Page 514 - Introduction to Business

488 PART 5 Finance

B.C. as a way to facilitate their widespread trade activities. The Greeks and Romans
expanded the use of coins, especially coins made of precious metals that increased
commodity money Coins that are made their store-of-value property. This so-called commodity money had the drawback
out of precious metals of being heavy and difficult to divide into smaller pieces. In Europe, the Spanish 8-
reale (or eightreale) was popular in the eighteenth century because it could be split
into pieces; half a coin equaled four bits and a quarter of a coin was two bits, terms
that are still used today when referring to a half or quarter dollar. In China the
weight problem was solved by paper money issued during the Tang Dynasty (618–
907 A.D.).
Paper money spread to Europe and was commonly printed by banks. By the
nineteenth century, a large number of banks issued their own notes in Europe and
in the United States. It became necessary to back paper currency with gold, silver,
or government securities to ensure its value. Currencies traded at different
exchange rates, depending on the likelihood that the notes could be redeemed at a
particular issuing bank and the cost of making the transaction. Trustworthiness of
banks was critical to the value of paper currency. However, problems with the print-
ing of thousands of different paper currencies by many different banks led to gov-
ernment control of currency and coin issuance at the close of the nineteenth cen-
tury in most countries. The history of money then entered a period in which the
fiat money Money that is valuable
because the government deems it so national currencies of each government in the world were created. Money became
a symbol of national sovereignty and identity during this period.
gold standard Backing of money with
gold at a fixed exchange rate per ounce The next important event in the history of money was the 1913 establishment of
of gold the Federal Reserve System in the United States and the resultant rise of the dollar
as a major world currency. Shortly thereafter, World War I
broke out, leading to unstable precious metal prices. Many
countries were forced to drop gold, silver, and other backing
of paper currency. Money was instead backed by the fiat, or
law, of the national government. Fiat money was legal ten-
der to purchase goods and services because the government
deemed it to be.
Many governments used money to meet the political
goals of stimulating economic growth and providing employ-
ment for citizens. Economic activity could be increased by
merely printing more money. With more money in their
hands, people purchased more goods and services and the
economy would benefit, at least for a while. This political use
of money was not without its pitfalls. Excess supplies of
money could cause inflation. That is, when the supply of
money exceeds the demand for goods and services, the
prices of goods and services can rise. For example, if we dou-
bled the amount of money in a country but the production of
goods and services stayed the same, the price of all goods and
services would rise approximately twofold, holding constant
other factors such as external trade.

Gold and Dollar Standards. Inflation problems with
printing fiat money led to repeated attempts to return to a
gold standard for money. For example, in 1934 the conver-
Today there are around 150 different national currencies in the sion rate was 35 U.S. dollars for 1 ounce of gold. In 1944, the
world. Currencies of large industrial nations are known as Bretton Woods agreement set up a global currency system
hard currencies, as opposed to the soft currencies of other
countries. The 1999 introduction of the European euro is with the dollar pegged at a fixed rate of exchange to gold,
interesting due to the fact that the euro is a regional currency. and 43 other countries fixed their currencies to the dollar.

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