Transcript Slide 1

CHAPTER 3
WHAT IS MONEY?
Doug Schonewille
Leslie Korolek
Amberlee Simon
Jacquelyn Benson
Trivia
Name the Currency:
€
Answer: Euro
Trivia
Name the Currency:
£
Answer: Pound Sterling
Outline
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Define Money
Functions, Value and Types of Money
History
Evolution of money
Credit
Economic Overview
Money
 Anything that is generally accepted in
payment for goods or services or in the
repayment of debt
Wealth: all resources owned by an
individual, including all assets
Liquidity: The relative ease and speed
with which an asset can be
converted into cash.
What is Money?
 Primarily a medium of exchange.
 Value varies with time and place.
Inflation
Legal jurisdiction
Money
According to our textbook, money has 3
primary functions:
 Medium of exchange
 Unit of account
 Store of value
Medium of Exchange
A medium of exchange is an intermediary
used in trade to avoid the inconveniences
of a pure barter system.
Unit of Account
 A measure or standard
 A standard unit of account allows
meaningful interpretation of prices, costs,
and profits.
Store of Value
To act as a store of value, a commodity, a form of
money, or financial capital must be able to be
reliably saved, stored, and retrieved - and be
predictably useful when it is so retrieved. When a
currency is stable, money can serve all of these
functions.
Other examples:
 real estate
 precious stones, and precious metals
 collectibles, e.g. original art by a famous artist or
antiques
Seigniorage
The net revenue derived from the
issuing of coins or notes.
Seigniorage
Coins:
 $1 coin costs $.12 to produce
 Sold to financial institutions at face value
 Net revenue per Loonie is $.88
Seigniorage
Bank notes:
 Seigniorage is in the form of interest
(treasury bills and bonds) less the cost of
production and distribution.
 $35 billion of notes in circulation.
 Bank of Canada seigniorage interest
revenue between $1.7 and $2.2 billion per
year.
Trivia
What is the oldest currency prior to
the euro?
Answer: Greek Drachma
Trivia
Name the Currency:
Answer: Chinese yuan
ISO 4217
International standard describing three letter
currency codes
 Removes ambiguity of symbols.
 $ symbol - US or Canadian?
 USD – US dollar
 CNY – Chinese yuan
 GBP – Great Britain pound
 CAD – Canadian dollar
 EUR – Euro zone countries
 MXN – Mexican peso
 JPY – Japanese yen
Trivia
What is the word used to describe the study of
money? Also used to describe the hobby of coin
collecting.
a) Moneyology
b) Numismatics
c) Coinismatics
d) Coinology
Answer: b) Numismatics
Types of Money
 Representative
 Commodity
 Fiat
 Credit
Types of Money
 Representative money: money that can be
reliably exchanged for a fixed quantity of a
commodity such as gold, silver or
potentially water, oil or food.
Types of Money
Commodity money: is any money that is
both used as a general purpose medium of
exchange and as a tradable commodity in
its own right.
 An example is coins made of precious
metal.
Types of Money
Fiat money: any money whose value is
determined by legal means.
 Typically, notes from a central bank are
declared by a government act (fiat) to be
acceptable and officially-recognized
payment for all debts, both public and
private
Types of Money
Credit money: any future claim against a
physical or legal person that can be used
for the purchase of goods and services.
 Treasury bill, personal I.O.U.'s , treasury
bond, savings bond, corporate bond,
bankers acceptance, etc.
 Credit money should not to be confused
with credit cards.
Gresham’s Law
 Sir Thomas Gresham (1519–1579)
 If two coins have the same face value but
are made from metals of unequal value,
the cheaper will tend to drive the other out
of circulation.
 A problem afflicting commodity money
throughout history.
Hard Currency
Refers to a currency in which investors have
confidence
Examples of hard currencies:
 United States dollar
 Euro
 Japanese yen
 British pound sterling
 Swiss franc
History
390 BC - The Gauls attack Rome
The cackling of geese in the capital, where
the city's reserves of money were kept,
alerted the defenders. The grateful
Romans built a shrine to Moneta, the
goddess of warning, and from Moneta the
words money and mint are derived.
History
600 BC - Crude coins produced in China and
Lydia, Asia Minor.
806-821 - Development of paper money in
China.
1489 – Gold sovereigns minted in England.
Up to 1489 the English pound has been a
unit of account. Now it is also a coin.
History
 1526 - Nicholas Copernicus argues that it is the
total number of coins in circulation, rather than
the weight of metal they contain, that determines
the level of prices and the buying power of the
currency.
 1944-1971 - The Bretton Woods agreement.
 1973 - The US abandons the gold standard
 2002 - Euro coins and notes are introduced.
Trivia
What is the oldest currency still in
use?
Answer: British Pound Sterling
The Evolution of Bank Notes
Pre – 1935:
Throughout Canada’s history, many articles have been
used as currency, including shells, glass beads, and
animal furs. Even pieces of playing cards were used
as legal tender in New France when hard currency
became scarce.
The Evolution of Bank Notes
The Need for a National Currency
 Banks, governments and even merchants issued
their own notes.
 Until 1858, many issued notes were denominated in
both shillings/pounds and dollars.
 Loss of hard currency to the United States with
increased cross-border trade.
