The history of money

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Contents

Introduction

Part I. The History of Money: From Barter to Banknotes

Part II. International monetary systems

Part III. Foreign exchange market

Conclusion

References

Introduction

Money is one of the great inventions of human thought, the whole structure of the modern economy predetermined the existence of money. Money is a commodity that is universal equivalent and has absolute liquidity. Money can be considered as a universal tool of economic management.

Money is often called the language of the market, as it is with their help is a circuit of goods and resources. Consumers buy goods that are sold on the market manufacturers who in turn paid for resources received by them from the public. Well organized and well functioning money system plays a critical role in ensuring the stability of national production, full employment and price stability. The object of study in this work is the theory of money, the subject of their evolution.

The topic about money was actual at all times, because the money is a major attribute of a market economy. From the operation of the monetary system, depends largely on the stability of the country's economic development. The study of nature and the basic functions of money, the evolution of monetary systems, organization and development of monetary circulation, causes, consequences and ways to combat inflation is necessary for subsequent analysis of the functioning of the financial system.

The aim of the work is a single, global view of money, their origins, role in economy and life of every human being. It must be stressed that the barter relations since their inception objectively gravitated to the search for a convenient product that is acceptable to all, able to speak a universal equivalent on the market. This equivalent is known to have been, at various times, metals-iron, copper, bronze, silver, gold.

Targets set for objective consideration of monetary theories and based on them-the essence and functions of money, their change, the description of money as organizing trade and its need. The course work is represented by the introduction, four chapters and a conclusion. The first section is devoted to the theory of money and its history in the second section of the work I tried to reveal the essence and role of the international monetary system, in the third section I described the work of the banking system, in the last section I reviewed the foreign-exchange market.

money economy barter trade

Part I. The History of Money: From Barter to Banknotes

Money, in and of itself, is nothing. It can be a shell, a metal coin, or a piece of paper with a historic image on it, but the value that people place on it has nothing to do with the physical value of the money. Money derives its value by being a medium of exchange, a unit of measurement and a storehouse for wealth. Money allows people to trade goods and services indirectly, understand the price of goods (prices written in dollar and cents correspond with an amount in your wallet) and gives us a way to save for larger purchases in the future. Money is valuable merely because everyone knows everyone else will accept it as a form of payment - so let's take a look at where it has been, how it evolved and how it is used today.

Money, in some form, has been part of human history for at least the last 3,000 years. Before that time, it is assumed that a system of bartering was likely used. Bartering is a direct trade of goods and services - I'll give you a stone axe if you help me kill a mammoth - but such arrangements take time. You have to find someone who thinks an axe is a fair trade for having to face the 12-foot tusks on a beast that doesn't take kindly to being hunted. If that didn't work, you would have to alter the deal until someone agreed to the terms. One of the great achievements of money was increasing the speed at which business, whether mammoth slaying or monument building, could be done. Slowly, a type of prehistoric currency involving easily traded goods like animal skins, salt and weapons developed over the centuries. These traded goods served as the medium of exchange even though the unit values were still negotiable. This system of barter and trade spread across the world, and it still survives today on some parts of the globe.

Sometime around 1,100 B.C., the Chinese moved from using actual tools and weapons as a medium of exchange to using miniature replicas of the same tools cast in bronze. Nobody wants to reach into their pocket and impale their hand on a sharp arrow so, over time, these tiny daggers, spades and hoes were abandoned for the less prickly shape of a circle, which became some of the first coins. Although China was the first country to use recognizable coins, the first minted coins were created not too far away in Lydia (now western Turkey).

In 600 B.C., Lydia's King Alyattes minted the first official currency. The coins were made from electrum, a mixture of silver and gold that occurs naturally, and stamped with pictures that acted as denominations. In the streets of Sardis, circa 600 B.C., a clay jar might cost you two owls and a snake. Lydia's currency helped the country increase both its internal and external trade, making it one of the richest empires in Asia Minor. It is interesting that when someone says, "as rich as Croesus", they are referring to the last Lydian king who minted the first gold coin.

Unfortunately, minting the first coins and developing a strong trading economy couldn't protect Lydia from the swords of the Persian army.

