Paper money, Managerial Economics

Assignment Help:

Paper Money

Due to the risk of theft, members of the public who owned such metal money would deposit them for safe keeping with goldsmiths and other reliable merchants who would issue a receipt to the depositor.  The metal could not be withdrawn without production of the receipt signed by the depositor.  Each time a transaction was made, the required amount of the metal would be withdrawn and payment made.

It was later discovered that as long as the person being paid was convinced the person paying had gold and the reputation of the goldsmith was sufficient to ensure acceptability of his promise to pay, it became convenient for the depositor to pass on the goldsmith's receipt and the person being paid will withdraw the gold himself.  Initially, the gold would be withdrawn immediately after the transaction was made.  But eventually it was discovered that so long as each time a transaction was made the person being paid was convinced that there was gold, the signed receipt could change hands more than once.  Eventually, the receipts were made payable to the bearer (rather than the depositor) and started to circulate as a means of payment themselves, without the coins having to leave the vaults.  This led to the development of paper money, which had the added advantage of lightness.

Initially, paper money was backed by precious metal and convertible into precious metal on demand.  However, the goldsmiths or early bankers discovered that not all the gold they held was claimed at the same time and that more gold kept on coming in (gold later became the only accepted form of money).  Consequently they started to issue more bank notes than they had gold to back them, and the extra money created was lent out as loans on which interest was charged.  This became lucrative business, so much so that in the 18th and 19th centuries there was a bank crisis in England when the banks failed to honour their obligations to their depositors, i.e. there were more demands than there was gold to meet them.  This caused the government to intervene into the baking system so as to restore confidence.  Initially each bank was allowed to issue its own currency and to issue more currency than it had gold to back it.  This is called fractional backing, but the Bank of England put restrictions on how much money could be issued.

Eventually, the role of issuing currency was completely taken over by the Central Bank for effective control.  Initially, the money issued by the Central Bank was backed by gold (fractionally), i.e. the holder had the right to claim gold from the Central Bank.  However, since money is essentially needed for purchase of goods and services, present day money is not backed by gold, but it is based on the level of production, the higher the output, the higher is the money supply.  Thus, present day money is called TOKEN MONEY i.e. money backed by the level of output.


Related Discussions:- Paper money

Prices of other goods must remain constant - law of demand, Prices of other...

Prices of other goods must remain constant Changes in the prices of other goods frequently impinge on the demand for a particular commodity. If prices of commodities for which

Milton friedman-demand function , Milton Friedman makes the demand for mon...

Milton Friedman makes the demand for money a function of the real per capital permanent income. in this study the demand function for money is stated as; M/NPP= r( YP/NP) δ W

Determine the perfectly competitive firms profit, 1. Suppose in a perfectly...

1. Suppose in a perfectly competitive industry the market demand and supply forces combine to produce a short-run equilibrium price of Rs 70. Suppose that a firm in this industry h

Corporate profit maximization , Difference between corporate profit maximiz...

Difference between corporate profit maximization and maximization of shareholder wealth? Ans) Sure, profit maximization relates to profits *only* while shareholder wealth also i

Disadvantages of the planned economy, Disadvantages of the Planned System ...

Disadvantages of the Planned System The centrally planned economies suffer from the following limitations: Lack of choice:   Consumers have little influence over what is p

Law of demand, explain the law of demand. briefly discuss the exception to ...

explain the law of demand. briefly discuss the exception to the law of demand

Price elasticity at terminal points, Price Elasticity at Terminal Points ...

Price Elasticity at Terminal Points The price elasticity at terminal point N equals 0 means that at point N, e = 0. At terminal point M, although, price-elasticity is undefined

General and selective credit control, General and Selective Credit Control ...

General and Selective Credit Control These are imposed with the full apparatus of the law or informally using specific instructions to banks and other institutions.  For insta

Mba, what is third degree discrimination

what is third degree discrimination

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd