The Origins of Money

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The Origins of Money

• Chapter 10 Section 1

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Objectives

• What is a barter economy?
• How did money emerge out of a barter economy?
• What is money?
• What gives money its value?
• What are the functions of money?

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What would life be like without money?

• Barter Economy
• Trade Goods Services
• Double Coincidence of Wants
• The requirement for a trade where two parties to
  an exchange has what the other wants

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• Transaction Costs
• Costs associated with the time and effort needed
  to search out, negotiate, and consummate an
  exchange

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What is Money?

• Money
• A good that is widely accepted for purposes of
  exchange and in the repayment of debt
• Example
• Gold, Silver, Copper, Beads, Rocks, Coins, Bills

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What gives money its value?

• General Acceptability

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Benefits of Using Money

• Lower Transaction Costs
• which means
• More time for you (grocery cart)
• More Leisure
• More Goods Services
• Specialization

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• Face Value
• The stated denomination on paper money or coins
• Example
• Face Value of a nickel is
• Five Cents
• (These words appear on the nickel)

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Greshams Law

• Bad money drives out good money
• Example
• New Old Silver Dollars
• People keep older silver dollars (good )

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3 Functions of Money

• 1. Medium of Exchange
• Generally Accepted
• 2. Unit of Account
• Measurement of Values
• 3. Store of Value
• Hold Value over Time
• (not a constant store of value)

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• When PRICES go UP, the VALUE of Money goes ...
• DOWN
• Explanation
• Money is often better at storing value at
  various times compared to other items.

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The Early Bankers

• Goldsmiths
• Goldsmiths held peoples gold.
• In turn goldsmiths issued warehouse receipts to
  their customers.
• People began to circulate warehouse receipts in
  place of the gold itself.

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• At this point warehouse receipts were fully
  backed by gold.
• Some goldsmiths lent out some of the gold and
  charged interest for the loan.
• Both warehouse receipts and gold were accepted
• This increased the supply of money
• The process was the beginning of

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• Fractional Reserve Banking
• A banking arrangement in which banks hold only a
  fraction of their deposits and lend out the
  remainder

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Assessment

• What is a barter economy?
• How did money emerge out of a barter economy?
• What is money?
• What gives money its value?
• What are the functions of money?