Reading the evolution of bank deposit money

From coins to banknotes to bank deposits.

Precious metals have been used as money for thousands of years. Even as lumps of metal carried around in sacks they still functioned quite well as money.

Coins made from these precious metals were an early improvement introduced by many societies including the Greeks and Romans. Coins had the clear advantage that they did not have to be weighed out each time were used. But despite this gain in simplicity and uniformity, the use of coins enabled many rulers to increase their spending by adding base metals to the coins and thereby increasing the number of coins. This debasement of the coinage frequently led to problems of inflation as money supply increased too rapidly.

Paper money has a much more recent origin. The first paper money was issued by goldsmiths. Wealthy merchants and individuals would deposit their gold with goldsmiths whose businesses required them to have safe storage facilities. The goldsmith would issue a receipt for the gold, much as you are given a receipt at a disco when you deposit your coat!

It was soon realized that it was much easier to use these receipts for the purchase of goods. It was easier still if these receipts were issued in fixed denominations. Thus goldsmith’s receipts became very much like modern banknotes.

The alternative was for a purchaser to write a note instructing the goldsmith to transfer a certain amount of gold to the seller. These notes were very much like modern cheques.

Goldsmiths also realized that only a small fraction of the gold in their vaults would be withdrawn at any one time, and even then there would be other people who were making new deposits. So why not lend out some of the gold and make money by charging interest? This is precisely what they did.

Of course, goldsmiths had to keep a fraction back each time to cover the possibility of depositors actually withdrawing their gold rather than relying on the notes. Nevertheless the total value of the notes issued considerably exceeded the total value of the gold! The notes were only partly backed by gold. This is known as a system of fractional backing.

It was a short step from goldsmiths’ notes to banknotes and bank loans. Banks, often originally operating as goldsmiths, issued their own banknotes in excess of the gold in their vaults, just as the goldsmiths had done.

Today banks in England do not issue their own notes, but their loans still exceed their deposits of cash. For every 1 in cash deposited in the banking system, loans considerably in excess of 1 can be created, and these loans come back as additional deposits. Today it is bank deposits that form the bulk of money supply. Only a fraction of these deposits are in cash. The rest are simply bookkeeping entries created by the banks.

But what of modern banknotes? If these are used to back bank loans, what backs the banknotes? What does the promise on a ten-pound note mean when it says, ‘I promise to pay the bearer on demand the sum of ten pounds’? It does not mean that if you take the note along to the Bank of England you will be given 10 worth of gold. Today’s currency is not backed by gold. The amount of gold in the Bank of England is only a tiny fraction of the total amount of currency in circulation.

A currency not backed by gold (and no currencies in the world today are) is known as a fiat currency: a currency whose supply depends on the will of government. The issuing of currency not backed by gold is known as fiduciary issue. This means currency issued on trust. The point is that if the government is prepared and able to match the supply of currency to the requirements of the economy, and if the public has confidence in the government’s willingness and ability to do this, then this will be adequate to ensure the stability of the currency. The backing of gold will be unnecessary.

Comprehension check

I. Have you find any new information to answer the questions, given before the text? Say what information was new to you.

II. Answer the following questions.

1. What form did the first metallic money have?

2. What is the primary advantage of coins compared to lumps of metal?

3. Why did many rulers turn to debasement of coinage?

4. What was the first paper money?

5. What was the prototype of a modern cheque?

6. Why was it possible for goldsmiths to lend out some of the gold?

7. Does every bank have the right to issue its own notes?

8. Are modern banknotes backed by gold?

9. Do you think that fiduciary issue threatens the economy?

10. If money is not backed by gold, what gives it its value?

III. Complete the sentences.

1. For thousands of years people have used …. as money.

2. Greeks and Romans used precious metals in the form of ….

3. The goldsmiths’ business required them to …

4. The goldsmiths realized that it was possible to … and make money by ….

5. The system of fractional backing means …

6. Today banks in England … own notes.

7. The majority of bank deposits consists of …

8. “There is a promise on each note which says …”

9. A currency not backed by gold is called …

10. Fiduciary issue of currency means …

IV. Translate into English.

1. Греки и Римляне использовали ценные металлы в качестве денег.

