The history of money

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We may not think we have enough of it, but in many ways, we tend to take money for granted. When you buy a pair of jeans or a CD, for example, you never wonder whether the merchant will accept the bills and coins in your wallet as payment. But suppose money as we know it didn't exist. How would you pay for the things you want to buy?

That was the situation in the early days of the American colonies. British money was scarce, so colonists substituted basic products of their local economies that were always in demand – things like tobacco, grain and fish. For small change, they often received nails and bullets.

But their system, called barter, had many shortcomings. How many fish would it take to buy a bag of flour or an oil lamp, for example? Suppose the merchant didn't want fish, or they spoiled before he could trade them to someone else. Later, as trade developed with other colonies and countries, colonists used various foreign coins, such as gold Spanish reales. That's when money as we know it finally gained a foothold in the U.S. economy.

The young United States experimented with a variety of monetary mechanisms for well over a century before settling on today's system, which is based on coins, paper currency and money in bank checking accounts. The early government tried unsuccessfully several times to make paper money work, but people relied mostly on gold, silver and copper coins because they were made of precious metals that had intrinsic value.

Today, though, our coins don't contain any gold or silver. You can see this for yourself by looking at the edge of a dime or quarter; you'll see a copper core, sandwiched between silvery nickel. The metal value of modern American coins are much less than their worth as money. American currency is no longer backed by gold or silver either, but it no longer really matters.

That's because what gives money real value is its purchasing power, not what it's made of. In fact, any economy's health can be measured not by how much money people earn, but by how much their money buys. The overall assortment and quantity of goods and services your money lets you buy reflects your standard of living.

Like diamonds, money is relatively scarce – on purpose – and that's just what makes it valuable. You as an individual want to earn as much as you can, of course. But the national economy can actually have too much money. When the amount of money circulating grows faster than the rate at which goods and services are produced, the result is inflation. Say you want a new pair of jeans, for example. Last year, they cost $20, but this year an identical pair costs $23. If prices of most other goods have also risen, then you are probably dealing with inflation - too much money chasing too few goods. Prices have inflated and your $20 buys less than it did. You must earn more just to stay even (на уровне).

Keeping prices stable is part of the job of the Federal Reserve, which was created by Congress in 1913. There had been two attempts at establishing a central bank in the United States in the 19th century, but politics killed them even though they were successful. Back then, state-chartered banks issued their own paper money backed only by their individual gold and silver reserves. As a result, there were once more than 10,000 different kinds of bank notes in circulation.

Suppose you owned a store in those days. How would you know which banks had enough gold reserves to make their currency worth its face value? Should you decrease the value of bills from a weaker bank? And how would you keep track of all those bank notes? You can imagine the shopkeeper's dilemma. If a bank went broke, its currency was instantly worthless, and those who held its notes could lose everything.

Naturally, people hurried to withdraw their money at the first hint of trouble in the economy. The result was periodic financial panics that could devastate the national economy for years. Finally, after a particularly bad panic in 1907, Congress decided to solve the problem with the creation of the Federal Reserve System. The Fed was established to provide for a safer and more flexible banking and monetary system.

With the Fed as a safeguard, banks can perform their proper role of bringing savers and borrowers together for the benefit of both. For any economy to be successful, a country first needs political stability so its citizens feel safe; then it needs a stable financial system that includes both trustworthy money and reliable financial institutions. Healthy, profitable banks, therefore, are a vital part of the nation's economic welfare.

Banks provide many services, but for most people, banking consists of depositing their salaries into checking accounts and writing checks on that account to buy things that cost more money than they want to carry in their wallets. People also commonly have savings accounts in which they deposit money they don't need right away or they are saving for a particular purpose. The bank pays interest, or a price paid for use of the money, on savings accounts and often on checking accounts, too.

Very little of this money is kept in the bank's vault, however. While the Federal Reserve requires banks to keep a specified percentage of customer deposits on hand to meet routine withdrawals, they lend the excess. Banks, like any other business, must make a profit.

Дата добавления: 2014-11-29