The Evolution, Functions and Characteristics of

MoneyAP Economics

The Evolution of MoneyBarter Economy-moneyless economy that relies on trade or barter

Problems-products some people offer are not always acceptable or easy to divide for payment

Benefits- “mutual coincidence of wants” when two people want exactly what the other has and are willing to trade what they have for it

Early Money Early Societies developed forms of proto-

money which were commodities that everyone agreed to accept in trade

Examples: Aztecs-Cacao Beans (aka cocoa beans) Norwegians-Butter Colonists- Tobacco leaves, animal hides China, India, Thailand, and West Africa-Cowrie shells

What would you trade?

If we did not have U.S. currency today, what do you feel we as a society could trade as proto-money?

Money in Primitive Societies

Commodity Money- money that has an alternative use as an economic good, or commodityFiat Money- money by governmental decree

Money in Colonial America Both fiat money and

commodity money were used in the original thirteen colonies. • Commodity money in

America was used to settle debts, make purchases, or for personal consumption

• In Massachusetts the local government gave wampum shells a monetary value

Early Paper Currency Early paper money was backed

by gold or silver deposits, served as currency for immediate area

States printed money in form of tax anticipation notes which were used to pay salaries, buy supplies and meet other expenditures until they received taxes and redeemed the notes

1775 Continental Congress printed money that was not backed by gold or silver

Issues??

Specie in the ColoniesSpecie- money in the form of gold or silver coins Most desirable form of money

because of mineral content, and limited supply

1776 there was $12million dollars worth of coin vs. $ 500 million in paper money

The Four Characteristics of Money Portability- can be easily transferred from one person to another, and makes the exchange of money for products easier

Durable- does not deteriorate when handled and can be easily replaced

Divisible- should be able to be broken down into smaller units so that people can use only as much as needed for a transaction

Limited Supply- can not have to much of something because then it becomes worthless

So does our money meet all the necessary requirements?

Portability-light weight, convenient, easily transferable

Durable-Coins tend to last over 20 years, and paper currency lasts 18 months in circulation before being replaced

Divisible-Penny is small enough for almost all purchases, and can write checks for exact amounts

Limited Supply/Stability- Fluctuates, grew at a rate of 10-12 percent a year in 1970’s, but for the most part there is a stable and limited supply

Which of these items meet the four characteristics of money?

Functions of Money1. Medium of Exchange- money or

other substance generally accepted as payment for goods or services

2. Measure of Value- function of money that allows it to serve as a common way to express value ex. Price Tags

3. Store of Value- allows people to preserve value for future use

This allows a period of time to pass between earning and spending an income

Different Definitions for the Money Supply

M1- component of the money supply relating to money’s role as a medium of exchange• Currency (Coins and Paper Money)• All checkable deposits (travelers

checks, DDAs/ checking account)

M2- component of the money supply relating to money’s role as a store of value• Savings (savings deposit & money

market deposit account)• Small time deposits (6 mo. CD)• Money market funds (mutual fund)

Today’s MoneyPrior Knowledge – what back’s today’s currency in the U.S.? It is not gold and silver!- Today, the GDP helps

back our money & its relative scarcity (this is why counterfeiting currency is a federal offense for a fine of up to $250,000 and a prison sentence of up to twenty years for the counterfeiting of U.S. obligations and securities (and no you can’t pay in counterfeited money you made)

The FDIC backs our deposits today up to $250,000 (M1 / M2)