Money originated as a medium of exchange that arose naturally in markets as an alternative to barter. Early forms of money included commodities like grains, shells, or precious metals that were portable, durable, recognizable, and scarce. Over time, the free market settled on gold and silver as money. Governments later began minting coins and issuing paper money, though money was not invented by the state. The key functions of money are as a medium of exchange, unit of account, store of value, and standard for deferred payments. Electronic forms of money can now fulfill these same functions.

1. Money – Its Origin
& Its Importance
ECO 285 – Dr. Dennis Foster

2. Backstory – The “Austrian” School
Menger
(Principles of Economics)
Böhm-Bawerk
(Capital & Interest)
Mises
(Theory of Money & Credit; Human Action)
Hayek
(Individualism & Economic Order)
(The Road to Serfdom)
Rothbard
(Man, Economy & State)
(The Mystery of Banking)

3. The Origins of Money
Arises in a market setting …
– Direct exchange (barter) gives way to …
– Indirect exchange
• Goods serve as mediums of exchange.
• When we settle down to one = money.
– Characteristics:
• Portable, store of value, relatively scarce, divisible,
widely used, easily recognized.
• If available, gold and silver.

4. Money solves problems …
• Electronic Money
• Allows for specialization of labor.
• Indivisibilities
– Even with barter, discrete units may
still be difficult.
• Calculation of profit and loss
– Business formation is possible.
– Division of labor  Economic growth
 Rising living standards.

5. Is Money “Invented” by the State?
• No.
– Even with the idea, it is difficult to image
how a king could create the institution of money.
– Governments have long been involved w/money.
• Minting (income=seignorage) & debasing.
• Issue unbacked claims to money – FR Notes.
• Supplant the market money – FR Notes.
• Note that money unit is some weight of …
• Pound sterling – a pound of silver.
• Dollar – an ounce of silver.
• POW camp & Electronic Money as money.

6. The main functions of money
Electronic Money :
– medium of exchange.
– unit of account.
– store of value.
– std. of deferred value.
Need money serve all these functions?
To be money, the object must serve
as a final means of payment.

7. What isn’t money?
Wealth is not money.
Income is not money.
A credit card is not money.
What about . . .
• Stored value cards?
• Electronic money?
• “Local” currencies?
To be money, the object
must be redeemable on
demand at face value.
Electronic Money

8. History
Favorable characteristics
– portable, durable, recognizable, scarce, commodity
– wheat, shells, precious metals
– Electronic Money
How do we get to paper?
– commodity, representative, fiat
– U.S. and the “gold standard.”
– Deciding on denominations and coins vs. paper.
– Evolution to e-money.

9. Money and Banking - Dr. D. Foster
The G-man
Mint coins to create standards of purity.
– Revenue source. [Seignorage]
– Beware of “debasing.”
Created 1st & 2nd Banks of the U.S.
– They used notes to buy gov’t. debt.
Civil War & pure fiat money - “greenbacks.”
Gold standard - 1879 to 1933/1971.
Created Federal Reserve in 1913.

10. The Continental Story
June, 1775 – 2 million Spanish
dollars in bills of credit authorized.
12 colonies pledged to redeem from 1779 to 1782.
Total money supply est. at 12 million Spanish dollars.
End of 1775 – 6 million Continentals issued.
End of 1779 – 242 million issued!! [26C=$1]
British added counterfeits.
End of 1781, 168C = $1. Electronic Money
“A wagon load of money will scarcely
purchase a wagon load of provisions”.

11. Measurement
How? - Liquidity of financial assets.
M1 = [Coins and] currency in circulation (C)
+ “transactions deposits” (D) + TC
M2 = M1 + (time deposits)S + MMMFIndividual
Liquidity – How fast, at full market value an asset
can be converted into a means of payment.
Cash – perfectly liquid
Diamond ring – not liquid
Money – only interested in financial assets
Electronic Money

12. The Monetary Base
Monetary Base (MB) = C + bank reserves (R)
Federal Reserve has perfect control over MB:
– Prints currency.
– All reserves are currency or deposits at the Fed.
The Federal Reserve has less control over M1, M2.
MB plays a role in the government’s budget:
G = T + Bonds + MB

13. Money and Banking - Dr. D. Foster
Monetary Data – M1, TD, C
$1.48 tr. C
July 2017
$2.04 tr. TD
$3.53 tr. M1
July 2,
2008
$1.4 tr.
Electronic Money

14. Money and Banking - Dr. D. Foster
Monetary Data – M2
July 2017
$13.59 tr.
Sept. 1,
2008
$7.75 tr.

15. Money and Banking - Dr. D. Foster
Monetary Data – Travelers Checks
Q2 2017
$2.1 bil.

16. Money and Banking - Dr. D. Foster
Monetary Data – Monetary Base
Aug. 2017
$3.91 tr.
July 30,
2008
$877 b.

17. Money – Its Origin
& Its Importance
ECO 285 – Dr. Dennis Foster

18. Yap Stone Wheels