Money in colonial America 2/14/07 9:58 AM

Four functions of money

it serves as a medium of exchange
•it is accepted for exchange in the US money is Legal Tender it must
be accepted by law
it is a unit of account
•20 lbs for a hat is an example of unit of account
It performs a store of value
•it allows you to accumulate wealth ex:100 pounds in your savings
It is acceptable as a standard of deferred payment
•debt obligations are written in terms of money value
even though at thetime of the revolutionary war income in the colonies were
higher than in England m especially after tax incomes money supply came in
many forms
in the colonies a lot of different things are substituted for money
•e.g. animals skins, rocks, ETC
but the only requirement for money is acceptability
historically, some types of money tended to be more preferred
•Specie-a gold or a silver coin leads the list during colonial times
•bimetallic means two metals monetary standard for oins which could
not be legally exported from the UK so silver coins of the Spanish
•each state is going to have its own currency
if you have a shortage of gold or silver coins you have to fin other means of
payment
payment in colonial times could be made in other ways
•the main method was the Bill of Exchange (a date ordered to pay for
something)
oe.g.,A sells rice to “B” for £100 they write out a bill of
exchange that says “B” will pay £100 in three months and “B”
says the bill
“A” has the bill of exchange, a promise to be paid from
person “B” “A” could wait until maturity ad wait for
three months from now, or “A” could sell it to someone
else , person “D” for cash for a discount before
maturity, depending on the current interest rate. And
maybe sell it for £98.
Then “D” holds it to maturity and collects £100
The bill of Exchange increased money supply and as
an excellent source of money
o“A” could also exchange the bill of exchange say to person “E”
for £100 of tobacco then “E” would wait until maturity then
collect £100 from person “B”
•Payment in Kind
 opayments could be made in corn wheat, skins and livestock
oone exxampple was livestocks payments for tuition at Harvard
college
•Gresham’s law payments in kind could cause a shortage in specie
people haord gold coins because they could pay wth a sick goat or a
pile of your own tobacco leaves
Paper money
•Europe stopped using paper money in the year 1500
•in 1690 the government of massachusetts issued paper monet. The
Govt needed to pay soldiers and had no specie for payment.
•in the beginning they paid them with bonds
•hence FIAT money- it has the full faith of the government paper
money with no specie backing
•soon sc COnn NY NH NJ followed
•problems with paper currency
ocounterfeiting
o
2/14/07 9:58 AM
2/14/07 9:58 AM