Week 9 - The Future for Money - How fiat money developed Central bank digital currencies

What are the key properties of money?

The key properties include being a medium of exchange, a unit of account, and a store of value.

What is commodity money?

Commodity money derives its value from its substance or potential use, consisting of goods or assets that are valuable for other purposes.

What is representative money?

Representative money is often made of paper and is backed by a physical commodity, making it exchangeable for that commodity.

What is fiat money?

Fiat money is a currency not backed by a physical commodity, declared legal tender by government decree.

When did the Bank of England start issuing fiat money?

Since 1931.

What historical development led to the use of paper money?

The introduction of paper money raised the rate of economic growth and changed commerce and government finance.

What problem did the introduction of money solve?

It solved the problem of coordinating wants that arose from barter systems.

What is a central bank digital currency (CBDC)?

A CBDC is digital money that a central bank can issue, serving as an alternative to physical cash.

What is the digital pound?

The digital pound is the term used by the Bank of England for its proposed CBDC.

What is the difference between retail and wholesale CBDCs?

A retail CBDC is used for everyday transactions, while a wholesale CBDC is used within the financial system.

What challenges might a retail CBDC address?

It could address declining cash transactions, market fragmentation, and the rise of privately issued digital money.

What is fractional reserve banking?

Fractional reserve banking occurs when banks lend more money than they have in reserves, based on the assumption that not all depositors will withdraw their funds at once.

What is the significance of trust in fiat money?

Fiat money holds value due to trust in the issuing institutions (government, central bank) and the belief that others will continue to accept it.

What are some advantages of fiat money?

Advantages include being backed by the state, socially accepted, and enabling monetary policy control.

What issues can arise with commodity money?

Commodity money can be debased, and issues such as inflation or insufficient supply can hinder economic growth.

How did Marco Polo contribute to the understanding of money?

His writings introduced Western audiences to the concept of paper money used in the far east.

What role did IOUs play in the development of money?

IOUs served as promissory notes that could be exchanged for underlying commodity currency, facilitating trade.

What is the role of a central bank in a fiat money system?

The central bank is the sole issuer of currency and is backed by the government, ensuring the stability and trust in the money supply.

What is the relationship between fiat money and inflation?

Trust in fiat money requires that agents believe it will not be devalued via inflation.

What is the significance of the term 'legal tender'?

Legal tender is money that must be accepted if offered in payment of a debt.

What does the term 'singleness of money' refer to?

It refers to the need for all forms of money to be exchangeable with each other at par, ensuring confidence in the monetary system.

What historical context led to the transition from commodity to fiat money?

The evolution of trade and the limitations of commodity money necessitated the development of fiat money.

What is a payment interface provider (PIP) in the context of CBDCs?

A PIP is a regulated private sector intermediary that provides the interface between individuals and their CBDC accounts.

What is the potential impact of a retail CBDC on public money?

It could prevent the loss of dominance of public money and contribute to financial stability in a digital era.

What are the implications of a central bank's failure for fiat money?

If the central bank fails, it could lead to a loss of credibility and trust in the fiat money system.

What does 'money as a social institution' mean?

It means that money is not just a medium of exchange but also a construct that relies on social trust and acceptance.

How did the exit from the Gold Standard in 1931 affect fiat money?

It enabled devaluation of the currency, allowing for expansionary monetary policy to prevent recession.