged roman coins for Jewish coins Roman Denarius (Tiberius) Shekel of Tyre
Money was valued purely through its metal content. The basis for the British currency standard was the pound sterling One pound sterling contained 16 troy ounces of sterling silver. The “L” comes from the Latin word for pound - Librium Equivalent to the pound sterling was a gold sovereign containing ½ ounce of pure gold
Early on, the colonies (being British colonies) used British money Pound (20 shillings) Gold Pounds were also called Guineas or Sovereigns Shilling (12 pence) All these coins are during the reign of Charles I. Inadequate supply of British money put commerce in jeopardy. Pence
Taking matters into their own hand, Boston authorities allowed John Hull and Robert Sanderson to set up a mint in 1652. “Pine Tree” shillings were minted until 1674 when the mint was shut down All the coins bear the date 1652. Why? Coinage was the sole prerogative of the king, but in 1652 there was no king (King Charles I had been beheaded three years earlier). They kept the date so they could deny any illegality if and when a monarchy was once again reestablished which it was in 1660.
Spain established a mint in what is now Mexico City in 1535. Spanish ships returning to Europe would stop off in the colonies to buy supplies. This made Spanish money widely available in the colonies. Spanish dollar = 8 Reals (.86 ounces of silver Doubloon = 4 dollars (1/5 oz. of gold) 2 Bits is still considered slang for a quarter! Spanish coins remained legal tender until the coinage act of 1857!
The Constitution (1787) gives the congress the right to “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures” (Section 8, Clause 5) On April 2, 1792 Congress passed the coinage act which created the mint. The Coinage Act of 1792 defined a US Dollar as .0538 ounces of pure gold or .86 ounces of pure silver (15:1 ratio) – same as the Spanish dollar The US mint began production in 1793 US coins made in 1792 were not minted for circulation and are EXTEMELY valuable. This 1792 penny sold for $603,750!
Where does the dollar sign come from? U S Imagine a U and an S (for United States overlapping) P P S The dollar was fashioned after the Spanish peseta - the P stands for Peseta, the “s” makes it plural (what if the P and S overlap), the line indicates an abbreviation 8 The back of a Spanish peseta had two columns (the pillars of Hercules) wrapped with a scroll that reads “plus ultra”- beyond the pillars, there are other lands. Could this be the origin of the dollar sign?
All American coins must have “an impression emblematic of liberty and the word liberty as well as the year. On the reverse of copper coins was required the denomination. The first circulated penny was released in 1793 The “Chain link penny” caused a lot of controversy..many believed that the chains represented slavery! The chain was immediately replaced with a victory wreath. Note that from 1793 to 1857, the cent was larger than a modern quarter Half penny 1793
On the reverse of gold and silver coins will be an eagle and “United states of America” . Denominations didn’t begin showing up on silver coins until 1804 Half dime introduced in 1794 The dime was first issued in 1796 Quarter: 1796 1794: US dollar (A gold dollar was released in 1849) 1794: US Half dollar Production of silver coins ceased in 1964
On the reverse of gold and silver coins will be an eagle an “United states of America” . Denominations didn’t begin showing up on gold coins until 1807 1796: Quarter Eagle ($2.50) US Half eagle ($5) - 1796 US eagle ($10) - 1795 US double eagle ($20) - 1849 Production of gold coins ceased in 1934
1909: Lincoln appeared on the cent to commemorate the 100 anniversary of his birth 1932, George Washington appears on the quarter 1938: Jefferson appears on the nickel 1946: FDR appears on the dime due to his big support for the march of dimes 1964: JFK appears on the half dollar
Women finally made it onto US coins! Susan B. Anthony was the first non-mythical woman to appear on a US coin in 1978 Sacagawea followed in Susan’s footsteps in 2000 Currently, the US mint produces between 4B and 10B coins annually. As a self funded agency, the mint generated 3.89B dollars of revenues in 2010. The US mint has facilities in Washington DC, Philadelphia, West Point, Denver , San Francisco, and the bullion depository at Fort Knox.
