AP Economics The Evolution of Money Barter Economy moneyless economy that relies on trade or barter Problems products some people offer are not always acceptable or easy to divide for payment ID: 675868
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Slide1
The Evolution, Functions and Characteristics of Money
AP EconomicsSlide2
The Evolution of Money
Barter Economy
-moneyless economy that relies on trade or barter Problems-products some people offer are not always acceptable or easy to divide for paymentBenefits- “mutual coincidence of wants” when two people want exactly what the other has and are willing to trade what they have for it Slide3
Early Money
Early Societies developed forms of proto-money
which were commodities that everyone agreed to accept in tradeExamples: Aztecs-Cacao Beans (aka cocoa beans) Norwegians-Butter Colonists- Tobacco leaves, animal hides China, India, Thailand, and West Africa-Cowrie shells Slide4
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?Slide5
Money in Primitive Societies
Commodity Money- money that has an alternative use as an economic good, or commodity
Fiat Money- money by governmental decree Slide6
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 consumptionIn Massachusetts the local government gave wampum shells a monetary value Slide7
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 notes1775 Continental Congress printed money that was not backed by gold or silverIssues??Slide8
Specie in the Colonies
Specie- money in the form of gold or silver coins
Most desirable form of money because of mineral content, and limited supply1776 there was $12million dollars worth of coin vs. $ 500 million in paper moneySlide9
The Four Characteristics of Money
Portability
- can be easily transferred from one person to another, and makes the exchange of money for products easierDurable- does not deteriorate when handled and can be easily replacedDivisible- should be able to be broken down into smaller units so that people can use only as much as needed for a transactionLimited Supply
- can not have to much of something because then it becomes worthlessSlide10
So does our money meet all the necessary requirements?
Portability-
light weight, convenient, easily transferableDurable-Coins tend to last over 20 years, and paper currency lasts 18 months in circulation before being replacedDivisible-Penny is small enough for almost all purchases, and can write checks for exact amountsLimited 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 supplySlide11
Which of these items meet the four characteristics of money?Slide12
Functions of Money
Medium of Exchange
- money or other substance generally accepted as payment for goods or servicesMeasure of Value- function of money that allows it to serve as a common way to express value ex. Price TagsStore of Value- allows people to preserve value for future use
This allows a period of time to pass between earning and spending an incomeSlide13
Different Definitions for the Money Supply
M1
- component of the money supply relating to money’s role as a medium of exchangeCurrency (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)Slide14
Today’s Money
Prior 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)