Bank Notes – 1935 Series
 On March 11, 1935, the Bank of Canada
issued its first series of bank notes
 Unilingual
 Unique to the 1935 series were:
$25 note, issued to commemorate the silver jubilee of King
George V
$500 note, a carry over from Dominion of Canada Bank
notes
Bank Notes – 1937 Series
The creation of a second series of bank notes,
only two years after the first issue, was
prompted by changes in Canadian
government legislation requiring the
Bank of Canada to produce bilingual bank
notes.
Bank Notes – 1956 Series
 Less susceptible to wear and tear
 Only series on which the Queen appears
on all denominations
 This series sparked great controversy
 WHY?
Bank Notes – 1969-1979 Series
 The words "this note is legal
tender" replaced the phrase
"will pay to the bearer on
demand"
Trivia
Who is on the $5 bill?
Answer: Sir Wilfred
Laurier, First
French/Canadian Prime
Minister
Trivia
Who is on the $10 bill?
Answer: Sir John A.
Macdonald, Canada’s first
Prime Minister
Bank Note - Durability
 Today's bank notes are printed on 100 per cent cotton paper.
The paper-making industry has long acknowledged the
superior quality of cotton-based paper over woodpulp paper. It
is both more durable and more resistant to fading.
What is a Mutilated Note?
A bank note is mutilated when its condition requires
special examination to determine its value. The most
common causes of mutilation are fire, floods,
chemicals, and explosives, deterioration by burial,
animal, insect or rodent damage.
*Unfortunate story*
Trivia
What is the approximate life of a
$50 Bank Note?
A) 1-2 Years
B) 2-4 Years
C) 4-6 Years
D) 7-9 Years
Answer: C) 4-6 Years
Debit Cards
 Eighty-six per cent of Canadians have a debit card and 83 per
cent of debit cardholders have used their card to make a
purchase.
 An estimated 3.2 billion debit card transactions were made in
Canada using Interac Direct Payment (IDP) in 2006.
 Canadians now use card-based payments (debit or credit
cards) almost twice as frequently as paper-based payments
(cash or cheques)
2006: 3,293,200,000 !!!!!!!
Cheques
Cheque Imaging –It’s Time to
Modernize
 Every business day in Canada, approximately five
million cheques are transported from one financial
institution to another, to reach the branches holding
the accounts on which they were written. Some of
them log thousands of kilometers on route, passing
through two or three processing centres and
countless hands.
Trivia
Name the Currency:
₪
Answer: Israeli New Shekel
E-Money
 Substitute for cheques and cash
 Debit Card
 Transfers funds from bank to merchant
 Stored Value Card
 Smart Card
 Gift Cards
 Cell phones (pay and talk)
 E-Cash
Gift Cards
 Gift Cards are the 2nd Top Gift
Should Canadians avoid Gift Cards?
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1 out of 4 are redeemed
2006 US unused gift cards = $8 billion
Cards forgotten, lost or expired,
Consumers can’t find anything to buy or time
to shop
Birth of the Credit Card
 Credit was 1st used in Assyria, Babylon, and
Egypt over 3,000 years ago
 Bill of Exchange (banknotes) 14th Century
 Consumer Credit 18th Century – Talliman
 Tally of people purchases on a wooden stick
 One side marked the payments, and the other
side marked the debt
Birth of Credit Con’t
 1920 “Buy now, pay Later” offer by certain
stores
 1950 Diner Cards in America were the first
Credit Cards
 1958 Bank of America issued 1st credit card
“BankAmericard” now Visa
 1960 Credit cards were advertised as “Time
Saving Devices” not a form of debt
 1970 Magnetic Strip
Why use Credit Cards?
 Credit cards are unsecured debt - do not have
collateral or net Reserves
 Interest Free for purchases till the end of billing
period
 Instant receipt of Goods & Services
 24/7 Access
 Fraud Protection
 Other Rewards/Benefits (air miles, car insurance,
damage and loss insurance, extended warranty)
Number of Cards In Circulation (Millions) Canada
2006
2005
Year
2004
2003
2002
2001
1977
0.0
10.0
20.0
30.0
40.0
(Millions)
50.0
60.0
70.0
VISA & MASTERCARD
OCTOBER 31,
2006
OCTOBER 31,
2005
61.1
56.4
0.8%
0.8%
Retail Sales Volume ($ billion)
$214.70
$190.60
Sales Slips Processed (million)
2,017.8
1,839.7
Average Sale ($)
$109.00
$106.00
Sales and Cash Advance Volume ($
billion)
$243.81
$216.04
Number of
(million)
cards
in
circulation
Delinquency Ratios (90 days and
over)
Future Cards
 Identification Card - which would keep all your
personal information
 Simultaneously acts as
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Credit Card
Medical History
Insurance Card
Driving License Etc
 Who will control the Information?
Government, Banks or Some Other Entity
Who would you trust?
Conclusion
“Hard Cash in the form of paper money, or
coinage will still be around for the foreseeable
future, especially in societies where personal
privacy is considered to be more important
then economic convenience or efficiency”.
Mudd, Douglas A. (2007)
Trivia
Name the Currency:
₩
Answer: South Korean Won
Gold
Mastercard (MA) vs
American Express (AXP)
USD vs CAD
Inflation
Bank of Canada
http://canwest.a.mms.mavenapps.net/mms/rt/1/site/canwest-globalontario-pub01live/current/launch.html?maven_playerId=consumersosmedium
Inflation
“During an inflation, when the price
level is increasing rapidly, money
loses value rapidly, and people will be
more reluctant to hold their wealth in
this form” (Mishkin &Serletis)
Trivia
Name the Currency:
¥
Answer: Japanese Yen
Questions?