David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 18 Money and banking
A token money is a means
of payment whose value or
purchasing power as money
greatly exceeds its cost of
production or value in uses
other than as money.
An IOU money is a medium
of exchange based on the debt
of a private firm or individual.
notes? The survival of token money requires a restriction on the right to supply it.
Private production is illegal. 2
Society enforces the use of token money by making it legal tender. By law, it must
be accepted as a means of payment. However, when prices rise very quickly,
domestic token money is a poor store of value. People are reluctant to accept it as
a medium of exchange. Shops and firms give discounts to people paying in gold or
in foreign currency.
In modern economies, token money is supplemented by IOU money, principally
bank deposits, which are debts of private banks. When you have a bank deposit,
the bank owes you money. The bank is obliged to pay your cheque. Bank deposits are a medium of exchange
because they are generally accepted as payment.
II
Barter economy vs monetary economy
Life without money
Some years since, Mademoiselle Zelie, a singer, gave a concert in the Society Islands in exchange for
a third part of the receipts. When counted, her share was found to consist of 3 pigs, 23 turkeys, 44
chickens, 5000 cocoa nuts, besides considerable quantities of bananas, lemons and oranges [. ..] as
Mademoiselle could not consume any considerable portion of the receipts herself it became necessary
in the meantime to feed the pigs and poultry with the fruit.
(W S. Jevons, 1898)
This vivid example shows just how costly a barter economy can be. The direct exchange of goods and services
for other goods and services either leaves one party with a load of stuff in which they have little interest - in
which case they then have to go to the further effort of bartering this in turn for something more useful - or
else restricts barter opportunities to the rare cases in which there is a 'double coincidence of wants: such that
not only does person A want what person B is offering but also person B wants what person A is offering.
The great benefit of a monetary economy is that the medium of exchange can be confidently accepted in the
knowledge that it can easily be reused for another transaction. The example below documents the first European
to discover paper money. But Europeans did not invent it. As in many other things, the Chinese got there first.
Marco Polo discovers paper money
In this city of Kanbula [Beijing] is the mint of the Great Khan, who may truly be said to possess the
secret of the alchemists, as he has the art of producing money. [ . ..]
He causes the bark to be stripped from mulberry trees [. . .] made into paper [. . .] cut into pieces of
money of different sizes. The act of counterfeiting is punished as a capital offence. This paper currency
is circulated in every part of the Great Khan's domain. All his subjects receive it without hesitation
because, wherever their business may call them, they can dispose of it again in the purchase of
merchandise they may require.
(The Travels of Marco Polo, Book II)
Source: World Bank (1989) Wo rld Development Report.
2 The existence of forgers confirms society is economizing on scarce resources by producing money whose value as a medium of
exchange exceeds its production cost.
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