Lecture 1 - What is Money and Where Did it Come From?

administrative stuff
why do we care about money?
what is money?
why money?

Administrative Stuff

You should carefully read the syllabus at your leisure. I want to only mention the highlights.

There will be 2 hourly exams over the semester. The dates are listed in the syllabus. The first is on February 13. Each hourly counts for 20% of your grade. The cumulative final counts for 30%.
Each class will end with a "minute paper". This consists of short answers to 2 questions: (1) What was the most important thing you learned today? (as in, what was today's class about?) and (2) What didn't you understand? (in other words, what do I need to better explain?).
This class has been designated as writing intensive. That not only means that you do a lot of writing, but also that you receive feedback on your writing. You are going to do a term paper that is turned in in stages. First will be a two or three sentence statement of your topic choice. It's due on February 13. Turning in late in paper component reduces your paper grade.
You will also be writing one page article summaries. The due dates are given in the syllabus. The first is due next Monday. You have the option of rewriting article summaries to try to get a better grade.
Attendance: come or don't come. But, you can't do the minute papers if you aren't here.

Why Do We Care about Money?

because money affects aggregate demand
because monetary disturbances have been associated with some of the most spectacular unstable episodes in economic history, e.g. German Hyperinflation, Great Depression

What is Money?

medium of exchange
store of value
unit of account
standard of deferred payment

Why Money?

Money was created to reduce the costs of exchange.

Specialization in the production process increases output. But, while each individual may specialize as a producer, she still wants to consume a variety of goods and services. Some exchange system must be devised so that each individual can enjoy the fruits of the specialization of others.

customary exchanges
barter - double coincidence of wants, lack of a unit of account, indivisibility
indirect exchange

Searches by potential barterers for some double coincidence of wants will be extremely time consuming in a large, highly specialized economy with millions of products and people. Barter was abandoned and a system of indirect exchange was adopted instead. Indirect exchange significantly reduces the time spent on any one transaction.

In spite of widely different tastes within a society, there will be a small number of commodities most everybody is will to accept for exchange purposes. Everyone will maintain an inventory of the generally accepted commodities and virtually all exchanges will be made with these commodities. We then have a medium of exchange. We call the medium of exchange money.