AP Economics

Barter Economy-moneyless
economy that relies on trade or
barter

 Problems-
products some people offer are not
always acceptable or easy to
divide for payment

 Benefits-
“mutual coincidence of wants”
when two people want exactly what
the other has and are willing to
trade what they have for it
 EarlySocieties developed forms of proto-
money which were commodities that everyone
agreed to accept in trade
 Examples:
Aztecs-Cacao Beans (aka cocoa beans)
Norwegians-Butter
Colonists- Tobacco leaves, animal hides
China, India, Thailand, and West Africa-Cowrie shells
 Ifwe did not have U.S. currency today,
what do you feel we as a society could
trade as proto-money?
Commodity Money- money that has an
alternative use as an economic good, or
commodity
Fiat Money- money by governmental
decree
 Both fiat money and
commodity money were
used in the original
thirteen colonies.
• Commodity money in
America was used to settle
debts, make purchases, or
for personal consumption
• In Massachusetts the local
government gave wampum
shells a monetary value
 Early paper money was
backed by gold or silver
deposits, served as currency
for immediate area
 States printed money in form
of tax anticipation notes
which were used to pay
salaries, buy supplies and
meet other expenditures until
they received taxes and
redeemed the notes
 1775 Continental Congress
printed money that was not
backed by gold or silver
 Issues??
Specie- money in the form of gold or silver
coins
 Most desirable form of money because
of mineral content, and limited supply
 1776 there was $12million dollars worth
of coin vs. $ 500 million in paper money
Portability- can be easily transferred from one person to another, and
makes the exchange of money for products easier

Durable- does not deteriorate when handled and can be easily

replaced

Divisible- should be able to be broken down into smaller units so that

people can use only as much as needed for a transaction

Limited Supply- can not have to much of something because then it

becomes worthless
 Portability-
light weight, convenient, easily transferable
 Durable-
Coins tend to last over 20 years, and paper
currency lasts 18 months in circulation before
being replaced
 Divisible-
Penny is small enough for almost all purchases,
and can write checks for exact amounts
 Limited Supply/Stability-
Fluctuates, grew at a rate of 10-12 percent a
year in 1970’s, but for the most part there is a
stable and limited supply
1. Medium of Exchange- money or
other substance generally
accepted as payment for goods
or services
2. Measure of Value- function of
money that allows it to serve as
a common way to express value
ex. Price Tags
3. Store of Value- allows people to
preserve value for future use
This allows a period of time to pass
between earning and spending an
income
 M1- component of the money
supply relating to money’s role
as a medium of exchange
• Currency (Coins and Paper
Money)
• All checkable deposits (travelers
checks, DDAs/ checking account)

 M2- component of the money

supply relating to money’s role
as a store of value
• Savings (savings deposit & money
market deposit account)
• Small time deposits (6 mo. CD)
• Money market funds (mutual
fund)
Prior Knowledge – what back’s today’s currency
in the U.S.?
 It is not gold and silver!- Today, the GDP helps
back our money & its relative scarcity (this is
why counterfeiting currency is a federal
offense for a fine of up to $250,000 and a
prison sentence of up to twenty years for the
counterfeiting of U.S. obligations and
securities (and no you can’t pay in
counterfeited money you made)
 The FDIC backs our deposits today up to
$250,000 (M1 / M2)