L16 - The Evolution, Characteristics & Functions of Money Flashcards Preview

18ECA001 - Principles of Macroeconomics > L16 - The Evolution, Characteristics & Functions of Money > Flashcards

Flashcards in L16 - The Evolution, Characteristics & Functions of Money Deck (31):

What is money?

- We normally think of currency when we talk about of money.
- However, more generally speaking, money is any commodity
which satisfies the following:
- Unit of account: a unit of account is an agreed-upon measure for stating the prices of goods and services.
- Store of Value


Why was Money developed?

- Medium of exchange
Money was developed according to needs and requirements.
- Main aim was to remove the shortcomings of the Barter System.
- The existence of money facilitates a wider range of transactions
than would otherwise be infeasible.


What are the Characteristics and Function of Money?

There are 3 functions of Money:
- Medium of exchange
- Means of Storing wealth
- Means of establishing value of future claims and payments


What is Medium of Exchange as a Characteristics and Function of Money?

- Absence of money will result in barter, which requires double
coincidence of wants.
- As medium of exchange, money facilitates selling and buying of
outputs and services.
- This leads to specialisation and division of labour that will in turn result in higher productivity and efficiency of an economy.


What is Means of Storing Wealth as a Characteristics and Function of Money?

- Money is a convenient way of storing wealth.
- To be an effective way of storing wealth, it must have a relatively stable value.


What is Means of establishing value of Future Claims and Payments as a Characteristics and Function of Money?

- Money can be used for accounting purposes.
- Its ability to serve as a means of establishing value for future payments can be threaten in an inflationary environment.


What are the Key dates in the Evolution of Money?

1 - 1792 - 1750 BC
2 - China: 1200 BC
3 - 640 - 630 BC
4 - 250 AD
5 - 270 AD
6 - 1542 - 1551
7 - 1560
8 - Paper Money in Europe
9 - The First US Dollar


Why is 1792 - 1750 BC a Key Date in the Evolution of Money?

- 1792 - 1750 BC: Money and banking originates in Babylonia
- The Code of Hammurabi includes laws governing banking operations - all carved in stone!


Why is China: 1200 BC a Key Date in the Evolution of Money?

China: 1200 BC - The Chinese began using cowries as money


Why is 640 - 630 BC a Key Date in the Evolution of Money?

-The earliest coins made in Lydia, Asia Minor (modern day Turkey), consisted of electrum, a naturally occurring amalgam of gold and silver.
- Athens issues bronze and silver coins.
- The Athenian public hoards silver coins which, as a result, quickly disappear from circulation, leaving only the inferior bronze ones


Why is 250 AD a Key Date in the Evolution of Money?

- Nero debases the gold and silver coinages.
- Twenty years later, the silver content of Roman coins has fallen to only 4%.


Why is 1542 - 1551 a Key Date in the Evolution of Money?

- The Great Debasement
- Henry VIII debases the coinage of England as a means of raising revenue


Why is 1560 a Key Date in the Evolution of Money?

- Elizabeth I begins the reform of England's debased
- Thomas Gresham, after whom Gresham's law ("bad money drives out good") is named, is an influential adviser.
The debased coins are recalled and melted down and the base
and precious metals separated.


Why is Paper Money in Europe a Key Date in the Evolution of Money?

- In the 1660's, goldsmith's notes are accepted as evidence ofability to pay.
- These notes mark the first use of Banknotes in England
The colony of Massachusetts was the first colony to issue paper currency in the US.


Why is The First US Dollar a Key Date in the Evolution of Money?

- To finance the Revolutionary War, the congress issued 'Continentals'.
- Due to oversupply, they rapidly became worthless.


How has Money physically evolved?

- Money has evolved from being based primarily on a precious metal to being mainly in the form of bank deposits.
- Paper currency started as a claim to a deposit of precious metal.
- Money in the world today is called fiat money. Fiat money is objects that are money because the law decrees or orders them to be money.
- The objects that we use as money today are: currency and deposits at banks and other financial institutions.


What is Currency?

- Currency --> notes and coins. Notes are money because the government declares them to be with the words printed on every pound.
- ' This note is legal tender for all debts, public and private.'


What is a Deposit?