None of our coins has any precious metal content 99% Zinc, 1%Copper Annual Production: 6.8M 75% Copper, 25% Nickel Annual Production: 1.4B 75% Copper, 25% Nickel Annual Production: 2.5B 88% Copper, 6% Zinc, 3% Magnesium, 3% Nickel Annual Production: 5.3M 75% Copper, 25% Nickel Annual Production: 2.4B 75% Copper, 25% Nickel Annual Production: 5.8M
Paper money first makes an appearance in China around 900AD Due to a severe copper shortage, the Chinese begin issuing paper currency. Frequent reissues fuel inflation
“The first authorized paper money issued by any government in the western world” – this was issued by the Massachusetts colony in 1690. It was a “bill of credit”. Not payable in any hard money, but could be used to pay taxes
Each of the colonies issued currency. Some of these were bills of credit while others were claims to gold or silver coins
Beginning in 1775, the Continental congress issued currency to finance the revolutionary war. Continentals were bills of credit – not backed by gold or silver. Easily counterfeited, the notes quickly devalued, giving rise to the phrase “not worth a continental!”
The First bank of the US was chartered in 1791. While officially a private bank, the US government controlled 25%. The charter was not renewed in 1811. The Second Bank of the US was chartered in 1816. Its charter renewal was vetoed by Andrew Jackson in 1836 The second bank of the US existed for five more years until going bankrupt in 1841
Prior to 1838, a bank charter could be obtained only by a specific legislative act. However laws passes by various states after 1838 allowed the automatic chartering of banks by the states without any special legislative consent. From 1840 – 1863 all banking business was done by state banks
Anyone who satisfied the chartering requirements could become a bank and issue currency! 1837 – 1863 over 8,000 “brands of currency issued by banks, state governments, private individuals, and private companies
The CSA also issued its own currency – John C. Calhoun and Andrew Jackson were shown (Big states rights guys) Slavery was a big deal in the south Well known unionist and ardent abolitionist Dr. Alfred Elwyn as a baby) Robert Mercer Taliaferro Hunter – Secretary of State for CSA
At the outbreak of the civil war, the union was depending on hand to mouth borrowing to meet expenses. The Act of July 1861 authorized the Treasury to issue Demand notes. Demand notes were zero interest treasury notes payable on demand in gold or silver at the Assistant Treasurer’s offices in Philadelphia, Boston, and New York. Most state bank notes were blank on the reverse. Because these demand notes were green on the back, they were nicknamed “greenbacks”
The US began issuing United States Notes in 1862 after passing the legal tender act. US Notes were fractionally backed by gold, but were “legal tender for all debts public and private US notes were last placed into circulation in 1971
The National Banking Act of 1863 allowed Nationally chartered banks to distribute bank notes (deemed legal tender) secured by US Debt (banks could issue notes equal to 90% of their US debt holdings) National notes were convertible at any national bank National Bank notes were issued until 1935
The National Banking Act also allowed the government to issue Gold/Silver Certificates. These were 100% backed by gold/silver reserves at the USTreasury. Gold notes were printed until 1934. All $1 bills in the US were silver certificates until 1963 and were still convertible to silver until 1968
The Federal Reserve was created in 1913 to essentially take over the money supply role of national banks. Federal Reserve notes were convertible to gold until 1934 (individuals) 1971 (Central Banks)
William McKinley - $500 Grover Cleveland- $1,000 Salmon P. Chase - $10,000 (Treasury Secretary under Lincoln) James Madison- $5,000 Denominations of $500, $1,000, $5,000, and $10,000 were no longer printed after 1946 for fear of German counterfeiting!!
The largest denomination ever printed was a $100,000 gold certificate. It was never circulated, but was used for inter-bank transfers
The beginning of the end: 1934 During the great depression, US citizens were converting paper currency into gold in large quantities. The government didn’t have enough gold to back up the currency, so FDR passed an executive order that made it illegal for US citizens to hold gold. Only foreign central banks could convert paper dollars into gold This coin sold at auction in 1996 for $7.5M!!
