What is Money

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   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 Money  Useful Characteristics of Commodity Money • Durable • Divisible or Maleable • Scarce • Easily Standardized • Easily Transported • Widely Accepted Commodity Money  Examples of Commodity Money • Precious Metals (gold, silver, etc.) • Barley (ancient Mesopotamia) • Salt () • Tobacco leaves (Colonial Virginia) • Cigarettes (prisons) • Wheat Flour (rural USA) • Large Stones (Isle of Yap) Babylonian Ring-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. Stone Coins from Yap 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 Money • Talent – amount of weight a worker could be expected to carry on his back or about 60 lbs. • Lira - Unit of currency originally issued by Charlemagne and based on a pound (libra) of silver. • Pound Sterling - Saxon coin minted in 775 with 240 sterlings weighing a pound. Originally large payments were made in "pounds of sterling." Commodity Money - Coins Lydian electrum coins Commodity Money - Coins Spanish milled dollar “Pieces of Eight” Commodity Money - Coins Silver Thaler from St. Joachimsthal First produced in 1519 Commodity Money - Coins Silver “Liberty” Dollar, first US coin issued Banking with Commodity Money  Little more than storage of the commodity 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 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 Paper “1000 cash” bill from the Ming dynasty in China. Issued in 1374 by the Imperial Treasury. 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 Paper 1860 two-dollar note. Prior to 1914 most paper currency circulating in the US was issued by private banks Convertible Paper 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    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 Paper Assets  Specie ($15)  Loans ($85) Liabilities  Banknotes ($100) Banking with Convertible Paper   Banking system creates money by loaning, receiving deposits, and reloaning Banks are susceptible to bank runs Fiat Money   Money that circulates “by command” It is not explicitly backed by any commodity. 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 Money “Greenbacks” were issued by the US Treasury to finance the Civil War. They were not redeemable for gold. Fiat Money Greenbacks could be used by the US government to pay its debts, but the government would not accept them as payment. Fiat Money February 1923 100,000 mark note. Fiat Money Federal Reserve notes were first issued in 1914. 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 1665 request to pay £25 15s from an account held with Morris & Clayton, “Scriveners in Cornhill”. 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 Deposits Assets  Cash ($5)  CB Deposits ($10)  Loans ($85) Liabilities  Checking Accounts ($100) Other Monies  Stored Value Cards • Smartcards (Hong Kong Octopus Card - 八達通 ) • T-Money Card “Some stores including Lotte World, Kyobo Book Centre, GS 25 and others accept T-money as cash.”  Electronic Money (PayPal) Historical Episodes      ???? 1871 1913 1945 1973 – – – – – 1871 1913 1945 1973 now Bimetallic Standard Classic Gold Standard Interwar Float Bretton Woods Float Measuring Money  Use Monetary Aggregates • Monetary Base (M0) • M1 • M2 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   Monetary Base (June 18, 2008) $797.0 billion • Currency - $740.5 • Bank Reserves - $56.5   Vault Cash – $48.5 Deposits at Fed – $8.0 Monetary Aggregates  M1 • Currency in circulation • Traveler’s Checks • Demand Deposits (Banks) • Other Checkable Deposits US Monetary Aggregates   M1 – June 12, 2008 $1378.5 billion • Currency - $768.5 • Traveler’s Checks - $6.2 • Demand Deposits - $291.2 • Other Check Deposits - $312.6   Banks - $177.6 Non-banks – $135.0 Monetary Aggregates  M2 • M1 • Small Time Deposits • Savings Deposits • Retail Money Funds     Repurchase Agreements Money Market Deposit Accounts Money Market Mutual Funds Etc. US Monetary Aggregates   M2 – June 12, 2008 $7690.2 billion • M1 - $1378.5 • Small Time Deposits - $1201.5 • Savings Deposits - $4059.8 • Retail Money Funds - $1050.4 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 Korean Monetary Aggregates     As of April 30th, 2008 Trillions of Won M1 300.9 (300,9000,0000,0000) M2 1,350.9