eco

Functions of Money

  • Medium of Exchange

    • Money facilitates trade and makes exchanges easier.

  • Store of Value

    • Money provides a convenient way to transport purchasing power over time and space.

  • Unit of Account

    • The unit of account is a standard numerical unit of measure that provides a consistent measure of value.

    • It performs two main functions:

    1. Denomination of Prices

      • Prices in the U.S. are denominated in dollars.

    2. Contract Writing

      • Contracts, such as debt contracts, are specified in terms of the unit of account (e.g., U.S. dollar).

    • Example:

    • A mortgage of $400,000 at Citibank requiring $3,000 monthly payments for 30 years.

    • Trust in the dollar's value over time is vital for credit agreements.

    • In countries with unstable currencies, it is difficult to secure credit due to lack of trust in future money value.

  • Importance of Stability in Unit of Account

    • A stable unit of account simplifies pricing for buyers and sellers.

    • Contracts reduce complexities of ongoing exchanges as seen in mortgages, credit cards, etc.

Contracts and the Economy

  • Contractual Obligations

    • Credit implies a contract:

    • You must sign when using credit cards or obtaining a loan.

    • Example: Agreeing to pay back a credit amount involves a contract with lenders.

    • Local businesses also utilize contracts with suppliers for various goods, ensuring agreed prices and quality.

  • Characteristics of a Contract Economy

    • In a contract-driven economy, a stable unit of account is essential.

    • Contracts are often used for ongoing exchanges, not one-time transactions like individual purchases.

Definition and Historical Context of Money

  • Definition of Money

    • Money is defined as anything that performs the functions of money (medium of exchange, store of value, unit of account).

Evolution of Money

  • Historical Changes in Money Usage

    • The forms of money have evolved over time, indicating shifts in society's needs and valuations.

  • Commodity Money

    • Early form of money whose value comes from the intrinsic value of the commodity.

    • Examples: gold and silver coins that had inherent value.

    • Modern paper currency does not retain intrinsic value as commodity money does.

Characteristics of Effective Money

  • Essential Features of Commodity Money
    - Valuable Relative to Bulk: Must hold significant value compared to its size (e.g., gold vs. lead).
    - Durable: Able to withstand physical wear and retain value over time.
    - Divisible: Ability to be divided into smaller units for various transaction sizes.

Historical Examples of Currency Standards

  • Bimetallic System

    • The U.S. historically used both silver and gold as currency until 1879.

    • Shift to a gold standard led to economic shifts and unrest due to perceived negative impacts on the economy.

  • Consequences of the Gold Standard Shift

    • The move away from silver reduced the perceived money supply, leading to economic downturns and political repercussions, notably the Populist Movement, which advocated returning to silver currency for economic benefits.