Just when it looked like Lydia was taking the lead in currency developments, in 600 B.C., the Chinese moved from coins to paper money. By the time Marco Polo visited in 1,200 A.D., the emperor had a good handle on both money supply and various denominations. In the place of where the American bills say, "In God We Trust," the Chinese inscription warned, "All counterfeiters will be decapitated." Europeans were still using coins all the way up to 1,600, helped along by acquisitions of precious metals from colonies to keep minting more and more cash. Eventually, the banks started using bank notes for depositors and borrowers to carry around instead of coins. These notes could be taken to the bank at any time and exchanged for their face values in silver or gold coins. This paper money could be used to buy goods and operated much like currency today, but it was issued by banks and private institutions, not the government, which is now responsible for issuing currency in most countries. The first paper currency issued by European governments was actually issued by colonial governments in North America. Because shipments between Europe and the colonies took so long, the colonists often ran out of cash as operations expanded. Instead of going back to a barter system, the colonial governments used IOUs that traded as a currency. The first instance was in Canada, then a French colony. In 1685, soldiers were issued playing cards denominated and signed by the governor to use as cash instead of coins from France.

The shift to paper money in Europe increased the amount of international trade that could occur. Banks and the ruling classes started buying currencies from other nations and created the first currency market. The stability of a particular monarchy or government affected the value of the country's currency and the ability for that country to trade on an increasingly international market. The competition between countries often led to currency wars, where competing countries would try to affect the value of the competitor's currency by driving it up and making the enemy's goods too expensive, by driving it down and reducing the enemy's buying power (and ability to pay for a war), or by eliminating the currency completely. Despite many advances, money still has a very real and permanent effect on how we do business today.

Part II. International monetary systems

International monetary systems are sets of internationally agreed rules, conventions and supporting institutions, that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. The systems can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. Alternatively, they can arise from a single architectural vision as happened at Bretton Woods in 1944.

Throughout history, precious metals such as gold and silver have been used for trade, termed bullion, and since early history the coins of various issuers - generally kingdoms and empires - have been traded. It is believed that at this time money played a relatively minor role in the ordering of economic life for these regions, compared to barter and centralized redistribution - a process where the population surrendered their produce to ruling authorities who then redistributed it as they saw fit. Coins were generally supported by the city state authorities, who endeavoured to ensure they retained their values regardless of fluctuations in the availability of whatever base precious metals they were made from Greece the use of coins spread slowly westwards throughout Europe, and eastwards to India. Monetary systems that were developed in India were so successful they spread through parts of Asia well into the Middle Ages. When a given nation or empire has achieved regional hegemony, its currency has been a basis for international trade, and hence for a de facto monetary system. In the West - Europe and the Middle East - an early such coin was the Persian daric, of the Persian Empire. This was succeeded by Roman currency of the Roman empire, such as the denarius, then the Gold Dinar of the Muslim empire, and later - from the 16th to 20th centuries, during the Age of Imperialism - by the currency of European colonial powers: the Spanish dollar, the Dutch Gilder, the French Franc and the British Pound Sterling; at times one currency has been pre-eminent, at times no one dominated. With the growth of American power, the US Dollar became the basis for the international monetary system, formalized in the Bretton Woods agreement that established the post-World War II monetary order, with fixed exchange rates of currencies to the dollar, and convertibility of the dollar into gold. Since the breakdown of the Bretton Woods system, culminating in the Nixon shock of 1971, ending convertibility, the US dollar has remained the de facto basis of the world monetary system, though no longer de jure, with various European currencies and the Japanese Yen being used. Since the formation of the Euro, the Euro has gained use as a reserve currency and a unit of transactions, though the dollar has remained the primary currency. Until the 19th century, the global monetary system was loosely linked at best, with Europe, the Americas, India and China (among others) having largely separate economies, and hence monetary systems were regional. European colonization of the Americas, starting with the Spanish empire, led to the integration of American and European economies and monetary systems, and European colonization of Asia led to the dominance of European currencies, notably the British pound sterling in the 19th century, succeeded by the US dollar in the 20th century. Some, such as Michael Hudson, foresee the decline of a single basis for the global monetary system, and instead the emergence of regional trade blocs, citing the emergence of the Euro as an example of this phenomenon. It was in the later half of the 19th century that a monetary system with close to universal global participation emerged, based on the gold standard.

