Fiat Money

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    08-Nov-2014

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<p>Fiat money Since 1971, the world economy has largely run on a system of floating exchange rates, with gold-backed currency replaced by what is called " fiat money". This is money that has no intrinsic value and obtains its worth entirely on the basis of governmental decree. ("This piece of paper can be used to pay debts because we say it can.") The use of fiat money obviously places a greater responsibility on governments than they had in the days when currency had to be backed by precious metals. Print too much of it and you end up in a right mess. Credit cards, debit cards and cheques Not so long ago, it was relatively difficult to open an account with one of the clearing banks, and the Mainwaring and Wilsons who ran the institutions long catered principally to the professional classes, discussing their affairs over a glass of Amontillado in the manager's office. Though bounders could be relied upon to write bouncing cheques, for most of the 20th century the possession of a current account denoted respectability. The manual working classes relied on a little brown envelope of notes and coins at the end of the week, and remained "unbanked" until well into the 1970s. If they wanted to send money away they relied on the postal order, now almost extinct. Then we all became more prosperous, the banks discovered marketing (black horses running across the landscape) and students were being offered rail cards and book tokens (another quaint form of money, happily still with us) just so that the bank could enjoy the mixed pleasure of them running up enormous overdrafts. In the 1980s, National Westminster Bank even raised eyebrows by allowing the customers the option of "pictorial" cheque-books, featuring images of badgers and bunny rabbits. Cheque use peaked in 1990, with 2.7 billion passing through the system; it's about one-third of that level now, and falling. The reason is the debit card, a sort of cheque guarantee card without the cheque. The first Switch card transaction took place in 1988; by 1995, they had overtaken credit cards in popularity, and cheques fell behind them in 1998. The advent of "chip and PIN" greatly reduced the scope for</p> <p>fraud. Last year, each debit-card holder used their cards 166 times on average, acquiring 3,848 in "cashback" and making purchases worth 4,799. However, British consumers were not to be constrained by such trivial considerations as how much money they had in the bank. The launch of the Barclaycard in 1966 (and its now defunct but long-running rival Access in 1972) was the start of "plastic" the discovery that a small rectangle of polyvinylchloride (always measuring 85.60 by 53.98mm) could transform your life. Until, that is, the astronomical APR (annual percentage rate of interest) and overlenient credit limits led to the inevitable personal mini credit crunch. The modern British addiction to debt can be traced back precisely to the advent of the credit card. By the 1990s, 0 per cent cards were being offered to lure customers, and those who took advantage of the initial free offers and then transferred the balance to the next free offer when the interest became due were known as "rate tarts". Our "flexible friend" (as the Access card marketing line went) had a nasty habit of landing us in economic trouble; now that he's been allowed to make the acquaintance of the "sub prime" community in the United States and Britain, the extent of the credit card's true perniciousness is becoming apparent. At any rate, we save less than at any time since the 1950s; the teenager of today is far more likely to have plastic than a building society E-money: the future of cash We may not be that far away from a world where cash follows the cheque book into oblivion and few transactions are conducted face to face. There are in excess of 20 billion payments of less than 10 made every year; they could all go cashless. E-money comes in three forms, two of them specifically creations of the internet. First, there is the "card not present" phenomenon, where you have sufficient faith in the online retailer nowadays, anyone from Tesco to Amazon and lastminute.com that you feel happy to tap your payment card details on to a web page. You and the "shopkeeper" never actually meet, and you never leave your home or office.