Encyclopedia of Money by Dipen

Saturday 30 June 2012

Yen

The yen is the money of account for Japan, comparable to the dollar for the United States. By the 1990s the Japanese yen had become a major international currency, sharing the stage with the U.S. dollar, the German mark, and the ECU as determinants of international monetary values.

The Shinka Jorei (New Currency Regulations) of 1871 established the yen as the monetary unit in Japan. The Japanese derived the word yen from the Chinese word yuan, which meant “round thing,” a reference to the U.S. and Mexican dollars that dominated East Asian trade at the time. The act set the yen equal to 0.05 ounces of gold, making the official Japanese price of an ounce of gold equal to 20 yen. At the time the official United States price of an ounce of gold was $20.67. The yen was intended to be equivalent to the Mexican dollar, the standard unit in Asian trade at the time. The yen began life as a decimalized currency; one-one-hundredth of a yen was called a sen, and one-tenth of a sen was called a rin.

Yeltsin’s Monetary Reform in Russia

Russia opened the 1990s in monetary chaos, manifested by soaring inflation, and a currency, the ruble, that had long been shielded from the free-market forces of foreign exchange markets. In foreign exchange markets, currencies are bought and sold with other currencies, as when Japanese yen are purchased with United States dollars.

Under economic reforms, prices, unfettered from state controls, took off, creating a ruble shortage that left some workers unpaid for months. Wages and pensions rose, and the Russian government cranked up the printing presses on a round-the-clock basis. For the month of July 1992 alone, the government printed up more rubles than the Soviet Union government had printed up in its last 30 years. To expedite the process, the government increased the largest denomination of the printed ruble from the 200-ruble note to the 1,000-ruble note. Coins also became available in higher denominations. Inflation reached its peak in 1992 when monthly inflation rates ran 15 percent, and prices increased 200 percent over the year.

In 1993 the government begin to step on the monetary brakes, but in ways that threw the country into deeper confusion. In July the government invalidated all rubles issued before 1993, and gave people only a few days to convert the old rubles into new rubles. It also put a limit on the number of old rubles that foreigners could convert into new rubles. Citizens could convert up to 35,000 old rubles into new rubles, and if they held additional rubles, these had to be put into savings accounts for six months. By the end of 1997 annual inflation had fallen to the 12 percent range, and the government announced a plan to lop off three zeros from the ruble. Effective 1 January 1998, in what was essentially an accounting reform, 1,000 rubles became 1 ruble, and all prices, balance sheets, debts, etc., were adjusted accordingly.

Yap Money

The inhabitants of the island of Yap, one of the Caroline Islands in the central Pacific, adopted large, thick stone wheels for money, a primitive medium of exchange that survived into the post–World War II era. The inhabitants called this from of money fei. A study of the operation of this system of currency reveals interesting insights into the nature of money that are relevant for modern monetary systems.

The stone wheels ranged in diameter from a foot to 12 feet and the larger stones were virtually immovable. The hole in the center of the stone wheels varied with the diameter of the stone, and the smaller stones could slide over a pole and be carried. The stones were quarried from Palau, about 260 miles away, and sometimes from as far away as Guam. Stones could serve as fei only if they were made of a fine, white, close-grained limestone.

World Bank

The World Bank, officially the International Bank for Reconstruction and Development, is the largest provider of development assistance to middle-income and low-income countries, directly financing projects and coordinating development assistance from other agencies. It also serves as a clearinghouse of ideas for promoting economic development, and publishes statistical data and research on the state of the world economy.

Aside from negotiating a fixed exchange rate system for international trade, the Bretton Woods Conference of 1944 organized the World Bank under the auspices of the United Nations. The delegates of the Bretton Woods Conference had in mind financing the reconstruction of war-torn Europe and Japan, and the development needs of the poorer areas of the world. On 25 June 1946 the World Bank opened his headquarters in Washington, D.C.

Member countries, now numbering more than 180, purchase stock in the World Bank, which also raises capital by selling bonds in private capital markets. Member governments guarantee the bonds, reducing the interest rate that investors demand and lowering the cost of capital to the bank. The United States is the largest shareholder and the president of the World Bank has always been from the United States.

