Chapter 11 money & financial institutions

When the English colonists first settled in the New World, they brought few of the pounds, shillings, and pence they had used in England. It didn't really mat­ter, though, because the Native Americans they traded with did not want British money. They were unwilling to exchange food for small pieces of paper and metal. However, Native Americans would trade fish, furs, and other essentials through barter. Barter is the exchange of one good or service for another. For example, a hungry Puritan family with some English cloth might have been able to trade with a Native American for fish.

11.1. Money

The earliest form of trade was by barter. But barter has many drawbacks. Before the Puritan family could plan its dinner, it had to find someone willing to accept cloth in payment for fish. Or suppose they wanted to swap a cow for a few fish. How would they decide how many fish are worth a cow? The many problems associated with barter led the Massa­chusetts colonists to use wampum.

Wampum, a form of money Native Americans used in Massachusetts in the 1640s, consisted of certain black or white shells. (Black shells were worth twice as much as the white ones.) Both colonists and Native Americans accepted wampum in payment for anything they had to sell. Wampum became the medium of exchange during the early colonial period. Those who had to have English money could pur­chase it at the rate of six white shells to the penny. Wampum was a vast improvement over barter.

What Is Money? Money can be anything that is generally accepted in payment for goods and ser­vices. From the earliest times precious metals-such as gold, silver, or copper-have been the most popu­lar forms of money. But throughout history societies have used such things for their money as tobacco, salt, fish hooks, shells, stones and, of course, various forms of paper.

Although anything can serve as money, as a practi­cal matter the material should have the following qualities:

• Stability. The value of money should be more or less the same today as tomorrow. In societies where the value of money fluctuates (goes up and down), people will save it in hopes its value will increase, or spend it immediately thinking it will be worth less tomorrow. Either could be harmful to the economy.

• Portability. Modern money has to be small enough and light enough for people to carry. Bowling balls would be impractical.

• Durability. The material chosen must have a reasonable life expectancy. For that reason most countries use high-quality paper.

• Uniformity. Equal denominations of money should have the same value. People could become confused if some quarters or dollar bills were worth more than others.

• Divisibility. One of the principal advantages of money over barter is its ability to be divided into parts. In other words, making change for a dollar is easy; making change for a chicken is not.

• Recognizability. Money should be hard to copy

and easy to recognize for what it is. The quality of the paper and intricate engravings make paper money extremely difficult to counterfeit.

Money also can be defined by what it does, which is to provide:

• A medium of exchange,

• A measure of value,

• A store of value.

A Medium of Exchange. Money economies differ from barter economies. In a barter economy you must find someone who has what you want and wants what you have. In a money economy people can sell what they have to anyone, then use the money to buy what they want. Money, therefore, is the medium that enables exchanges to be made easily.

A Measure of Value. Money enables us to state the price of something in terms that everyone can understand. One can say that a dozen eggs is worth 85 cents. This is far simpler than figuring out how much milk, meat, or clothing one could expect for a dozen eggs.

A Store of Value. Money enables us to use the value of something that we sell today to make a pur­chase some time in the future. For example, an egg seller could save the money from the day's sale to pay next year's college tuition. But imagine the diffi­culties in saving eggs to pay tuition.