Coins and Paper Money

Metal objects were introduced as money around 5000 B.C. Metals like gold and silver have been used as commodity money for thousands of years, being in the form of metal dust, rings, bracelets and assorted pieces. Eventually people began coining gold and silver around 560 BC. Countries were soon minting their own coins with specific values. Since coins were given a certain value, it became easier to compare the cost of trade items people wanted to buy or sell.

One of the first coins were produced by the use of hammering. Hammered coins were produced by placing a blank piece of metal of the correct weight between two dies, and then striking the upper die with a hammer to produce the required image on both sides.

As it was difficult to produce coins of a regular diameter, coins were likely to suffer from "clipping" because very often dishonest people would remove slivers of precious metal, therebygettingmetal to make more money To prevent “clipping” Sir Isaac Newton, after being appointed Master of the Mint, was the first to have used the method of making coins with serrated edge, to discourage "clipping".

Coins were also vulnerable to "sweating," which is when silver coins would be placed in a bag that would be vigorously shaken. This would produce silver dust, which could later be removed from the bag to make more silver coins.

Hammered coins gradually became obsolete. They were replaced by milled coins. France became the first country to adopt a full machine-made coin in 1643. In England, the first non-hammered coins were produced in the reign of Queen Elizabeth I in the 1560s.

Some of the earliest known paper money dates back to China, where the issue of paper money became common from about AD 960 onwards. With the introduction of paper currency, commodity money gradually changed into representative money. This meant that what money itself was made of no longer had to be very valuable.

Representative money was backed by a government or bank's promise to exchange it for a certain amount of silver or gold. For most of the nineteenth and twentieth centuries, the majority of currencies were based on representative money. But the system was not stable. Stability came into the system with national Banks guaranteeing to change money into gold at a promised rate. However, it did not come easily. The Bank of England risked a national financial catastrophe in the 1730s when customers demanded their money be changed into gold in a moment of crisis. Eventually London's merchants saved the bank and the nation with financial guarantees.

3. Fiat Money

Representative money has now been replaced by fiat money. Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done". In other words, this is money given value by a government decree. In a fiat money system, money is not backed by a physical commodity (i.e. gold). Instead, the only thing that gives the money value is the faith placed in it by the people that use it. As a result of this change in the money system there is no restraint on the amount of money that can be created. This allows unlimited credit creation. A rapid growth in the availability of credit is often mistaken for economic growth, This currency is declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves.

In most cases, a fiat monetary system comes into existence as a result of excessive public debt. When the government is unable to repay all its debt in gold or silver, the temptation to remove physical backing rather than to default becomes irresistible. This was the case in the 18th century France during the Law scheme, as well as in the 70s in the US, when Nixon removed the last link between the dollar and gold which is still in effect today.

4. Fiat Money – Toilet Paper Money

The history of fiat money, to put it kindly, has been one of failure. In fact, every fiat currency since the Romans first began to practise it in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy as a whole.

The French have been particularly unsuccessful in their attempts with fiat money. John Law was the first man to introduce paper money to France. In 1716 John Law convinced France to use paper money and declared all taxes must be paid with it to gain acceptance. The idea snowballed and paper money became more desired than coin. It led to excessive printing, additional moneymaking schemes and fraud. The new paper currency rapidly became oversupplied until nobody wished to own the worthless junk anymore and demanded coinage for their currency. Exaggerated values coinciding with money printing eventually blew up the system. John Law became the most hated man in France and was forced to flee to Italy.

In 1971 the US finally switched to fiat money. At this point in time many of the economically developed countries' currencies were fixed to the US dollar, and so this single step meant that much of the western world's currencies became fiat money based.

Nowadays the United States is one of the most prominent nations which relies on fiat money, although many other countries do as well. There are a number of advantages and disadvantages to this type of currency, and the issues with fiat money have been debated vigorously for centuries by economists and politicians.

The biggest disadvantages of the fiat money system are:

1. The system represents nothing more than a sinister and evil form of hidden taxation. When the government can print money at will, it is morally identical to the counterfeiter who illegally prints currency. Fiat money is the opposite of honest money.

2. Fiat money polices especially hurt savers and those on fixed incomes, who find the value of their money (euros, dollars, pounds) steadily eroded (gradually reduced) by the printing presses.

Sources: 1) http//www.en.wikipedia.org/

2) adapted from “The History of Money” by

Mary Bellis

HISTORICAL NOTES

1. Elizabeth I (1533–1603) – the queen of England from 1558 until her

death. She never married, and is sometimes called the Virgin

Queen. She is thought of as a very strong woman and an effective

ruler.

2. Sir Isaac Newton (1642–1727) – a British scientist who is best

known for discovering gravity. He made many other important

scientific discoveries and is considered to be one of the most

important scientists who ever lived.

3. Nixon, Richard (1913–1994) – a US politician who was President of

the US from 1969 to 1974. He is most famous for being

involved in “Watergate scandal”. He was thought by some

people to be dishonest and because of this he was sometimes

called “Tricky Dicky”.

4. John Law (1671–1729) – a Scottish economist who believed that

money was only a means of exchange and that it did not

constitute wealth in itself. According to John Law, national wealth

depended mostly on trade. Law suggested the establishment of

a national bank to create and increase instruments of credit.

Law proposed to stimulate industry by replacing gold with paper

credit and to reduce the national debt by introducing shares

in economic ventures. Though most of these economic ventures

ultimately failed, his theories were 300 years ahead of their time.

VOCABULARY NOTES

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