ECON305, Maclachlan, Spring 20061 Money & Banking: An Historical Perspective Week 12.
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Transcript of ECON305, Maclachlan, Spring 20061 Money & Banking: An Historical Perspective Week 12.
ECON305, Maclachlan, Spring 2006 1
Money & Banking: An Historical Perspective
Week 12
ECON305, Maclachlan, Spring 2006 2
Definition
Money is anything generally accepted in payment for goods and services or in the repayment of debts.
Money = Wealth?
Money = Income?
ECON305, Maclachlan, Spring 2006 3
Functions of Money
• Medium of exchange
• Unit of account
• Store of value
ECON305, Maclachlan, Spring 2006 4
Early forms of money
Big stones of Yap
ECON305, Maclachlan, Spring 2006 5
Manillas were ornamental metallic objects worn as jewelry in west Africa
Bronze bracelets.
ECON305, Maclachlan, Spring 2006 6
Commodity Money
Intrinsically valuable
Divisible
Homogeneous
Scarce
Portable
Durable
ECON305, Maclachlan, Spring 2006 7
Examples
Amber, beads, cowries, drums, eggs, feathers, gongs, hoes, ivory, jade, kettles, leather, mats, nails, oxen, pigs, quartz, rice, salt, thimbles, umiacs, vodka, wampum, yarns, and zappozats (decorated axes).
ECON305, Maclachlan, Spring 2006 8
Cattle Paradox
“When cattle are regarded as a form of money, not only healthy cattle but also scrawny ones will be valued to the detriment of the environment supporting them and their owners.”
ECON305, Maclachlan, Spring 2006 9
Linguistic Links
• Capital, cattle, chattels have a common root.
• Pecuniary comes from the Latin word for cattle pecus.
• In Welsh da as an adjective means good but as a noun means both cattle and goods.
ECON305, Maclachlan, Spring 2006 10
Origin of Banking
• Originated in Ancient Mesopotamia (3500 BC)
• Royal palaces and temples for safe keeping grain & other commodities.
• In Egypt state warehouses for harvest led to a system of banking.
• “Checks” written on deposits.
ECON305, Maclachlan, Spring 2006 11
First Coins
Cowrie shells used throughout the world before metal coins came into existence.
ECON305, Maclachlan, Spring 2006 12
Government Minted Coins
• Advantage to the public: standardization
• Advantage to the government: seigniorage
ECON305, Maclachlan, Spring 2006 13
Coin Crisis in Ancient Greece
In 407 BC, Sparta captured Athenian silver mines and released 20,000 slaves.
Athens was faced with a silver shortage and started minting silver plated bronze coins.
Aristophanses’ The Frogs
“the ancient coins are excellent … yet we make no use of them and prefer those bad copper pieces quite recently issued and so wretchedly struck.”
ECON305, Maclachlan, Spring 2006 14
Gresham’s Law: bad money drives out good money
• Queen Elizabeth I wanted to stop debasement of the currency so began minting high purity coins.
• Her economic advisor Gresham told her the plan was flawed.
ECON305, Maclachlan, Spring 2006 15
Paper Money
• Banks store coins and issue receipts.
• If receipts can be transferred, they can serve as money.
• Receipts are call “bank notes”
ECON305, Maclachlan, Spring 2006 16
Early bankers: the goldsmiths
In 17th century England, savers deposited valuables in the goldsmith’s safes.
Receipts could be used as evidence of one’s ability to pay a debt.
Eventually receipts were used as bank notes.
ECON305, Maclachlan, Spring 2006 17
Credit Money
What if banker issues “receipts” to more precious metal than he has on deposit?
ECON305, Maclachlan, Spring 2006 18
Instability with credit money
If depositors worry about the soundness of the banks they will “run” on the bank.
Solution: government regulation of banks to ensure soundness.
ECON305, Maclachlan, Spring 2006 19
Problem with privately issued bank notes
Counterfeiting is difficult to control because each bank’s notes would look different.
Solution: government central bank issues bank notes.
ECON305, Maclachlan, Spring 2006 20
Origin of Fiat Money
When the government obtains a monopoly and can suspend redeemability, the link with commodity money is easily broken.
When redeemability is permanently suspended the result is FIAT MONEY.
Fiat money is government issued money with no intrinsic value.
ECON305, Maclachlan, Spring 2006 21
Seigniorage under fiat money
Consider what happens when money leaves the country.
Money supply contracts.
Fed buys Treasury securities and returns interest to the Treasury.
The U.S. public save on interest they would otherwise have to pay on their debt.
ECON305, Maclachlan, Spring 2006 22
What about the dollar coin?
Why has it not been successful in U.S. when all other countries use coins for denomination of the same and even greater value?
ECON305, Maclachlan, Spring 2006 23
CluesThe Bureau of Engraving and Printing produces
37 million notes a day with a face value of approximately $696 million.
95% of the notes printed each year are used to replace notes already in circulation. 45% of the notes printed are $1 notes.
Between the Fort Worth, Texas and the Washington, DC Facilities approximately 18 tons of ink per day are used.
ECON305, Maclachlan, Spring 2006 24
• The following information regarding the average life of a Federal Reserve Note was provided by the Federal Reserve System - please note that the life of a note depends on its denomination:
$ 1 .............. 22 months$ 5 ................ 16 months$ 10................ 18 months$ 20 ............... 2 Years$ 50 ............... 5 Years$100 .............. 8.5 Years
ECON305, Maclachlan, Spring 2006 25
Electronic Payment Systems
Electronic payment systems are one of the early applications of computer systems but they were used for large size transactions.
Recently with reduction in computing costs, they have been used for small size transactions.
Cost savings for every bill paid electroncially: $1