</p> <p>Money thus moves from being a physical commodity a gold coin, a paper banknote or a plastic card to being a purely virtual commodity (though of course banks themselves have long held your current account in virtual form, as a series of binary codes in a computer file). Second, we have seen the growth of outfits specifically set up to facilitate payments on the web. Perhaps the most high profile of these is Pay Pal, as featured, and trusted, on eBay. Barclays Bank can chart its origins back to 1685, the Royal Bank of Scotland to 1727 and Lloyds to 1765; Pay Pal dates back only to 2000, yet it now operates in 103 markets, manages more than 133 million accounts and allows customers to send, receive and hold funds in currencies from the US dollar to the Polish zloty. The real revolution, though, may be the abolition of cash, cheques, credit cards and debit cards and their replacement by one single means of payment, which you just wave, possibly nonchalantly, at the shop assistant. This is what the "contact less" card promises, so called because you don't even have to put it into a reader to buy something. The Barclaycard One Pulse card, for example, was launched only a month ago, with 4,000 guinea-pig customers in London. It will combine the functions of an Oyster card (Transport for London's existing "cashless" method of prepaying for bus and Tube journeys), a Barclaycard, and a "One Touch" contact less technology card. This is the novel bit. It allows cardholders to make purchases of 10 or under more quickly and conveniently with a single touch of their card against a reader instead of entering a PIN or signature, thus reducing the need to use and carry cash. In a Bourne-style nightmare, your every move and tiniest purchase will then be tracked by your bank and, if legislation allows, officialdom. Thus can "they" know about your purchase of The Independent, a flapjack and day trip to Tate Modern. Alternatively, the SIM card in your mobile phone could be used to pay for the little things in life (they're trying this out in South Korea). Either way, you will be being monitored. Money is what money does, according to the old adage. And in the future, your money may even spy on you.</p> <p>HISTORY OF MONEY</p> <p>Barter The first people didn't buy goods from other people with money. They used barter. Barter is the exchange of personal possessions of value for other goods that you want. This kind of exchange started at the beginning of humankind and is still used today. From 9,000-6,000 B.C., livestock was often used as a unit of exchange. Later, as agriculture developed, people used crops for barter. For example, I could ask another farmer to trade a pound of apples for a pound of bananas.</p> <p>Shells At about 1200 B.C. in China, cowry shells became the first medium of exchange, or money. The cowry has served as money throughout history even to the middle of this century.</p> <p>First Metal Money China, in 1,000 B.C., produced mock cowry shells at the end of the Stone Age. They can be thought of as the original development of metal currency. In addition, tools made of metal, like knives and spades, were also used in China as money. From these models, we developed today's round coins that we use daily. The Chinese coins were usually made out of base metals, which had holes in them so that you could put the coins together to make a chain.</p> <p>Silver At about 500 B.C., pieces of silver were the earliest coins. Eventually in time they took the appearance of today and were imprinted with numerous gods and emperors to mark their value. These coins were first shown in Lydia, or Turkey, during this time, but the methods were used over and over again, and further improved upon by the Greek, Persian, Macedonian, and Roman empires. Not like Chinese coins, which relied on base metals, these new coins were composed from scarce metals such as bronze, gold, and silver, which had a lot of intrinsic value. Leather Currency In 118 B.C., banknotes in the form of leather money were used in China. One-foot square pieces of white deerskin edged in vivid colors were exchanged for goods. This is believed to be the beginning of a kind of paper money.</p> <p>Fiat money Since 1971, the world economy has largely run on a system of floating exchange rates, with gold-backed currency replaced by what is called " fiat money". This is money that has no intrinsic value and obtains its worth entirely on the basis of governmental decree. ("This piece of paper can be used to pay debts because we say it can.") The use of fiat money obviously places a greater responsibility on governments than they had in the days when currency had to be backed by precious metals. Print too much of it and you end up in a right mess. Credit cards, debit cards and cheques Not so long ago, it was relatively difficult to open an account with one of the clearing banks, and the Mainwaring and Wilsons who ran the institutions long catered principally to the professional classes, discussing their affairs over a glass of Amontillado in the manager's office. Though bounders could be relied upon to write bouncing cheques, for most of the 20th century the possession of a current account denoted respectability. The manual working classes relied on a little brown envelope of notes and coins at the end of the week, and remained "unbanked" until well into the 1970s. If they wanted to send money away they relied on the postal order, now almost extinct. Then we all became more prosperous, the banks discovered marketing (black horses running across the landscape) and students were being offered rail cards and book tokens (another