Series 9

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Editor: Troy LennonWriter: Chris HookGraphics: Paul Leigh and Will Pearce

Series 9

Money and the sophisticated systems of global trade and exchange that we use today took thousands of years to develop. It is a story that goes back to the earliest civilisations. Throughout its long evolution, money has taken many forms, including beans, shells and woodpecker scalps.

Find out moreSources and further study: The Ascent Of Money: A Financial History Of The World by Niall Ferguson, PenguinEconomics Principles And Policy by William J. Baumol, Alan S. Blinder, Alan W. Gunther and John R.L. Hicks, Harcourt BraceThe Ascent Of Money (BBC DVD)Investopedia: Investopedia.comEncyclopaedia Brittanica: brittanica.com.auAustralian Bureau Of Statistics: http://www.abs.gov.au/Global Financial Crisis Reserve Bank Of Australia: www.rba.gov.au/speeches

The world f m ney Did you know?n Paper money is called “fiat money” as it is only money because the government says so and we agree. Unlike the coins of old, it would not be worth anything if the government said it wasn’t whereas gold and silver coins could be melted down. But these days our coins no longer contain gold or silver (mostly copper, aluminium and nickel) and so are also fiat money.

n Our ancestors’ use of cattle as money in primitive times is recognised today in the word pecuniary (which basically means of or relating to money), which comes from the Latin word pecus, meaning cattle.

n The word money is thought to have come from the Latin moneta, which was part of the name of the Roman goddess Juno Moneta, who was a protector of funds.

n One problem with coins is that because they were originally made out of precious metals people were tempted to shave bits off the side. This went on for many hundreds of years, then, in the late 17th century, mints began making serrations around the circumference of a coins to prevent this. If you look at Australian coins today, those serrations are still used (apart from the 50c coin, which has a special dodecagonal shape).

n The word bank is derived from the Italian word banca, which means bench or counter.

n The foreign exchange market is the biggest and busiest in the world with about $3.7 trillion in various currencies being traded every day.

n The value of money was once based on the gold standard, where paper notes are convertible into pre-set, fixed quantities of gold.

Coins and paper METALS such as gold, silver and iron could pack some serious purchasing power without weighing too much and so were easily transported. By the 7th century BC, the use of metals in the form of coins began to be formalised, with rulers such as the king of Anatolia, a kingdom in what is now Turkey, putting an official stamp on the coins to signify an agreed value. Gradually this approach spread throughout the ancient world.

But if coins were handy, even more easily stored and transported was paper money, which was first used by the Chinese in the 12th century. In the late 17th century the newly formed Bank Of England began to issue paper money and the trend jumped across the English Channel and was quickly adopted throughout the continent, and, later that century in the newly independent America. These notes began as promises toredeem a certain amount of wealth at a particular bank and were known as bank notes. Gradually these evolved into the standardised currencies we know today, that

are administered by central banks. In Australia our central bank

is called The Reserve Bank Of Australia.

Before moneyIT IS so ubiquitous that we tend to take it for granted but, like the wheel, money had to be invented. Before money, people would simply exchange goods directly with each other through a system called “barter”. But this was not very efficient because it meant people would have to find someone who had something they wanted and who wanted what they had before they could do any shopping. So money was invented. Money is known as a “medium of exchange”; it allows us to obtain goods and services in an efficient way. It is also a “store of value”.

So if a farmer grew more corn than he needed, he could sell the excess, receive money in exchange and so “store” the value of his excess corn. It is also a “measure of value”. This value can then be sold again for other things the farmer might need later on.

The invention of money thus allowed the development of markets, although it would take many thousands of years before shopping centres as we know them today would develop.

Safe as a bankIF WE understand a bank as simply being a safe place to store wealth, then the development of banking can be traced back to about 3000 years ago. In various places in what we now call the Middle East, commodities such as grain and livestock as well as other valuables were often kept in temples and even in secure private houses.

Ownership of these “deposits” could be transferred via the exchanging of deposit receipts. This kind of banking system was also prevalent in ancient Egypt, Greece and throughout the Roman empire. By about the 5th century BC, the issuing of credit notes also became quite common, making trade between cities far easier, as merchants did not have to risk carting around large amounts of money.

The fall of Rome largely saw the practice of banking disappear in Europe until the Crusades in the 12th century. The financing of such expeditions required the movement of money, which was risky, so the practice of credit notes was re-established.

By the 16th century there were essentially two types of banks in Europe: the banks of exchange that facilitated foreign exchange and trade between countries; and banks of deposit, which looked after people’s valuables and began a practice of lending. This role increased with the Industrial Revolution and the growth of large-scale industry, which required large amounts of capital to establish.

In for a penny, in for a pound

THE British currency pounds sterling is the oldest currency still in use. It dates back to at least 775AD, when silver coins were issued by the Saxons. These became known as sterlings, and 240 would be made from each pound of silver. So large payments became known as pounds of sterling, which was abbreviated simply to pounds sterling. After the Norman conquest in 1066, the pound was divided into 20 shillings and 240 pennies, or pence. The written language of administration used at the time was Latin and records referring to the pound, shilling and penny used the

words libra, solidus and denarius, leading to the use of the symbols £, s and d.