Wizard of Oz

The book The Wonderful Wizard of Oz, by L. Frank Baum, is one of the most famous of American children’s stories and the inspiration of a movie classic that is shown annually on television in the United States. What is often lost in the movie is that the book, published in 1900, incorporated allegorically an important monetary debate in the United States in the 1890s.

The book was written against the background of the free silver movement in the United States. From 1880 until 1896 the United States saw the average level of prices fall by 23 percent, a strong downdraft of deflation that worked a severe hardship on debtors, mostly farmers of the South and West. The bankers and financiers concentrated in the Northeast benefited from the deflation. One proposal for mitigating the hardship of deflation was to supplement the money supply, then tied to the gold standard, with silver, creating a bimetallic standard of gold and silver to replace the gold standard. Under a bimetallic standard both silver and gold could be minted and circulated as money. The infusion of silver would put an end to deflation by increasing the amount of money in circulation.

Wildcat Banks (United States)

During the pre–Civil War era, wildcat banks, although technically legal, abused the bank note-issuing authority of state banks by issuing bank notes or paper money under circumstances that discouraged or rendered impossible conversion into gold and silver specie. The wildcat banks emerged in a banking system that allowed each bank to issue its own bank notes, which legitimate banks stood ready to redeem into gold and silver specie. As security for outstanding bank notes, state banking laws required banks to own federal or state government bonds, and keep them on file at a state auditor’s office. The First Bank of the United States and the Second Bank of the United States had helped maintain an honest currency by forcing western banks and country banks to redeem their bank notes in specie.

In 1833 the demise of the Second Bank of the United States left the banking system without an important safeguard against the temptation of bankers to issue bank notes in excess of their reserves. Bank notes from distant localities circulated at varying discounts, depending upon the likelihood of redemption into specie. Newspapers published lists of good notes and bad notes, and periodicals appeared that were exclusively devoted to the values of bank notes.

Whale Tooth Money in Fiji

The case of whale tooth money on the island of Fiji shows how a commodity can become a symbol of wealth in a collectivist society in which most trade in goods takes the form of gift exchanges, omitting the need for a common standard of value. To the people of Fiji the polished ivory teeth of the sperm whale commanded a ceremonial value and sacredness that put them beyond the realm of a fixed value compared with other goods. The idea of pricing a wide range of goods in terms of whale teeth would not have occurred to the Fijians.

Wendish Monetary Union

From the mid-fourteenth century to the mid-fifteenth century the Wendish Monetary Union maintained and guarded a common monetary standard for cities of the Hanseatic League. The Wendish Monetary Union ranks among the first of the European examples of monetary union, a distant ancestor to the contemporary European Monetary Union.

The Hanseatic League was an association of north German towns, mainly maritime towns and inland towns engaged in foreign trade, that dominated Baltic trade during the fifteenth century. The league negotiated trade concessions and monopoly privileges from foreign countries such as England, Norway, and Russia, often at the expense of local merchants. The league operated self-government trading compounds, called kontors, at trading centers such as London, and these kontors were shared by the merchants who were citizens of Hanseatic towns.

Wampumpeag

Wampumpeag was a famous currency used by the American Indians, particularly but not exclusively along the eastern seaboard, and became widely accepted by the English colonists. The name of the currency, a bit of a mouthful, was usually shortened to wampum. The peag meant “beads” in the language of the Indians, and the wampum referred to the white color of the beads. The most common color was white but some of the beads were black. Wampum rose to the status of legal-tender currency in 1643 when Massachusetts set the value of the white beads at eight and the black at four to the penny for sums no more than 40 shillings. In 1649 Rhode Island set the value of black beads at four to the penny, but reduced the value in 1658 to eight to the penny regardless of the color of the beads. White beads, however, were taken in payment for taxes at six to the penny. As the white man with improved tools learned to manufacture wampum at a faster rate, the supply increased, and in 1662 Rhode Island ended the acceptance of wampum for payment of taxes.

