Money, Banking, and Finance Chapter 11

What is NOT Money?

• A lot of things you might in everyday life call “money” is NOT money in the eyes of economists
• Income: If someone has a high income (“he earns a lot of money”), you would call this income, not money
• Wealth: If someone has a lot of stocks or bonds, he does not have money in the economic meaning of the term

Types of Money

• Commodity money: something that contains intrinsic value and is used in exchange
• Coins made of gold or silver; sometimes cigarettes developed into a medium of exchange in hard times
• To be used as money, a commodity must be generally acceptable, standardized, durable, portable, scarce, and, preferably, easily divisible

The System of Gold-Backed Currencies

• Gold and silver coins inconvenient to carry around in large quantities
• Paper monies were issued representing claims on actual commodities
• Starting in the late 1830s, most European countries had their national currencies by law backed by gold
• Exchange rate between different currencies was computed from their respective value relative to gold, and international transactions were finally settled in gold reserves
• System of gold-backed currencies broke down with the start of World War I

What is the Basis of Value of the Coins and Euro Banknotes we use Today?

• The basis of value is—precisely and no more than—the expectation that the euro bill will be acceptable in exchange.
• Fiat money
• A euro bill is money because the government declares it to be money
• Fiat money possesses exchange value
• The value of the goods or services that such money can pay for in the market

Nowadays, You Are Likely to Make Many of Your Transactions by Other Means

• Type of money which is purely based on a promise to pay by someone other than the central bank, is called credit money
• Your deposit in a checking account