2. Бумажные деньги появились гораздо позже металлических.

3. Золотых дел мастера имели надежные хранилища для золота.

4. Золотых дел мастера могли давать взаймы часть золота и получать за это проценты.

5. Так как общая стоимость долговых расписок превышала общую стоимость золота, такие расписки считались частично обеспеченными золотом.

6. Современная валюта не обеспечена золотом.

7. Официальная валюта Соединенного Королевства является фунт стерлингов.

8. На лицевой стороне английских банкнот можно прочитать их достоинство.

9. После того как золотых дел мастера стали банкирами, их расписки стали банкнотами.

Word Power

I. Give English equivalents for the following words and phrases from the text.

ценный металл, повысить расходы, ухудшение качества монет, золотых дел мастер, хранилище, расписка (в получении), взимать процент, забрать (назад) золото, частичное обеспечение, банковские вклады, по требованию, валюта, не обеспеченная золотом.

II. Match synonyms in columns A and B.

A. B.

advantage safe place

lump part

to require to give possibility

to rely on smb forgery

to enable to understand

to transfer gain

vault to trust smb

debasement to demand

fraction money

to realize to hand over

currency piece

III. Translate the following word chains, determine the part of speech and the way of word building.

price – priceless – precious

improve – improvement – improving – improved

simple – simplicity – simplify – simplified

base – basement – debasement

rule – ruler – ruling

busy – business – businessman

instruct – instruction – instructing

require – required – requiring – requirement

Use some of these words in your own sentences.

Grammar Revision

Look through the text again and find Participle forms. Determine their function in the sentence.

Quick reading

I. Read the following text without a dictionary. Write out key words and sum up the information on a) the old system of English currency; b) its present-day state.

Note on “Sterling”.

Sterling was originally the name of the Old English silver penny, which first appeared in the 12^th century. A pound was a pound weight of silver pennies, or a pound of sterlings, in the language of that time. In the 16^th century, “sterling” acquired the meaning: “money of the quality of the sterling or standard silver penny; genuine English money”. Then from the 17^th century it began to be used in the sense of the English money as opposed to foreign money, and that is its modern meaning.

From about 1918 to 1971 British currency consisted of pounds, shillings, and pence. There were twelve pence in a shilling, and twenty shillings in a pound, making 240 pence in a pound.

In addition to pounds, shillings, and pence, the guinea and the half-crown were in use up to 1971, although they were not units of currency.

When decimal currency was introduced in 1971, the value of the pound remained the same, but it was divided into 100 new units (instead of former 240) called “(new) pence”. The new system thus consists of two units of currency: pounds and pence. One pound equals a hundred pence.

The following coins are now in circulation:

the (new) halfpenny – bronze; the (new) penny – bronze; the two-pence piece – bronze; the five-pence piece – cupro-nickel; the ten-pence piece – cupro-nickel; the fifty-pence piece – the cupro-nickel;

The following notes are now in circulation:

the pound note; the five-pound note; the ten-pound note; the twenty-pound note.

II. The text below touches upon the problem of counterfeiting (подделка денег).

Look through the text and say what methods are used to prevent counterfeiting.

Counterfeiting.

Counterfeiting of money is one of the oldest crimes in history. In the USA it was a serious problem in the past. The U.S Government took special measures to stop counterfeiting but this crime still exists. The U.S. dollar is now the most counterfeiting currency in the world.

Modern photographic and printing devices, colour copiers, laser scanners have made the production of counterfeit money relatively easy.

A lot of special security features are usually used in making banknotes of every country. They are:

- red and blue fibres, embedded in the paper

- the intaglio printing of some features

- invisible thread embedded in the paper

- microprinting and others.

Notes:

security feature – метод защиты

fibres embedded in – волокна, вкрапленные в …

intaglio printing – глубокая печать

thread – нить