quaint form of money, happily still with us) just so that the bank could enjoy the mixed pleasure of them running up enormous overdrafts. In the 1980s, National Westminster Bank even raised eyebrows by allowing the customers the option of "pictorial" cheque-books, featuring images of badgers and bunny rabbits. Cheque use peaked in 1990, with 2.7 billion passing through the system; it's about one-third of that level now, and falling. The reason is the debit card, a sort of cheque guarantee card without the cheque. The first Switch card transaction took place in 1988; by 1995, they had overtaken credit cards in popularity, and cheques fell behind them in 1998. The advent of "chip and PIN" greatly reduced the scope for</p> <p>fraud. Last year, each debit-card holder used their cards 166 times on average, acquiring 3,848 in "cashback" and making purchases worth 4,799. However, British consumers were not to be constrained by such trivial considerations as how much money they had in the bank. The launch of the Barclaycard in 1966 (and its now defunct but long-running rival Access in 1972) was the start of "plastic" the discovery that a small rectangle of polyvinylchloride (always measuring 85.60 by 53.98mm) could transform your life. Until, that is, the astronomical APR (annual percentage rate of interest) and overlenient credit limits led to the inevitable personal mini credit crunch. The modern British addiction to debt can be traced back precisely to the advent of the credit card. By the 1990s, 0 per cent cards were being offered to lure customers, and those who took advantage of the initial free offers and then transferred the balance to the next free offer when the interest became due were known as "rate tarts". Our "flexible friend" (as the Access card marketing line went) had a nasty habit of landing us in economic trouble; now that he's been allowed to make the acquaintance of the "sub prime" community in the United States and Britain, the extent of the credit card's true perniciousness is becoming apparent. At any rate, we save less than at any time since the 1950s; the teenager of today is far more likely to have plastic than a building society E-money: the future of cash We may not be that far away from a world where cash follows the cheque book into oblivion and few transactions are conducted face to face. There are in excess of 20 billion payments of less than 10 made every year; they could all go cashless. E-money comes in three forms, two of them specifically creations of the internet. First, there is the "card not present" phenomenon, where you have sufficient faith in the online retailer nowadays, anyone from Tesco to Amazon and lastminute.com that you feel happy to tap your payment card details on to a web page. You and the "shopkeeper" never actually meet, and you never leave your home or office.</p> <p>Money thus moves from being a physical commodity a gold coin, a paper banknote or a plastic card to being a purely virtual commodity (though of course banks themselves have long held your current account in virtual form, as a series of binary codes in a computer file). Second, we have seen the growth of outfits specifically set up to facilitate payments on the web. Perhaps the most high profile of these is Pay Pal, as featured, and trusted, on eBay. Barclays Bank can chart its origins back to 1685, the Royal Bank of Scotland to 1727 and Lloyds to 1765; Pay Pal dates back only to 2000, yet it now operates in 103 markets, manages more than 133 million accounts and allows customers to send, receive and hold funds in currencies from the US dollar to the Polish zloty. The real revolution, though, may be the abolition of cash, cheques, credit cards and debit cards and their replacement by one single means of payment, which you just wave, possibly nonchalantly, at the shop assistant. This is what the "contact less" card promises, so called because you don't even have to put it into a reader to buy something. The Barclaycard One Pulse card, for example, was launched only a month ago, with 4,000 guinea-pig customers in London. It will combine the functions of an Oyster card (Transport for London's existing "cashless" method of prepaying for bus and Tube journeys), a Barclaycard, and a "One Touch" contact less technology card. This is the novel bit. It allows cardholders to make purchases of 10 or under more quickly and conveniently with a single touch of their card against a reader instead of entering a PIN or signature, thus reducing the need to use and carry cash. In a Bourne-style nightmare, your every move and tiniest purchase will then be tracked by your bank and, if legislation allows, officialdom. Thus can "they" know about your purchase of The Independent, a flapjack and day trip to Tate Modern. Alternatively, the SIM card in your mobile phone could be used to pay for the little things in life (they're trying this out in South Korea). Either way, you will be being monitored. Money is what money does, according to the old adage. And in the futu...</p>