Wage and Price Controls

Wage and price controls freeze wages and prices at a certain point in time, and perhaps establish procedures for gradually adjusting wages and prices. Episodes of hyperinflation and wars have most often laid the groundwork for the enactment of programs of wage and price controls. Inflation is rising prices, but also can be defined as a decrease in the purchasing power of a unit of money.

In 1793 the government of the French Revolution initiated a system of price controls that became known as the Law of the Maximum. A decree of 29 September 1793 empowered district administrations with the authority to set commodity prices at rates one-third higher than the levels of 1790. The decree granted municipal authorities the responsibility for setting wages at 50 percent higher than the 1790 level. In 1794 the Committee on Provisions issued an enormous schedule of the national Maximum, or price list. Each district added transportation costs, 5 percent profit for the wholesaler and 10 percent for the retailer, and then published a catalog of prices. Hoarding commodities to avoid selling at controlled prices was punishable by death. Despite the government’s involvement in the forcible requisitioning of supplies, the controlled economy of the Revolution broke down. In December 1794 the government suppressed the Law of the Maximum.

Virginia Tobacco Act of 1713

The Virginia Tobacco Act of 1713 created the most advanced form of a commodity monetary standard found in the American colonies. Under the provisions of the act planters brought their tobacco to public warehouses, where it was weighed, graded, and stored. The planters received paper notes that were titles of ownership to the tobacco, and these notes circulated as money. Any recipient of these tobacco notes had the option of claiming the tobacco and taking possession of it.

The American colonies, struggling with a shortage of precious metal specie for transacting business, turned to several expedients, including allowing certain commodities to be acceptable in the payment of debts. Several of the northern and middle colonies had a whole list of commodities that could be used in the payment of debts at prices mandated by the government. The colony of Virginia, however, relied almost exclusively on tobacco as a medium of exchange to compensate for the shortage of specie. The government accepted tobacco in the payment of taxes and government officials and the Anglican clergy received payment in tobacco.

Virginia Colonial Paper Currency

In the last half of the eighteenth century the colonial government of Virginia was the last of the colonial governments to have recourse to paper currency. Paper money was not completely new to Virginia because tobacco notes, essentially warehouse receipts for stored tobacco, had circulated as money since early in the eighteenth century. Later, however, the Virginia colonial government issued fiat paper currency that was declared legal tender.

The circumstances that pushed Virginia to the paper currency brink were hardly rare in the history of paper money. Robert Carter Nicholas, a member of the House of Burgesses at the time but not a friend of paper money, explained the rationale as follows:

Money, the acknowledged Sinews of War was necessary, immediately necessary; Troops could not be levied and supported without it; of Gold and Silver, there Was indeed some, what Quantity I do not know, in the Hands of Individuals, but The Publick could not command it. Did there not result from hence a Necessity Of our having Recourse to a Paper Currency, as the only Resource from which we Could draw Relief?

(Brock, 1975)

Venetian Ducat

During the late Middle Ages the Venetian ducat became the preferred international currency, sometimes referred to as the dollar of its time, a reference to the dominant role the United States dollar played in post–World War II international trade. By the fifteenth century the prestige of the gold ducat of Venice made it the standard for currency reform in Muslim and Christian nations of the Mediterranean. The Mamluk ashraftil, the Ottoman altun, and the Portuguese and Castilian ducat were based upon the Venetian ducat.

Venice first minted the gold ducat in 1284 at a weight and fineness of 3.5 grams of virtually pure gold (0.997 fine), a standard of purity and fineness that would be maintained until the end of the Venetian Republic in 1797. Gold coinage had disappeared in Western Europe after the eighth century, and the Italian city-states were the first European governments to renew coinage of gold. Florence and Genoa first struck gold coins in 1252, and Venice minted its ducat at the same weight and fineness as the Florentine florin, a coin that commanded the prestige of an international currency before it lost credibility when the Florentine government minted issues of lighter weight. The florin also suffered from inferior imitations issued by other governments. The Venetian ducat clearly superseded the florin in the fifteenth century as the international currency par excellence.