The official currency of Ukraine is Hryvnia, also spelled as Hryvna or Grivna. It replaced the Coupon in 1996, which was the short-term currency used in Ukraine after it split from the Soviet Union. Ukrainian coins are called "kopiyka". One kopiyka equals 1/100 of Hryvnia. Lettered code - UAH, numeric code - 980, abbreviated name - Hrn. There are bills for 1, 2, 5, 10, 20, 50, 100, 200, and 500 Hryvnia. There are coins for 1, 2, 5, 10, 25, and 50 kopiykas. Also there are 1, 2, and 5 Hryvnia coins as well as some commemorative collectible coins. The artist of all circulation coins of all denominations is V.Lopata. USA dollars and Euros are the most popular foreign currency in Ukraine, so it is preferable to bring US dollars or Euros with you. Use of them is officially forbidden in shops, bars and restaurants. There are a lot of currency exchange places throughout the city; at the hotels, banks and airports. Make sure your foreign currency bills are new looking and crisp. Written-on, torn or crumpled banknotes are usually rejected or could be exchanged only at the banks and sometimes at a lower rate. Your passport is not required for the exchange of currency. Avoid changing money with private individuals. Personal checks practically don't exist in Ukraine, but many places in Kiev have started to accept major credit cards like Visa or MasterCard and some others. Travellers' checks could be cashed at the banks for 3%. American Express does not have an office in Ukraine to replace lost checks. You could get money using your credit card out of the ATM machines (local word for it is "Bankomat") throughout the city. But make sure the ATM you are going to use is located in a public place, like shopping malls, hotels, inside the banks or next to the banks, inside the travel agencies or ticket offices, etc. Make sure, your card logo is on the ATM machine. Usually ATMs offer Hryvnias. Only a few locations could offer you dollars via an ATM. Instructions are in Russian, Ukrainian or English.

Part III. Foreign exchange market

The foreign exchange markets are among the largest markets in the world, with annual trading volume in excess of $160 trillion. The purpose of the foreign exchange markets is to bring buyers and sellers of currencies together. It is an over-the-counter market, with no central trading location and no set hours of trading. Prices and other terms of trade are determined by negotiation over the telephone or by wire, satellite, or telex. The foreign exchange market is informal in its operations: there are no special requirements for market participants, and trading conforms to an unwritten code of rules. You know that almost every country has its own currency for domestic transactions. Trading among the residents of different countries requires an efficient exchange of national currencies. This is usually accomplished on a large scale through foreign exchange markets, located in financial centers such as London, New York, or Paris--in order of importance--where exchange rates for convertible currencies are determined. The instruments used to effect international monetary payments or transfers are called foreign exchange. Foreign exchange is the monetary means of making payments from one currency area to another. The funds available as foreign exchange include foreign coin and currency, deposits in foreign banks, and other short-term, liquid financial claims payable in foreign currencies. An international exchange rate is the price of one (foreign) currency measured in terms of another (domestic) currency. More accurately, it is the price of foreign exchange. Since exchange rates are the vehicle that translates prices measured in one currency into prices measured in another currency, changes in exchange rates affect the price and, therefore, the volume of imports and exports exchanged. In turn the domestic rate of inflation and the value of assets and liabilities of international borrowers and lenders are influenced. The exchange rate rises (falls) when the quantity demanded exceeds (is less than) the quantity supplied. Broadly speaking, the quantity of U.S. dollars supplied to foreign exchange markets is composed of the dollars spent on imports, plus the amount of funds spent or invested by U.S. residents outside the United States. The demand for U.S. dollars arises from the reverse of these transactions. Many newspapers keep a daily record of the exchange rates in the highly organized foreign exchange market, where currencies of different nations are bought and sold. For instance, the Wall Street Journal shows the price of a currency in two ways: first the price of the other currency is given in U.S. dollars, and second the price of the U.S. dollar is quoted in units of the other currency. Pairs of prices represent reciprocals of each other. These rates refer to trading among banks, the primary marketplace for foreign currencies.

The foreign exchange market is extremely competitive so there are many participants, none of whom is large relative to the market. The central institution in modern foreign exchange markets is the commercial bank. Most transactions of any size in foreign currencies represent merely an exchange of the deposits of one bank for the deposits of another bank. If an individual or business firm needs foreign currency, it contacts a bank, which in turn secures a deposit denominated in foreign money or actually takes delivery of foreign currency if the customer requires it. If the bank is a large money center institution, it may hold inventories of foreign currency just to accommodate its customers. Small banks typically do not hold foreign currency or foreign currency-denominated deposits. Rather, they contact large correspondent banks, which in turn contact foreign exchange dealers. The major international commercial banks act as both dealers and brokers. In their dealer role, banks maintain a net long or short position in a currency, and seek to profit from an anticipated change in the exchange rate. (A long position means their holdings of assets denominated in one currency exceed their liabilities denominated in this same currency.) In their broker function, banks compete to obtain buy and sell orders from commercial customers, such as the multinational oil companies, both to profit from the spread between the rates at which they buy foreign exchange from some customers and the rates at which they sell foreign exchange to other customers, and to sell other types of banking services to these customers. In main all participants of an exchange market are usually divided on two groups. The first group of participants is called speculators; by definition, they seek to profit from anticipated changes in exchange rates. The second group of participants is known as arbitragers. Arbitrage refers to the purchase of one currency in a certain market and the sale of that currency in another market in response to differences in price between the two markets. The force of arbitrage generally keeps foreign exchange rates from getting too far out of line in different markets.

