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For example, say you’re a weaver in sleepy medieval England. You want to purchase 10 bales of wool from a nearby sheep farmer. You have an account with a bank in London. Over the years, you have deposited your hard- earned gold and silver coins into your account. In exchange, the bank gives you bank notes. You make a deal with the sheep farmer agreeing to pay a certain amount for the wool. You pay with bank notes. The sheep farmer can take the bank notes to the bank to collect payment, or use them to pay someone else for goods or services. Bank notes were like paper money, but issued by a bank, not by a government . Eventually, governments took over the job of issuing and controlling the supply of all money . The Gold Standard By now, a little voice in your head might be saying “Hey wait a minute…I’m pretty sure the quarters and dimes I used today were not made of precious metal, and the 10 spot I earned babysitting is just paper, nothing special. Where’s the intrinsic value in those?” You’re right to be suspicious. Coins are no longer made of precious metals and, as you can imagine, paper money never had any intrinsic value. It’s nice looking and all, but it’s just paper. When governments first issued paper money, many countries including the U.S., built in the intrinsic value by backing the paper with gold or sterling silver. That doesn't mean the dollar bills were painted or dipped in precious metals. It means that the issuing government held a percentage of the value of the circulating paper money in the form of gold bullion or sterling silver . In the U.S., gold bullion was held in a super-secure vault at Fort Knox. This reservation of gold “backed up” the value of paper currency providing intrinsic value. In fact, the value of the currency was tied to the value of gold. This was called the gold standard . Theoretically, anyone could go the U.S. Treasury or Federal Reserve Bank and convert their paper money into a quantity of gold, if they wanted to. From Gold to Fiat Before you go running down to the Fed with a fistful of dollars shouting Eureka! , you should know that the U.S. went off the gold standard in 1971. Paper money is no longer backed by gold reserves. What took its place? Nothing. Money is now backed by fiat , which is really nothing more than a government decree that its legal tender has value . Fiat is Latin for “it shall be.” In other words, our legal tender is backed by the U.S. government’s decree that a $100 bill is, in fact, worth $100. Yes, it’s a little bizarre and unsettling. Even 40+ years later, the move off of the gold standard continues to be debated by economists. Some say fiat money is dangerous because it has no intrinsic value. Others believe that it makes the economy more stable. The fact is no country on earth functions on a gold or silver standard any longer. Into the Cashless Future: EFTs in Bytes How often do you use cash? Not often, according to the Federal Reserve Bank, whose job it is to track those things. (Recall that in the U.S., the Federal Reserve Bank is the bank of the government which oversees monetary policy and the money supply.) Modern money is pretty much invisible. It is expressed in bytes – electronic PRODUCT PREVIEW
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Lesson 4 | The Money Morph
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