econ 331 midterm notes - Feb 8 1) Seniorage- profit from...

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Feb 8 1) Seniorage- profit from the business of minting money a) State monopoly: exchange metal for coins 2) States were inclined to cheat/adulterate the coin a) Expanded currency and prices went up inflation 3) Monarchs a) Got fiscal surplus through taxation b) brought in adulterated currency at discount, make it legit and sell it i) Called “calling up the currency” ii) Recoinage associated with declining price level (?) 4) Paper Money (Han Dynasty 206 BC-220 AD) a) To have major seniorage, print paper money i) Taking out old currency and replace with IOU ii) Strong state needed to issue paper money iii) If you refuse “Legal Tender” state will not help you collect debt (better to use it) b) Invasion from Mongolia created problems i) Heavy state expenses ii) Increased taxes, printed more money iii) Prices shot up 5) Northern Italy used as an intermediary for trade. a) Trade of precious metals melting of coins. b) Dark Ages i) Break down in trade ii) Deflation due to decreasing money supply (bc of coin melting) iii) Prices falling c) Bills of exchange i) Overland exchange: post dated IOU collectable 3-6 months after written (1) Safe: plenty of time to stop payment if lost d) Bill of fair i) Fairs in which merchants sold goods ii) Established “clearinghouse,” which exchanged checks and settled accounts iii) Depending on balance, merchants got bills redeemable at next fair iv) Was the earliest form of credit merchants were extending credit to each other. Feb 13 1) Merchant Bankers a) Double entry accounting i) Helped value merchandise b) Sovereign lending i) Merchants had to practice safe lending activity so they actually got paid back by sovereigns ii) Can be very profitable until sovereign stiffs you for common popularity. 2) Financial market developed in Amsterdam and London Bank of Amsterdam was first north Europe bank (1609).
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a) Bank of Amsterdam was lending money during tulip bulb craze until it ran out of money to lend Crashed and the Dutch lost financial supremacy. b) 1660 Bank of Stockholm in Sweden. i) Made loans to metal industry ii) First to allow writing checks on account c) Bank of England (1694) i) Only bank to set up joint stock bank easy to raise money. ii) Raised money by issuing its own notes. Feb. 20 1) London insurance company due to fire in London a) Avoid “insuring correlated risk”—possibility of being hit by many policy holders at the same time.
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This note was uploaded on 02/28/2008 for the course ECON 3310 taught by Professor Davis during the Spring '07 term at Cornell University (Engineering School).

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econ 331 midterm notes - Feb 8 1) Seniorage- profit from...

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