Velocity of Money

The velocity of money is the average number of times per year that a unit of currency (e.g., U.S. dollar, Japanese yen, German mark, etc.) is spent on goods and services. From a theoretical perspective a percentage change in the velocity of money can have the same impact on prices or other economic variables as an equivalent percentage change in the money supply.

Sir William Petty (1623–1687) may have been the first writer on economics to describe the velocity of money. He advanced the plausible view that the velocity of money was determined by the frequency of people’s pay periods. The famous philosopher John Locke (1632–1704) wrote on monetary economics and referred to the ratio of a country’s money stock to its trade, a concept bearing a marked resemblance to velocity. By the mid-twentieth century, the concept of velocity was a cornerstone of monetary economics, which is the study of the relationship between the money supply and prices, interest rates, and output.

Vellon

Originally, vellon was a mixture of copper and silver that became widely used for subsidiary coinage in Spain in the sixteenth, seventeenth, and eighteenth centuries. Over its history vellon took several forms. Calderilla, an early type of vellon, contained a variable but modest amount of silver, and was coined mainly in the sixteenth century. Another type of vellon, rich vellon, was coined mainly in the seventeenth century and contained a token 6.95 percent of silver. A pure copper vellon containing no silver or metal alloys also appeared in the seventeenth century.

Vellon was coined into units of maravedis, ranging from 1/2 maravedi to 12 maravedis. The maravedi was a large Moorish coin that emerged as the smallest unit of account in the Castile monetary system.

Variable Commodity Standard

Under a variable commodity standard a currency is officially redeemable in a certain amount of a commodity, such as gold, but the authorities may vary the redemption rate, depending upon other economic conditions. If the commodity is gold, the monetary authorities would vary the amount of gold the central bank stood ready to buy and sell for a unit of currency (e.g., a dollar) to maintain the value of the currency.

One of the legacies of the inflation-ridden 1970s and early 1980s was a renewed search for an inflation-proof currency. Issues surrounding the formation of the European Monetary Union and the planned development of a single European currency, focused additional attention on schemes of monetary reform. In the late 1980s numerous proposals for monetary reform surfaced that incorporated the concept of a variable commodity standard. The common theme in these proposals was the idea of a currency whose value is tied to a weighted basket of goods. The emphasis was on a currency not convertible into a fixed weight of gold, or other commodity, but convertible, at least indirectly, into a weighted basket of goods.

Value of Money

The value of money has to do with the purchasing power of a unit of money. One approach to the measurement of money value is to look at its precious metal equivalent. Under a gold standard, a dollar should be worth approximately a dollar’s worth of gold. Under a gold coin standard, the value of a dollar could drop below a dollar if the government reduces the gold content of its coinage relative to its face value. Under such circumstances it might be appropriate to say that a dollar is worth only 75 cents or 50 cents, based upon the value of its precious metal content.

Despite the widely hailed virtues of precious metal backing for money, the amount of precious metal a unit of money can buy is not the essential factor to individual consumers, who have to think of the cost of things they must buy to maintain themselves and their families. Furthermore, under an inconvertible paper standard such as that of the United States, where even the metallic coinage is token money, the value of money is divorced from any precious metal connection. The true measure of money value must be measured in terms of its purchasing power.

Vales (Spain)

Vales were Spanish paper money notes issued in the late eighteenth century and the Napoleonic era, the first paper money issued in Spain. During the last half of the eighteenth century, the gold and silver mines of Spanish America supplied the lion’s share of the world’s precious metals, and mints in Spain and the Indies struck most of the coins. Vast gold and silver resources were of little avail when war interrupted the flow of trade with the New World, compelling Spain to turn to the issuance of paper money.

War between England and Spain, the major colonial powers in the New World, broke out in 1779. Charles III, king of Spain, refused, perhaps out of fear, to raise taxes to fight the war. Also a history of defaults and bankruptcies damaged the ability of the Spanish government to float bond issues. A royal decree of 20 September 1780 authorized the issuance of 16,500 vales, each with a face value of 600 vellon pesos and bearing 4 percent interest. A syndicate of Dutch, French, and Spanish merchants had offered to extend funds to the Spanish government in return for interest-bearing notes that passed as legal-tender money.

