Finance: The History of Money (combined)

The history of money in ten minutes number one early money Long before money was invented people were quite happy making doing and growing things from one another in small communities they could largely remember the payments and receipts of
what was exchanged keeping tabs or tallies of these exchanges helped with a
key requirement which was to record who had been paid and who was still owed but
as communities grew so the exchanges became more and more numerous and as
people created things for the common good and rulers began to impose taxes so
the accounting was increasingly hard to keep track of IOU notes might have been
a neat solution but unless you knew the individual issuer personally they were
hard to enforce or verify so instead people started to use objects such as
whale’s teeth as a kind of IOU This intermediate step in the exchange
process meant that people were free to trade with anyone and they could even
store up purchasing power for later use with their REIT ratable IOU tokens so at
the same time that humans invented money they’d also invented debt Number two metal money Once people start using money to facilitate trade whether in the
form of shells barley feathers or whale’s teeth some useful
characteristics of money become apparel barley for example is heavy to carry
so not portable or even durable. Whales teeth neither are to split into two so not
easily divisible shells can be picked up on any Beach so not exactly scarce and
if the token standing as money doesn’t have much intrinsic value like feathers
it’s hard to trade outside your immediate community Another noticeable
feature of money was that having a lot of it made you powerful and power could
get you a lot of it so kings hit on the idea of minting coins from precious
metals sounding them with an emblem that guaranteed their weight and value
metal money ticked all the money boxes and because it had intrinsic value that
could be used to trade with other communities but the success of metal
money brought temptation and sovereign soon realized that by slimming down the
coins or slipping cheaper base metals into the mix they could make money by
circulating debased currency worth less than face value Number three Paper money Carrying around large quantities of coins could be exhausting work and it was early Chinese rulers that hit on the idea of keeping their
heavy coins back in the palace of issuing IOU certificates on paper for
long distance trading. Although the paper had no intrinsic value people trusted that it was worth what it said it was worth and they could always exchange it
for gold or silver or the coins it represented. As global trade grew the
idea of paper money caught on but traders and lenders were concerned that
it was a bit too easy just to print money so they tried to link the value of
money to the value of gold which had the benefit of creating a standard for
exchange between different currencies attempts to peg currencies to a fixed
gold standard continued for centuries but the need for flexible exchange rates
always prevailed and since the early 1970s the world has stopped trying to
keep to a gold standard. So today the only thing that distinguishes the value of a banknote from any other paper is trust. Number four Controlling money Years ago on the Pacific island of Yap the nearest thing to gold was the race tone notable
for its enormous size and weight from the day the Chiefs decided to ask their
taxes in race tones it meant that for all taxpayers the currency became
universal unavoidable and under the control of the chief The most valuable
race tones were just so heavy that the Yap population tended to leave their
currency in one place and then trade effectively in promises Any trader who
owned a race tone on Yap could issue a promissory note against the value of
their stone and thus banking was born and once the Chiefs accept these
promissory notes instead of race tones for their taxes they effectively lose
control of the amount of money in circulation the money supply In the 20th century some economists argue that the amount of money in circulation directly
affects economic performance and it is important for governments to try to
control it but this is not easy especially when it’s private lenders
that create most of it Number 5 Money and inflation In the 16th century Spain brought home massive additional supplies of precious metals from the colonies. But what seemed like a dream come true and should surely have boosted trade
turned sour when traders simply put up the price of their goods to match this
new purchasing power. So the returning explorers were no better off and those without the new gold were even worse off it was only those who had debts which
had in effect got smaller who were actually better off This was the first appearance of a theory with too much money chasing too few goods can cause
inflation. Unless that is that traders produce more goods or unless the newer
bigger money supply circulates less rapidly by people saving more either
because they are rich enough or because they’re particularly gloomy about the
future. Number six International Money In the 18th century the British forced their colonies in America to pay their taxes
in pounds and they made it illegal for the British colonies to print their own
money this meant that the colonies were forced to trade with the motherland to
access the currency According to Benjamin Franklin the American War of Independence was caused by the sheer burden of British taxation and the disadvantageous trade needed to access British pounds. And the hard-won freedom after the war allowed the Americans to create the American dollar Which because of the country’s vast trade and trustworthy tax base eventually became
the most widely used currency on the planet, leading many countries including
Britain to store large reserves of dollars, But by choosing to keep a
reserve currency in dollars the UK ceded at least some power back to those
runaway Americans. Number 7 Money and building banks By the 19th century banking had become a thoroughly respectable business. Making a profit by basic money lending banks paid a lower rate of interest for the money they took in than they charged on the money they loaned out But the bank soon realized
that as long as depositors didn’t all ask for their money at once, they could
in fact lend out many times more money than they had on deposit This is known as fractional reserve banking On rare occasions when depositors all tried to get their money out at once there was a run on the bank and the effect on the
wider economy was so serious the government started to ensure customers
deposits to prevent it happening and thereby enabling banks to loan out more
and more By the 21st century some banks had taken fractional reserve banking to
a whole new level funding most of their loans not from cash deposits from savers
but with loans from other banks often secured against bundles of previous
loans. So when there was a run on the bank in 2007 banks like Northern Rock
not only didn’t have enough money to pay out but the effect went way beyond just
one bank Number eight Money and saving The banks To understand how government’s tried to prevent global financial meltdown after
2008. Economists distinguished between two kinds of money. Money created by banks inside the banking system and money created by governments outside the banking system When a bank creates money by making a new loan. The bank acquires a
new private asset the loan with an equivalent private liability to the
borrower to pay it. This is money created inside the banking system. Governments can create money by selling new bonds these bonds go into circulation as new
private assets but there is no equivalent private liability to pay them
instead this outside money is added to the public debt although it’s normally a
very small percentage of total money in the economy it was this outside money
that was used to buy up the bank’s bad private debts and write them off. The private sector retained its wealth with new assets inside the system supported
by government with public debt from outside the system. Number nine The power of money Since the last traces of a gold standard disappeared in 1973. The world has carried on trading in u.s. dollars even though these aren’t backed by anything
of intrinsic worth. The US government’s decision to borrow billions for its bank rescue and stimulus plan dramatically increased supply of dollars and some
predicted that this would lead to a big fall in the dollars value on the basis
that economies which print money so they can consume more than they produce will
suffer price inflation and exchange rate of depreciation. But six years on this
still hasn’t happened. Why then does the dollar retain its value? perhaps with so much of the world holding its wealth in u.s. dollar assets
people simply have faith that the dollar will retain its value and the knowledge
that so many others share that faith reinforces the general optimism that the
dollar will stay strong Number 10 Future money Minted coins and paper money once
the cutting edge of technology are now used in only 2% of transactions Credit card and electronic banking technology has enabled massive global transactions
to take place in the fraction of a second. And digital technology is
enabling new currencies to be created Linden dollars Bitcoin and other
cryptocurrencies which exhibit the enduring characteristics of money being
hard to forge durable portable divisible and limited in supply and which may even
challenge the power of government backed money but until a government accepts
taxes in bitcoins or other privately issued currencies or banks start lending
in them they are not much different from any other token such as whale’s teeth. one sign that a new form of money has become important will be when
governments and banks try to control it and if governments and banks continue to
have the power to control money those who use it will always wonder to what
purpose will they put that power get more from the Open University check
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