Download Backed by Gold Fiat Money - Saint Joseph High School

The Evolution of Money
Barter Economy
“”Mutual Coincidence of Wants
Functions of Money
• Medium of Exchange
– Accepted by ‘all’ in payment of goods and services
• Measure of Value
– Provides a way to compare the worth of one
product to another
• Store of Value
– Can be saved until needed
Commodity Money
• Can be used to settle debts or consumed
Musket Balls
Compressed
Tea Leaves
Gun Powder
FIAT MONEY
• Money by Government Decree
Porpoise
Teeth
Wampum
PAPER MONEY
• Originated by 17th Century England Goldsmith
– Became a safe place to store gold
– Depositor receipts served as the first paper money
– Goldsmiths issued more receipts than gold held in
reserve causing a liquidity problem.
The First U.S. Paper Currency
• Individuals and Banks began printing their
own paper money
– Backed by Gold or Silver (Commodity Money)
• Continental Dollars were issued to finance the
Revolutionary War
– Not backed by Gold or Silver (Fiat Money
– Printed by the Continental Congress
Backed by Gold
Fiat Money
Massachusetts State
First US Currency
Continental
Currency
Specie
Most desirable form of money – Limited in supply
ORIGINS OF THE DOLLAR
• George Washington commissions Benjamin
Franklin and Alexander Hamilton to establish
money supply
• To eliminate the Peso from circulation
• Pesos were used in Triangular Trade
– Most Common Currency used in the U.S. in 1789
Characteristics of Money
• Portable
• Durable
• Divisible
• Limited in Supply
MONETARY STANDARD
• Tool or mechanism used to keep the money
supply portable, durable, divisible and limited
in supply
• Article 1,Section 8 – gave Congress the power
to coin money
• Article 1, Section 10 – Prohibited states from
coining money (did not prohibit state banks
from issuing paper money)
State Banks
• Received charter from State Government
• Issued paper currency that was backed by
either gold or silver
• More notes issued than could be backed with
gold or silver
• Each bank’s currency varied in size, color and
denominations
• 1,600 banks with 10,000 kinds of paper
money by the Civil War Era
• Counterfeiting was widespread as a result
Civil War and the Greenback
• Bonds to raise money for war was insufficient
• Congress prints paper money - $60 million
– Not backed by silver or gold
– Declared legal tender – fiat currency
– Must be accepted as payment for debts
– Greenback – green ink to distinguish from state
notes
GREENBACK #2
• Legal Tender Act (1862)– Union government
prints $150 million United States Notes
CONFEDERACY CURRENCY
• To finance Civil War
National Currency Established
• Lost confidence in Greenbacks
• Congress created the National
Banking System (NBS)
– National Banks chartered by Congress
• Required to purchase government bonds
–Issued National Bank notes or national
currency backed by U.S. Government Bonds
–Uniform Appearance
• State Banks join or pay 10% tax on their notes
• Rigorous bank inspections
NATIONAL BANK NOTES
• National Currency
• Eventually squeezed out all privately issued
(state) bank notes from circulation.
1863 Gold Certificates
• Backed by Gold – In Large denominations
• Original Purpose – End of Day Balancing
Transactions between Banks
• In 1882 smaller denominations printed for public
use
SILVER CERTIFICATES
• Introduced in 1886
• Backed by Silver Dollars and Bullion (Too Bulky)
– Placed on reserve with the U.S. Treasury
• Increased demand and price for silver
Treasury Coin Notes
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Redeemable in both gold and silver
Issued in 1890
Last paper currency until 1913
Law Repealed in 1893
The GOLD STANDARD
• 1900 Gold Standard Act
• Made possible by huge discovery of gold
– South Africa and Klondike region of Canada
• $20.67 an ounce
• All current notes could be redeemed for gold
at the U.S. Treasury
The Gold Standard
Advantages
• Security
• Gave the impression that
paper currency was limited
to the amount of gold on
deposit with the Treasury
Disadvantages
• Increase in stock of gold was
insufficient to meet growing
economy
• More paper currency was
printed than gold to back it
up
• Price of gold did not stay
fixed at $20.67 an ounce
The Great Depression (1930)
• People cash in dollars for gold
• Gold felt safer
• 1934 – U.S. confiscated gold from private
citizens and went off the Gold Standard
Inconvertible Fiat Money Standard
• 1934 – New Monetary Standard
• Government controls quantity, composition and
quality of money supply
• National Currency and Treasury Coin Notes
withdrawn from circulation in 1934
• Federal Reserve Notes issued
Characteristics of Modern Money
• Portable – lightweight and transferrable
-Cybercurrency, smart cards, electronic money
• Transfer velocity/instantaneous transfer/low
cost/reduced fees
• Durable – Metal currency lasts 20 years/$1 bill
lasts 18 mos.
• Divisible – pennies, checks, cybermoney, etc.
• Limited Availability - perception
• Stable Value - questionnable
THE FEDERAL RESERVE SYSTEM
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First Central Bank
Issued Federal Reserve Notes
Privately owned by banks who bought shares
Publicly controlled
– President appoints Board of Governors and Chair
FDIC
• Federal Deposit Insurance Corporation
• Created by Glass-Steagall Act/The Banking Act
of 1933
• Insure customer’s deposit in case of bank
failure
• Provide sense of security
• Reduced runs on the banks