What is Money

1
What is Money?

• "When it's a question of money, everybody is of
  the same religion." Voltaire

2
Functions of Money

• Store of Value
• Medium of Exchange
• Unit of Account

3
Various Types of Money

• Commodity Money
• Convertible Paper
• Fiat Money
• Demand Deposits
• Electronic Money

4
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

5
Commodity Money

• Useful Characteristics of Commodity Money
• Durable
• Divisible or Maleable
• Scarce
• Easily Standardized
• Easily Transported
• Widely Accepted

6
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)

7
Babylonian Ring-money
8
Salt as Money

• Pliny the Elder stated as an aside in his Natural
  History's discussion of sea water, that "In
  Rome. . .the soldier's pay was originally salt
  and the word salary derives from it. . ." Plinius
  Naturalis Historia XXXI.

9
Stone Coins from Yap
10
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

11
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."

12
Commodity Money - Coins

• Lydian electrum coins

13
Commodity Money - Coins

• Spanish milled dollar
• Pieces of Eight

14
Commodity Money - Coins

• Silver Thaler from
• St. Joachimsthal
• First produced in 1519

15
Commodity Money - Coins

• Silver Liberty Dollar, first US coin issued

16
Banking with Commodity Money

• Little more than storage of the commodity

17
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.

18
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 banks agents in
  Constantinople by paying them 460 bezants one
  month after their arrival.

19
Convertible Paper

• 1000 cash bill from the Ming dynasty in China.
• Issued in 1374 by the Imperial Treasury.

20
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.

21
Convertible Paper

• 1860 two-dollar note. Prior to 1914 most paper
  currency circulating in the US was issued by
  private banks

22
Convertible Paper
23
Convertible Paper

• 1935 one-dollar silver certificate. This note
  was issued by the US Treasury and was redeemable
  for a fixed amount of silver.

24
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

25
Banking with Convertible Paper

• Assets

• Liabilities

• Specie (15)
• Loans (85)

• Banknotes (100)

26
Banking with Convertible Paper

• Banking system creates money by loaning,
  receiving deposits, and reloaning
• Banks are susceptible to bank runs

27
Fiat Money

• Money that circulates by command
• It is not explicitly backed by any commodity.

28
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.

29
Fiat Money

• Greenbacks were issued by the US Treasury to
  finance the Civil War. They were not redeemable
  for gold.

30
Fiat Money

• Greenbacks could be used by the US government to
  pay its debts, but the government would not
  accept them as payment.

31
Fiat Money

• February 1923 100,000 mark note.

32
Fiat Money

• Federal Reserve notes were first issued in 1914.

33
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.

34
Checkable Deposits

• 1665 request to pay 25 15s from an account held
  with Morris Clayton, Scriveners in Cornhill.

35
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

36
Banking with Checkable Deposits

• Assets

• Liabilities

• Cash (5)
• CB Deposits (10)
• Loans (85)

• Checking Accounts (100)

37
Other Monies

• Stored Value Cards
• Smartcards (Hong Kong Octopus Card - ??? )
• T-Money CardSome stores including Lotte World,
  Kyobo Book Centre, GS 25 and others accept
  T-money as cash.
• Electronic Money (PayPal)

38
Historical Episodes

• ???? 1871 Bimetallic Standard
• 1871 1913 Classic Gold Standard
• 1913 1945 Interwar Float
• 1945 1973 Bretton Woods
• 1973 now Float

39
Measuring Money

• Use Monetary Aggregates
• Monetary Base (M0)
• M1
• M2

40
Monetary Aggregates

• Monetary Base
• Currency in circulation
• Reserves of Commercial Banks
• Vault Cash
• Deposits in the Central Banking System
• less adjustments for float

41
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

42
Monetary Aggregates

• M1
• Currency in circulation
• Travelers Checks
• Demand Deposits (Banks)
• Other Checkable Deposits

43
US Monetary Aggregates

• M1 June 12, 2008
• 1378.5 billion
• Currency - 768.5
• Travelers Checks - 6.2
• Demand Deposits - 291.2
• Other Check Deposits - 312.6
• Banks - 177.6
• Non-banks 135.0

44
Monetary Aggregates

• M2
• M1
• Small Time Deposits
• Savings Deposits
• Retail Money Funds
• Repurchase Agreements
• Money Market Deposit Accounts
• Money Market Mutual Funds
• Etc.

45
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

46
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

47
Korean Monetary Aggregates

• As of April 30th, 2008
• Trillions of Won
• M1 300.9 (300,9000,0000,0000)
• M2 1,350.9