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Module:
EC6012 International Monetary Economics
Date:
26
th
January 2008Professor Edward Nell
History of Monetary Economics
Concept of money:
Origins in various cultures. Began as intermediary between 2 sides of a barter.Means of exchange or medium of circulation. Facilitates and simplifies exchange.“Money grows on trees” – was true for a tribe in the Gulf of Mexico who used a berry as form of currency.
 Primitive Money – 
agreement resides within the community, not necessarilyaccepted outside the community.
Origins of money:
Lidya (Turkey)
– used electrum, alloy of silver and gold. Relatively easy to mineand purify. Became used in the Aegean region. Trading cargos, e.g. oil for wool – needed to devise a method to reconcile the difference in value of the cargos.Kings of Lydia, named Midas – added stamp to electrum. Introduced the idea of 
credibility.
Stamp gave guarantee that it could be exchanged for new coin, even if it was worn and had lost weight – simplifies transaction, no need to weigh coins.Stamped coin simplified commerce. Introduced concepts of 
  state
and
credibility.
Mintmust have reserve of metal, which comes from taxes.
Egypt
- Perception of origins in Egypt, BUT not clear if this was this case. Notclear if there was a sophisticated system of accounting and circulation.
Mesopotamia
(now Iraq) – sophisticated system of accounting, including doubleentry book keeping system and stone tablets. A rudimentary banking system. Butno sophisticated system of circulation. King Hammurabi,
1750BC 
– good recordsof bookkeeping, debt, creditors and early version of financial institutions. Appliedto trade only.
 
1789: France
– probably the richest and most powerful state in Europe, collapseddue to inability to collect taxes
Coinage – 
involves credibility, which rests on power – the power to collect taxes.Power to tax is based on agreement - no civil war.
Market
 
 – mint can stamp coin to determine value. Supply and demand determines price of the metal. Value of the coin is what the mint will give you in exchange for your ‘worn’ coin. Mint must also have credibility – coins should be minted withfull weight, i.e. a $1 coin should contain $1 weight in gold. When mint producesunderweight coin, the market concept is introduced – market decides value of coin.Market value is determined by perceived credibility of mint/state. (similar conceptas the recent devaluation of Irish bonds).
Worthless Coins
There are historical examples of coins with no intrinsic value. South of France – region where tin coins were issued by the lord and peasants could buy themselvesout of servitude. Completely based on sovereign power. Credibility no as much of an issue as the practical value (buying out of servitude) was very visible. Note the contrast between the 2 models – similar to gold vs paper concept.
Credibility
 – are there institutions in place to preserve credibility, to make it believable? Especially important for paper money.
Paper Money
Practical issues – easier to carry than heavy metals, easier to conceal and does notwear as coins do.The promise was printed on the paper – “ I promise to pay the bearer..”. Has beenremoved from US Fed Reserve notes, but is still on Sterling. Meaning was thatyou would get silver in return for your note. Principle of 
backed money.
Banking- issue bank notes to give loans. Deposits of gold would be exchanged for notes. Important distinction between real vs nominal money.
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