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Series 9
26
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.
Before money
It 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.
Cash cow:
Cattle as
currency
Cultural exchange
QUITE 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
The world f m ney
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
Metal magic: An
ancient Chinese
bronze coin
Paper power: The
Bank of England and
£20 notes
Humble start: A Bank Of
New South Wales branch
in rural Australia in the
early 1800s
Taking stock
Rise and fall: Share
prices on the Hang Seng
Index in Hong Kong
Anxious era: Depositors
queue on Wall Street,
New York, in 1929
IF 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.
Australian 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
THE easiest way to characterise the stock
currency pegged to another must be able to supply
market is to look at it as a market for
the market with enough of the pegging currency to
capital. It simply allocates money to where
justify the level at which the local currency is pegged,
it is most productive in the economy, so
that is be able to buy enough of its own currency with
that this money may be used by companies
the pegging currency to justify the price.
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
Out in the cold: A tent city on the outskirts
raising of capital.
of Sacramento, California, as unemployed
and homeless numbers grow in the US
To market
Regal: Cleopatra on a
Roman coin (dinarius)
dated to 32BC
Safe as a bank
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Centre of attention: The floor of the New York Stock Exchange
Stock 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.
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.
Currency converter
Global financial crisis
Great Depression
Throughout 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.
Contact Classmate at [email protected] or
Doing it tough:
Australian swagmen
during the Great
Depression.
phone 9288 2542
there 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.
Cl@ssmate
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: A
protector of funds.
Roman coin
n One problem with
featuring Juno
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
Setting
was once based
standard:
on the gold
Gold bars
standard, where
paper
notes are
convertible
into preset, fixed
quantities
of gold.
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.
Find out more
Sources and further study:
The Ascent Of Money: A Financial
History Of The World by Niall Ferguson,
Penguin
Economics Principles And Policy by
William J. Baumol, Alan S. Blinder,
Alan W. Gunther and John R.L. Hicks,
Harcourt Brace
The Ascent Of Money (BBC DVD)
Investopedia: Investopedia.com
Encyclopaedia Brittanica: brittanica.
com.au
Australian Bureau Of Statistics:
http://www.abs.gov.au/
Global Financial Crisis Reserve Bank
Of Australia: www.rba.gov.au/
speeches
Editor: Troy Lennon
Writer: Chris Hook
Graphics: Paul Leigh and Will Pearce
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