Properties or Characteristics of Money

Any item which is going to serve as money must be:

• acceptable to people as payment;

• scarce and in controlled supply;

• stable and able to keep its value;

• divisible without any loss of value;

• portable and not too heavy to carry.

Exercise 1. Answer these questions:

1. Why do people accept money?

2. How are goods exchanged in a barter economy?

3. Why is trading expensive in a barter economy?

4. What is the unit of account in your country?

5. When did Germany not use its own currency?

6. What else does the writer say can be used instead of money as a store value?

7. What does the writer mean by "standard of deferred account"?

8. Explain in your own words what "token money" means.

9. When are people unwilling to accept their own currency?

10. What example of IOU money does the writer give?

Exercise 2. Vocabulary

Find words with the same meaning

par. 1. put off till later

vital

Find words with the opposite meaning

par. 2,3. to be unwilling

take away

reject

planned event

What words correspond to the definitions

par. 4 shared by two or more people

the performance of work for another

Explain in your own words

par. 5. trading

barter economy

swap

money

par. 6. accounts

medium of exchange

quoted

Find words with the same meaning

par. 7. without value

merchandize

to reduce value

par. 8. always

sum of money

serving to avoid difficulty

giving the name or details of

absolutely necessary

par. 9. major

changeless

Find words with the opposite meaning

par. 10 in a minor way

unusual

to increase

cheap

par. 11. separately

is less than

very large

Find words with the same meaning

par. 12-13. limitation

against the law

Find words with the opposite meaning

par. 14. be under no compulsion to

public

particularly

Activity 2. Hryvnia: the New Ukrainian Currency

This article was published in Panorama in January 1997 and was devoted to the introduction of the new currency in Ukraine – the hryvnia. Read this article and find answers to the following questions:

1. Why wasn’t the new currency introduced immediately after the proclamation of independence?

2. What is Karbovanets (coupon)?

3. Why was the new currency introduced into circulation in early 1996, although it was printed in 1992?

4. What are characteristic features of the Ukrainian currency market?

Hryvnia: the new ukrainian currency

Ukrainian currency: History

In one of his speeches shortly after Ukraine gained its independence, Mr. Kravchuk, the first president of Ukraine, proclaimed that Ukraine will become fully independent only after three major objectives are achieved: it must possess its own state symbols, including the flag and national anthem, its own army and its own currency. The first two objectives were relatively easy to achieve and soon after proclaiming independence, Ukrainian soldiers paraded along the main street, Khreshchatyk, carrying blue and yellow Ukrainian flags and singing the old Cossack anthem.

The task of introducing the new currency has proved to be a challenge for the many Ukrainian governments which have changed since independence. Firstly, Ukraine inherited from the former USSR an economy which was dominated by heavy industry. Major Ukrainian enterprises, such as the largest ore enrichment factories in Krivy Rig and Dnipropetrovsk, were merely suppliers to a larger production cycle. One of the most illustrious cases is the Mykolaiv Aluminium Factory which received bauxites from mines in Guinea, enriched them and sent them to Siberia for further processing.

Secondly, Ukraine lacked a developed banking system and functioning currency markets. With the breakdown of the Soviet Union, Ukraine lost not only foreign exchange reserves kept in Zovnisheconombank vaults in Moscow, but, more importantly, the country lost access to the skills and experience of banking experts and professionals who worked in the USSR Central Bank in Moscow.

The banking system needed rapid transformation from a system in which the vast majority of business was carried out by Ukrainian subsidiaries of the five state-owned banks with headquarters in Moscow, to a system where a number of private banks could compete for both clients and money.

When the Ukrainian banking system became fully separate from the banking systems of the former USSR countries and 'old' Russian Rubles could not serve as a means of payment for long, the introduction of a transitional currency, Karbovanets or coupon, was a logical and necessary move by the National Bank of Ukraine (NBU). Without foreign exchange reserves and a proper banking system in place, however, it started to follow the fate of all other transitional currencies in the former Soviet republics; rapidly depreciating in value against any convertible currency. If in January 1992, shortly after its introduction, it was valued at slightly more than 100 coupons to US $1, in a year it was already 637 coupons. A number of factors, such as the development of 'shadow' economy, an underdeveloped tax collection system and accumulating debt for supplies of oil and gas from Russia contributed towards rapid devaluation of the coupon. It took Ukraine four years and six governments to get itself ready for the new currency.

New Ukrainian currency: Why in 1996?

At a glance, this looks strange. Bills which were introduced into circulation in late 1996, were printed in early 1992. Four years between these dates,

however, saw major changes in the Ukrainian economy.