FDR put the Great Seal on US Currency in 1935 Old Version (prior to 1935) New version (began in 1935) Secretary of Agriculture (and later, vice president) Henry Wallace saw the Latin phrase “Novus Ordo Seclorum” which means a new order of the ages and thought it meant “The new deal of the ages” both were freemasons and saw the symbol above the pyramid as the “all seeing eye” – the Masonic symbol for the great architect of the universe.
In God We Trust was adopted officially as the motto of the United States in 1956 as an alternative or replacement to E Pluribus Unum. In god we trust has appeared sporadically on coins since 1864 In God we trust has appeared on currency since 1957 Some atheists have been known to mark out the motto with a custom made stamp
On August 15, 1971, Nixon closes the gold window and the US dollar ceases to be convertible into gold by anyone. This marks the beginning of a truly anchorless system
The US Treasury’s processing and issuance of currency began in 1861 with workers signing, separating and trimming currency by hand Gradually, the process was mechanized and, on August 29, 1862, a note processing operation was set up in the basement of the Treasury becoming the Bureau of engraving and printing. • Today, the BEP has facilities in Washington DC and Fort Worth Texas • During 2011, the BEP produced 23.5 million notes per day with a face value of approximately $453M • The average cost of a note is 9.1 cents
The BEP has had a contract with the Crane paper company to supply the paper for our currency since 1879. • The “paper” is 75% cotton and 25% linen with blue and red silk threads running through it • For denominations above $5, a security thread and watermark are built in • Each sheet is tracked throughout the production process All bills, regardless of denomination, utilize green on the backs. Faces use black ink, color shifting ink, and metallic ink. Inks are formulated and blended by the BEP US currency utilizes a combination of offset and Intaglio printing. In Intaglio printing, images are engraved on plates. Ink is applied to the plate and then pressed into the paper under great pressure.
Federal Reserve District Seal: A (1) = Boston, B (2) = New York, C (3) = Philadelphia, D (4) = Cleveland, E (5) = Richmond, F (6) = Atlanta, G (7) = Chicago, H (8) = St. Louis, I (9) = Minneapolis, J (10) = Kansas City, K (11) = Dallas, L (12) = San Francisco Seal of the US Treasury Federal Reserve District Number Series Date Signature of the Secretary of the Treasury Signature of the Treasurer of the US (Note: Every Treasurer of the US has been a woman since 1949 under Truman)
Each printing plate has 32 objects. The plate, therefore, is divided into 32 locations… One press run will be 200,000 sheets. The serial numbers are applied use skip numbering. The numbers are placed so that when the sheets are stacked and cut, the stacks of bills will be sequential. This would be the serial number locations for the first page of the first run of 200,000 sheets. After the first run of 200,000, the process is repeated starting with 06400001 After 15 runs of 200,000 (1 cycle) we are at serial number 96000000. At this point, we go back to 00000001
Given the numbering system, each serial number is guaranteed to come from one particular plate location. This gives currency an anti counterfeiting device… This letter identifies the number of “cycles”: Y = 25 Serial number Plate position Federal Reserve District Plate serial number
Great Seal of the US (back) Great Seal of the US (front) Added by FDR in 1935 Added in 1957 by Eisenhower Plate serial number
See it now? Did you know that the owl is a Masonic symbol of wisdom?
The narrowest definition of money would be the Monetary Base (also called M0, Inside Money, or High Power Money). The monetary base is a direct liability of the Federal Reserve – that is, cash! Federal Reserve System (2006) In Millions Assets Liabilities $11,036 (Gold) $793,705 (Currency in Circulation) $792,581 (US Bonds) $12,346 (Reserve Deposits) $64 (Loans) $15,275 (US Treasury Deposits) $78,968 (Other) $61,323 (Other) Total: $882,649 Total: $882,649 Monetary Base = Cash in Circulation + Vault Cash + Reserve Deposits