Shining example: A silver penny of Saxon King Offa of Mercia

Currency converterAUSTRALIAN dollars and cents are only

usable in Australia. A visit to another country will require converting Australian money into whatever

currency is used in that country. The exchange rate is how much one currency is worth in terms of another. For

example, at the time of writing, one Australian dollar had a value of 0.4992 British pounds. But these values change daily

for a variety of reasons, as Australia has had a floating exchange rate since 1983. That means that what our currency is worth

relative to other currencies changes according to how many people from other countries buy our currency on the foreign exchange.Most of the world’s most traded currencies such as the euro, the US

dollar, the Canadian dollar and the British pound float, but many are “pegged” against other currencies. The Saudi Arabian riyal is pegged to the US dollar, while in the South Pacific region, the Kiribati dollar is pegged with our own currency. A central bank in a country that has its currency pegged to another must be able to supply the market with enough of the pegging currency to justify the level at which the local currency is pegged, that is be able to buy enough of its own currency with the pegging currency to justify the price.

Taking stockSTOCK markets can be traced back to Belgium in 1531, when money lenders would gather to deal in various debts owed to them. A century or so later, the concept evolved when the great European powers of the time gave private companies the right to import all kinds of exotic goods and spices from colonies in the African and Asian regions. But voyages undertaken by these ships loaded with goods were long and arduous and so to reduce their risk, companies would sell shares in these voyages to private investors. If the ship was lost, the investors would lose their investment, but if the ship returned there were profits for the investors. These shares were assets and bought and sold.

The practice of selling shares spread to other businesses and the first stock exchange was

formed in London in 1773. The New York Stock Exchange was founded in 1792.

Centre of attention: The floor of the New York Stock Exchange

Metal magic: An ancient Chinese bronze coin

To marketTHE easiest way to characterise the stock market is to look at it as a market for capital. It simply allocates money to where it is most productive in the economy, so that this money may be used by companies to carry out their business. It works by companies listing on the stock market and selling shares in their business, which are then bought by investors. These companies are rated on a price index according to how great is the demand for the shares. People who do the actual

buying and selling of shares on behalf of investors are called stockbrokers. These days there all kinds of complex financial products sold on stock markets besides shares, but all are concerned with the raising of capital.

Cultural exchangeQUITE literally anything can be used as money. For example, Native Americans used beads made of shells, while people in India simply used brightly coloured shells on their own. Fijians used whale teeth, while the Maya people of South America used cocoa beans (you could buy a slave for 100 beans, but a turkey was worth twice as much).

Elsewhere, items such as giraffe tails, woodpecker scalps and flat stones have also been used. Each of these items had a particular value in the culture using it, beyond its agreed value of money, whether as a beverage using cocoa beans or simply because it looked nice.

The best example of an item used as money that had a value within itself is cattle and other livestock, which were used very widely in ancient times, because they could be eaten.

But the problem with using items such as cattle and beans as money is that they are not easily divisible (broken down into smaller amounts), not durable (able to take wear and tear and last for long periods of time) and not easily

stored and transportable (able to be carried easily and kept anywhere). Metal seemed to be

a solution to these problems and was first used some 2500 years ago, in the area

we now know as Iraq, in a city called Babylon.

Bean counter: Cocoa beans

Paper power: The Bank of England and £20 notes

Great DepressionTHROUGHOUT the 1920s, the US stockmarket was booming. So much so, that ordinary people were taking out extra mortgages and getting loans to buy shares. This sent share prices rocketing. But throughout October 1929, share prices began to drop. Many investors were already stretched and began to panic.

On Tuesday, October 29, the market went into free-fall. That day became known as Black Tuesday and signalled the beginning of the Great Depression. Many people lost everything they had and the effects were soon felt throughout the whole of the US economy and then the world. The Great Depression really only ended because of World War II. Across the world, there were massive levels of unemployment, poverty, homelessness and hunger. In Australia, unemployment peaked at 29 per cent in 1932. The Great Depression was the worst economic slowdown of the 20th century.

Global financial crisisTHERE have been several periods of economic slow down throughout the 20th century, most notably during the 1970s, early 1980s and early 1990s. A more recent slowdown has been labelled the Global Financial Crisis which, like the Great Depression, also began in the US and led to global turbulence.

The problem is thought to have begun with a housing boom in the US. With low interest rates and a relaxation of the requirements to obtain a loan, many people borrowed more than they could afford. These loans were then bundled up as bigger packages, which then became assets that were bought and sold to other institutions across the world. But when interest rates began to rise in 2004, many borrowers discovered they could not meet the repayments on these loans and so defaulted. The US housing market began to crash from about 2006 onwards.

A bigger effect was that many financial institutions found that these bundled loans were no longer worth anything and so trillions of dollars were lost. This meant there was a shortage of money to lend to businesses and other productive enterprises in the economy, which began to slow down. And the drop in the housing market eroded the confidence of ordinary people who then began to spend less, in case conditions worsened for them. A slowing economy and falling consumer confidence means rising unemployment and throughout 2008, the effects quickly spread throughout the world.

Anxious era: Depositors queue on Wall Street, New York, in 1929

Doing it tough: Australian swagmen during the Great Depression.

Humble start: A Bank Of New South Wales branch in rural Australia in the early 1800s

Regal: Cleopatra on a Roman coin (dinarius) dated to 32BC

Cash cow: Cattle as currency

Rise and fall: Share prices on the Hang Seng Index in Hong Kong

Out in the cold: A tent city on the outskirts of Sacramento, California, as unemployed and homeless numbers grow in the US

Setting standard: Gold bars

Protector: A Roman coin featuring Juno

CoRRECTIon: An error was made in last week’s Classmate under the heading Decimal Currency. The line reads “One dollar was equal to the old two pounds”. it should read “two dollars was equal to the old pound”. The editor apologises for the mistake.

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