Instruments of the foreign exchange markets:

· Cable and Mail Transfers

Several financial instruments are used to facilitate foreign exchange trading. One of the most important is the cable transfer, an execute order sent by cable to a foreign bank holding a currency seller's account. The cable directs the bank to debit the seller's account and credit the account of a buyer or someone the buyer designates. The essential advantage of the cable transfer is speed because the transaction can be carried out the same day or within one or two business days. Business firms selling their goods in international markets can avoid tying up substantial sums of money in foreign exchange by using cable transfers.

· Bills of Exchange

One of the most important of all international financial instruments is the Bill of Exchange. Frequently today the word draft is used instead of bill. Either way, a draft or bill of exchange is a written order requiring a person, business firm, or bank to pay a specified sum of money to the bearer of the bill.

· Foreign Currency and Coin

Foreign currency and coin itself (as opposed to bank deposits) is an important instrument for payment in the foreign exchange markets. This is especially true for tourists who require pocket money to pay for lodging, meals, and transportation. Usually this money winds up in the hands of merchants accepting it in payment for purchases and is deposited in domestic banks. For example, U.S. banks operating along the Canadian and Mexican borders receive a substantial volume of Canadian dollars and Mexican pesos each day. These funds normally are routed through the banking system back to banks in the country of issue, and the U.S. banks receive credit in the form of a deposit denominated in a foreign currency. This deposit may then be loaned to a customer or to another bank.

Other Foreign Exchange Instruments

A wide variety of other financial instruments are denominated in foreign currencies, most of this small in amount. For example, traveler's checks denominated in dollars and other convertible currencies may be spent directly or converted into the currency of the country where purchases are being made.

Conclusion

Money theory economists express views on the essence of money, their functions and laws of money circulation. Basic theory of money raised in the 16-18 centuries, during the genesis of classical political economy is metal and nominalistic quantitative. What is the nature of money had two schools- metallic and nominalistic supporters of theories of money. Quantitative theory remained the most relevant to the present day. On the basis of the synthesis of the theories we have selected the essence and functions of money in the modern market economy, transformation functions. Having studied the evolution of money one can conclude that electronic money is the highest form of evolution of money, the most optimal form of settlements. -A new kind of electronic cash credit money. The importance of money in life of modern society cannot be underestimated as well as exaggerated. In contemporary mass consciousness of success is often expressed in digits of the bank account. Many economists believe it is money the main basis of modern economic life. Both of these positions are a manifestation of fetishism, where money is seen by the Centre. In fact the money very often is a reflection of the (sometimes distorted) all other relationship. Every cultured person knows that “Happiness is not in money” (more precisely, not only in money), because a number of essential values of human life (say, love and friendship) are monetized. The economy, too, there are many problems which cannot be solved by relying exclusively on monetary policy.

References

1. Article made by Andrew Beattie [http://www.investopedia.com/articles/07/roots_of_money.asp]

2. Jonathan Williams with Joe Cribb and Elizabeth Errington, ed. (1997). Money a History. British Museum Press. pp. 16-27, 111,127, 131, 136, 136.

3. Raaflaub, Kurt (2005). Social Struggles in Archaic Rome. WileyBlackwell. pp. 59-60.

4. "The Ascent of Money, episode 1".

5. Ravenhill, John (2005). Global Political Economy. Oxford University Press. pp. 7, 328.

6. Blog “Financial system of Ukraine” from [http://www.bank.gov.ua/control/en/index]

7. L.A. Ilyina «Money and banking», Новосибирск - 2002г.

8. В.Д. Португалов «Учебник по английскому языку», Москва - 2003

9. “Money, banking and the economy” T. Mayer, J.S. Duesenberry, R.Z. Aliber, W.W. Norton & company New York, London 1981

10. “Principles of international finance” Daniel R. Kane 1988

11. “Money and banking” David R. Kamerschen College Division South-western Publishing Co. 1992

12. “Money and capital markets: the financial system in a increasingly global economy” fifth edition Peter S. Rose IRWIN 1994

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