Physical Properties of Money

1. Portability – for the ease of use in

transaction
-Sth valuable in smaller quantities
2. Divisibility – to permit transaction of
various sizes money shd be made of a
commodity that is divisible into smaller
units
Gold Vs Diamond
3. Durability
Shd not wear and tear or depreciate
quickly while in use.
4. Recognizable Value- it shd be easy for
people engaged in exchange to agree to
the value of the good used as money

The Evolution of Banks

Need for a safe place to store money.
Banks/Goldsmiths as Depositories-
people required their ‘specie’ to be safe
from theft, fire and other hazards and
town goldsmiths of the time offered
their safe or strongboxes for general
deposits.
Specie term used for gold and silver
“In kind”
Demand Deposits
Those deposits which r available on
demand by the depositors.
T (Transaction Account)
Assets and Liabilities

Stage-1
Goldsmith provided safekeeping for
specie deposits and
1. charge depositors a fee for this
service.
2. Visit to goldsmith for specie
withdrawl
Stage-2
Depositors started using ‘written order
to pay’ for goods.
- Checks
A shopper had no longer had to visit the
goldsmith to obtain gold before
shopping; she or he could write checks
for purchase inside the store. Shoppers
were also less likely to be robbed since
they did not have to carry gold on
shopping trips.
Stage-3
‘Introduction of bank notes’. A
document written by early banks
(goldsmiths) promising to pay a sum of
specie to the bearer on demand.
Charge/fee on using paper money
Banks notes are supplied by
Goldsmiths/Banks
Various Denominations
Used to stay in circulation for longer
period of time
Stage-4
Fractional Reserve Banking- Under
fractional reserve banking, bank
reserves equal only a fraction of
outstanding demand deposits and bank
notes. With fractional reserve banking,
banks held some deposits as reserves in
the vault but loaned out the remainder
to people in need of funds.

Illiquidity- Assets > Liabilities

Bankruptsy- Liabilities > Assets
Bank run: Bank crisis