EC140 Lecture Notes - Lecture 26: European Central Bank, Precious Metal, Federal Reserve System
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EC140 Full Course Notes
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The three functions of money: money as a medium of exchange: Widely accepted in exchange for goods and services. Eliminates the need for a barter economy (double coincidence of wants): money as a store of value: Must have a stable value: money as a unit of account: Money is used for accounting and to account for transactions. Before the invention of coins, it was necessary to carry the metals in bulk. The invention of coinage eliminated the need to weigh metal at each transaction. But, coins often could not be taken at their face value because of the practice of clipping a thin slice off the edge of the coin (coin clipping). Gresham"s law is the theory that bad money drives good money out of circulation. For instance, when coin clipping took place, people would keep their good coins and use their bad coins to purchase things, resulting in a market full of clipped coins: paper money:
