A.P. U.S.

HISTORY 2010-11 – MONEY

Money is lubricant that greases the wheels of the economy. This is how:
1. Money is a medium of exchange with a uniform agreed-upon value. Money’s use speeds up
transactions and increases the variety of possible transactions because nobody has to compute how many
chickens a pig is worth; they just sell the pig for X dollars and then buy a chicken for Y dollars.
2. Another advantage of money is that it keeps its value if you put it in storage and ignore it, which also
does not work with chickens and pigs.
3. Yet another advantage of money is that it serves not only as a uniform measure of value, but also as a
uniform measure of debt. This enables the widespread lending of capital among people who do not even
know each other, and further promotes economic activity.
Traditionally money was some kind of metal, gold or silver, with value everyone agreed upon. But by 1800,
the amount and value of commerce far outpaced any existing precious metal reserves. Americans came up
with other media of exchange as the needs arose. All kinds of money, or currency, circulated. U.S. and
foreign HARD MONEY mingled with SPECIE MONEY issued by the various states, BILLS OF EXCHANGE used in
foreign trade, and BANK NOTES, or CREDIT MONEY, used both internationally and domestically. Here are the
classifications:
 HARD MONEY – “The Coin of the Realm.” This type of currency is created of forged precious
metals that hold value across time and civilizations, the exchange value being determined by the relative
weight and purity of the coin. The first coins were pieces of metal stamped by a king or respected
merchant/banker, whose authority certified the weight and purity of the metal. In modern times, the face
value of a coin is most often different than its value as a metal, thus modern coinage operates as FIAT
MONEY.
 SPECIE MONEY – An adaptation of HARD MONEY designed for commerce, where a PAPER NOTE holds
value because it is backed by a reserve of precious metal, either in a bank or national treasury.
 CREDIT MONEY – Currency that is backed only by a collective belief in the stability of its issuer. If
issued by a government, or CHARTER BANK, in the form of BANK NOTES it was generally supposed to be
redeemable for SPECIE MONEY upon demand. CREDIT MONEY was also issued by private banks, often
backed by land holdings with a market value theoretically greater than the total of the BANK NOTES
issued. Large businesses also sometimes issued CREDIT MONEY.
As CREDIT MONEY was not actually backed by reserves or SPECIE MONEY, a panic (too many people
wanting to exchange their notes for SPECIE at the same time) would result in the collapse of the issuing
bank. CREDIT MONEY is worth no more than the popular faith in the institution that issues it. It is that faith
that prevents panics. Beginning in 1933, faith in U.S. banks has been supported by the FDIC, a federal
program that insures individual deposits (up to a set value) against bank failure.
 FIAT MONEY – A particular type of CREDIT MONEY, it holds particular value because the
government accepts or requires it as payment for taxes, and the government has a reasonable expectation
of being able to collect those taxes. It is not backed by any precious metal. Much of the money in
circulation today is FIAT MONEY because it is only used by mutual agreement (fiat) that it will serve as the
medium of exchange. Today the dollar’s value is supported by faith in the size of the economy. The
reason exchange rates with other countries’ currencies fluctuate so much is that our dollar’s market
value is determined by the international demand for dollars or dollar-denominated investments on any
given day.
Cause of inflation in the 19th century
A rule of thumb for both CREDIT MONEY and FIAT MONEY is that if more of it is introduced into the economy –
printed and/or loaned out – than the institution can reasonably expect to have flowing back in, either though
returns on investments (BANK NOTES) or payments of taxes (FIAT MONEY), the value of the currency goes
down relative to its exchange rate or purchasing power. This results in a rise in prices – inflation.