Banking evolved from the basis of a pan-USSR banking system in which each of the big five sate-owned banks operated in a specific area of banking business without competition with each other, to a normal Western-style two-tier banking system with the National Bank of Ukraine supervising and monitoring more than 200 commercial banks. Large formerly state-owned banks were privatized and partly restructured. Increased competition from the large newly emerged banks, such as Ukrinbank and PrivatBank, made them more competitive.

The government learned how to make ends meet without the need to switch on the printing machine to cover holes in the state budget. The National Bank of Ukraine was turned into an independent central banking institution and started to exercise a high degree of control over the financial sector of the economy. A strict reporting system for banks has been introduced which decreased the risk of collapses in the banking sector which plagued Russia and some Baltic states.

The tax system became less prohibitive. Not only tax rates for both businesses and individuals were revised downwards, but the system itself became simpler. In addition, strong efforts by tax collecting agencies to enforce the tax law for many small businesses started to have an impact and tax revenue started to pick up.

Inflation was curbed from four-digit figures per annum to a more sustainable 40 per cent.

Privatisation allowed the government to shed a number of unprofitable enterprises from the state's balance sheet.

Tactically, the date was undoubtedly influenced by the factors of a political nature. Ukraine was preparing to celebrate its fifth anniversary of independence and the introduction of the new currency was a good addition to the anniversary fireworks and parades.

Currency market in Ukraine

The introduction of a new currency would have been impossible without a well developed and efficient currency market. Ukrainian legislation requires the mandatory conversion, through authorised banks on the Interbank Currency Market of Ukraine, of 50 per cent of foreign currency received by residents at the market rate. Such a requirement led to the development of the currency market in Ukraine with over $350mn traded monthly on the Interbank Currency Market alone, even though hard currency receipts of enterprises with foreign investments from sales of products, services or works produced by themselves are exempt.

Further exemptions from the 50 per cent mandatory conversion are:

• Payments in foreign currency received on the account of a Ukrainian resident acting as on agent under a contract of agency provided that those payments are transferred to the principal selling entity, which can be resident or non-resident.

• Investments in foreign currency contributed to the authorised capital of legal entities with foreign investments by foreign investors.

• Payments in foreign currency received by Ukrainian citizens (except Ukrainian sole proprietors) from non-residents of Ukraine.

• Foreign currency purchased at the Interbank Currency Market.

• Foreign currency reserves of authorised bonks.

Residents and non-residents of Ukraine need on individual license from the National Bank of Ukraine for effecting currency operations, except for:

• Foreign currency which was duly brought into Ukraine at an earlier date.

• Foreign currency payments related to foreign trade transactions.

• Foreign currency payments related to credit, interest and dividends.

• Foreign and Ukrainian currency taken out of Ukraine by residents of Ukraine (up to the limits specified by the National Bank of Ukraine).

• Repatriation of foreign investment amounts in the case of termination of investment activity.

Bringing foreign currency into Ukraine is not subject to licensing.

Exercise 1. Match the words (1-10) on the left with their translation (a-l) on the right.

1. ore enrichment factory a. система збору податків

2. lack b. розвал, розпад

3. breakdown c. тверда (вільноконвертована) валюта

4. foreign exchange reserve d. конвертована валюта

5. vault e. рудозбагачувальний комбінат

6. convertible currency f. податкова служба

7. tax collection system g. надходження від податків

8. devaluation h. валютний резерв для торгівлі закордоном

9. tax collecting agency i. девальвація

10. tax revenue j. бухгалтерський баланс

11. balance sheet k. нестача, відсутність

12. hard currency l. сховище

Exercise 2. Now use some of the words from Exercise 1 in the following sentences.

1. ______ is traded in a foreign-exchange market. There is consistent demand for it and, therefore, it is unlikely to decline significantly in value.

2. In Fort Knox the gold is kept in a steel and concrete _____ beneath the building.

3. Of the two traditional types of financial statements, the _____ relates to an entity's position, and the income statement relates to its activity.

4. Bank for International Settlements (BIS) is an international bank founded in 1930 and now it assists about 90 central banks in managing and investing their monetary reserves, which amounted to more than 10 percent of world _____.

5. _____ often is criticised as an inflationary monetary policy because it raises the domestic price of imports.

6. The Soviet Union exported sizable amounts of gold, diamonds, platinum, and nickel to earn _____ (the Soviet currency was non-convertible to foreign currencies and could not be used to purchase imports).

Exercise 3. Find the following information (in reference books or in the Internet).

1. What did the name ‘hryvnia’ come from?

2. What is the symbol for the hryvnia and when was it introduced?

3. What is the future of the hryvnia?

Activity 3. Facelift Continues for the Hryvnia

The following article was published in Kyiv Weekly in 2004. Read and translate the article.