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intro RSM part 1

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University of Toronto St. George
Rotman Commerce
Michael Szlachta

RSM Part 1 Readings: P. 1-29, 36-49, 140-149, 274-279, 589-600, 603-605, 608-612 1.A (The Origin and Development of Money) 3 functions of money: 1. Method of Exchange 2. Store of Value 3. Unit of Account (common denominator) Gold worked best in early civilizations because: 1. Portable 2. Divisible 3. Durable 4. Stable in quantity (relatively rare) Otherwise useless (except art) use as money based on trust others would accept Coinage followed: Use of metals for money by standardizing purity and weight Counterfeiting and clipping soon followed Monarchs debased coinage by melting down existing coins diluting with other metals reissue leaving extra for monarch BUT, often did prices rise in response (MV=PT) Money and Prices (Quantity Theory) MV=PT M Money supply V Frequency of money changing hands in a year RSM Part 1 Page 1 P Prices T Real transactions (e.g. number of bushels of wheat) Velocity is generally constant more M may cause more T in short run (productive resources remain unchanged, thus in long run no more can be produced) P rises in step with M (debasing causes prices to rise) Gold from New World would temporarily finance more production, but P eventually rose Origins of Banking: In middle Ages, wealthy would give their gold to goldsmiths or money traders who had vaults to protect. Will receive paper receipts in return Easier to pay for soldiers, land, castles by signing over the paper rather than transferring gold banknotes Goldsmiths soon realized they could lend some gold out for interest as not everyone wanted gold back at same time Origin of money multiplier. A base amount could yield a larger money-supply by re-lending Interest rates depended on: riskiness + money available to be loaned out (more bankers had to lend, lower borrowers could bargain down interest) Interest is price of borrowing banca - early Italian money traders trust was again key (that gold could be retrieved when needed). Defaulters would threaten money trade business, thus other traders would smash up defaulter benches (banca rupta) Banking families set up banks across the continent so they could respond to quick needs for money. Banking networks system was ready when industrial revolution began Gold and Prices in International Trade 1500s-1700s many nations tried to become Net Exporters so gold would flow in they were supposedly wealthy; Mercantilism. Idea does NOT work because of MV=PT (specie-flow mechanism) Gold flowing into a net RSM Part 1 Page 2
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