20Lecture

20Lecture - LECTURE 20 ON THE ORIGIN OF MONEY (CONTINUED)...

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LECTURE 20 ON THE ORIGIN OF MONEY (CONTINUED) Beyond Coins Although the introduction of uniform money via the minting of coins was efficient compared with using cattle for money, which itself was efficient compared with barter, the use of coins introduced other problems of inefficiency. Remember what I said. When you attempt to analyze many problems in economics you need simply think of your own situation. You live in a household, and receive income, and consume, and save. Economics is about explaining, in part, how you behave. How would you like to use only coins as money? How would you like to pay your rent, your tuition, your car payment, your phone bill, and buy stocks and bonds, all with gold and silver coins? Bummer. Yet this is what societies did for thousands of years. Remember, the first coins show up in biblical lands around 700 B.C. The Bank of England was established in 1694 A.D. The Bank of Scotland was established in Edinburg in 1695. The first bank in the United States opened in Boston in 1785. 1 That is almost a decade after the Declaration of Independence. 2 That is a long time to go without currency and checking accounts and use only coin. Well, they didn't use only coin. We need to understand how we moved from gold and silver coins to our current money supply, M1, which is currency in the hands of the public and demand deposits at banks or bank-like institutions. The First Paper Money At this point I always ask the class the same question: What do you think came first, currency, like the $1 bills that we now use, or checks, like the ones we write when we pay the rent. Don't worry if you missed this. You had a 50- 50 chance, yet everyone always misses it. Checks came first. I mentioned in class, and Adam Smith mentioned, that in Colonial Virginia, tobacco leaves were used as money. This is one of the many commodity monies that we have cited in this class to this point. Why were tobacco leaves used as money when gold and silver coins were more efficient? It is 1 It is still there. It now goes by Bank One . Clever, huh? 2 Note that this implies that George Washington, Ben Franklin, Thomas Jefferson, and all of the others did not use banks until after our independence from England.
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simple; there was a shortage of coins in the colonies. So you make do. You use tobacco leaves, which was a major product of the Virginia Colony. When the American Tobacco Company was sued by the Justice Department in the 1911 trial, it was noted that in 1895 the price of grade A tobacco in the U.S. was 6¢ per pound. Now, I don't know what the price was in Colonial Virginia, but I bet it was less. Let's just use 6¢ a pound. Suppose you wanted to buy a horse in Virginia for $18. Suppose you wanted to buy a fine pistol for $18. At 6¢ per pound, you would only have to lay 300 pounds of tobacco leaves on the counter to make your payment. If you were a little ole lady you wouldn't have a chance of buying a horse. You couldn't carry the money. If you know anything about tobacco, and you probably don't, you know that
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This note was uploaded on 04/06/2008 for the course ECON 112 taught by Professor Kingston during the Spring '08 term at ASU.

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20Lecture - LECTURE 20 ON THE ORIGIN OF MONEY (CONTINUED)...

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