- Deposits at banks, credit unions, savings banks, and savings and loan associations are also money.
- Deposits are money because they can be converted into currency
on demand and are used directly to make payments.
How does money get into the economy?


How does Money get into a Economy?

- Central banks create the monetary base or high-powered money, which is made up of notes and coins (high powered money, cash base or monetary base) and bankers' deposits at the central bank.
- Banks create deposit money by expanding loans and deposits. --> by buying securities ( usually government debt instruments( --> it pays for these purchases with newly issued high-powered money
- Near money --> Commodities which fulfil only some of the functions of money cannot be classed as money e.g. Credit cards and luncheon vouchers (debated about electronic currencies being near money or actual money)
- These are sometimes used as a medium of exchange for transactions, but they are not money because they cannot always be used, nor do they fulfil the other functions of money

- Paper Assets --> such as government securities serve as a store of value, but they cannot be used as a medium of exchange.

- Liquid Assets --> . those which can easily be converted
into money without loss of value, form a potential addition to
the money stock, and are often referred to as 'near money'.


What are some assets classed as Liquid?

- Time deposits --> a deposit in a bank account that cannot be withdrawn before a set date or for which notice of withdrawal is required.
- Treasury and commercial bills, and certificates of deposit.
- Other assets become more liquid the nearer is their maturity


What are the different UK Monetary Aggregates?

- Notes and Coin
- Retail M4
- M4
- M3


What is the definition of Notes and Coin as a UK Monetary Aggregate?

-This measure refers to all the currency in circulation outside the Bank of England.


What is the definition of Retail M4 as a UK Monetary Aggregate?

- This encompasses UK non-bank and non-building society holdings of notes and coins, plus sterling retail deposits with UK banks and building societies.


What is the definition of M4 as a UK Monetary Aggregate?

- M4 is retail M4 plus all other private sector sterling interest bearing deposits at banks and building societies, plus sterling
certificates of deposit (and other paper issued by banks and building societies of not more than five years' original maturity).


What is the definition of M3 as a UK Monetary Aggregate?

- This is a harmonized measure created to have standard money
definitions throughout the EU.
- It is equal to M4 plus residents' foreign currency deposits in UK
banks and building societies plus public corporations' sterling and foreign currency deposits in UK banks and building


What is Electronic Money?

- Electronic purse - pre-paid credits into a magnetic strip (e.g.credit/debit and other cards).
- Internet money - Bitcoin.
- Mobile money, e.g. M-Pesa. --> make mobile payments by text using a personal code

-Some people argue that electronic money will change the nature of monetary system and even perhaps eliminate the central banks.
- this is by either eliminating their power to either control the stock of high-powered money or to set the short-term interest rate in the money market


Will electronic money change the nature of the monetary system?

- it possible but very unlikely for two reasons
- use of electronic purses which involves loading some prepaid credit on to a plastic card that can be read on a cash register --> uncertain whether it will catch on
- but in effect its still the transferring of ownership of bank deposits from one person to another --> just a new way of ordering your bank to transfer money from your account to another from whom you buy goods
- payments via the internet
--> if all you are doing is using an internet message to transfer the money it is basically a new form of cheque
- However is new types of institution become able to issue tokens that become widely accepted in payments this would be a new departure and these new forms of money could provide a substitutes for existing moneys --> however governments will likely regulate these


What is debasing of coinage?

Debasement refers to lowering the value of a currency, particularly one based on a precious metal, by adding metal of inferior value.


What is Seigniorage?

the revenue that accrues from the monetary authority's power to create money by such means as printing banknotes
- by printing more money the government can sustain their government spending without imposing anymore taxes
- Seigniorage is simple to implement and is the easiest way for a government to pay its debt
- however lead to an increase in the price level --> inflation


What is the difference when banks buy securities from the public rather than the government?

- When the Bank buys securities from the public, it is allowing the public to alter the ratio of securities to money in their hands but changing the total
- When the Bank buys securities from the government, it is increasing the total supply of money in circulation without reducing the total of securities in the hand of the public


Why is 270 AD a Key Date in the Evolution of Money?

Aurelian issues new, nearly pure coins, using gold from his eastern conquests.
- He raises the coins' nominal value by 2 and a half
times hoping in this way to stay ahead of inflation.
- This "reform" sends inflation soaring.