Usury Laws

Usury laws either prohibit payment of interest on loans or set a maximum interest rate that lenders can charge. Historically, the medieval Catholic Church disapproved of charging interest on loans. As late as 1950 Pope Pius XII felt it necessary to reassure people that bankers earn their livelihood honestly. In the late medieval period the Church began to relent, allowing certain forms of credit involving the payment of up to 5 percent interest.

In the early history of France, the French crown often forced subjects to loan money to the crown at zero percent interest. Businesses worked around the Church’s prohibition on interest. In 1311 Philip the Fair (IV), drawing a distinction between usury and trade loans made at fairs, set a maximum of 2 1/2 percent interest for commercial loans between fairs. (The annualized rate of this maximum equaled about 15 percent.) In 1601 Henry IV for reasons that were unclear issued an edict putting a 6 1/4 percent legal ceiling on interest rates. The edict was widely disregarded, but his government probably saw it as a way of promoting commerce. Under the regime of Cardinal Richelieu the crown issued a royal edict (1634) further reducing the legal rate of interest to 5 5/9 percent, citing the evil effects of high interest rates that allow people to live on interest income instead of engaging in commerce.

Tzarist Russia’s Paper Money

Of the European countries only Sweden beat Russia to the punch on the issuance of government-sanctioned paper money inconvertible into precious metal. Perhaps it is no accident that Russia first saw paper money under Catherine the Great (1762– 1795), whose wars broke the power of Turkey and made Russia a player among the powers of Europe. The first issue of paper money, called roubles-assignats appeared in 1768 to help finance the first Turkish war. Russia termed its paper money assignats before the French issued their own more-famous assignats during the French Revolution, which fueled one of the great hyperinflation episodes in history.

The government created two note-issuing Assignation Banks to issue the notes. The supply of assignats swelled as Catherine fought a second Turkish war and wars with Sweden, Poland, and Persia. For the first two decades the bourse exchange rate between assignat rubles and silver rubles traded close to par. Toward the end of the century the assignat rubles were trading at a 30 percent discount, and fluctuated around that level until the Napoleonic struggles increased the government’s dependence upon paper money. By 1811 a silver ruble equaled 3.94 assignat rubles. The victory over Napoleon brought some improvement in confidence but the trading range remained between 3 and 4 assignat rubles per silver ruble for the following three decades.

Trial of the Pyx (England)

The Trial of the Pyx was a public trial or test of the purity of gold and silver coins that began in the thirteenth century and continued into the present day. In 1982 Queen Elizabeth II and Sir Geoffrey Howe, chancellor of the Exchequer, attended the Trial of the Pyx in celebration of a custom marking its seven-hundredth anniversary. The oldest extant writ ordering a trial came at the behest of Edward I in 1282. Although similar tests were conducted at regional mints, the most meticulous and thorough tests were held for coins struck at the Royal Mint in London.

To conduct a trial a specified sample of coins of each denomination was set aside and stored in leather bags identified by the month of coinage. In 1485 a sample consisted of 10 shillings from every 10 pounds of gold and 2 shillings from every 100 pounds of silver. These leather bags were put in a chest, or pyx, hence the name “Trial of the Pyx.” The pyx was locked with three keys, one held by the warden of the mint, a second by the comptroller, and a third by the master-worker. The crown could call for a trial every three months, but the trials were much less frequent.

Treasury Notes

Treasury notes were interest-bearing treasury bonds that circulated as money in the pre–Civil War era in the United States. The notes were not legal tender but were accepted for payments owed the federal government, including tax obligations.

For the first two decades of its existence the new government of the United States steered clear of the issuance of government notes that circulated as money. The hyperinflation of the American Revolution remained a thought-provoking memory of the dangers of paper money, and Alexander Hamilton stood as a staunch opponent of Treasury issues of paper money.

By the War of 1812 Congress was in the hands of people without firsthand experience of the Revolutionary hyperinflation, and wartime demands for resources pressed hard on government officials. On 30 June 1812 Congress authorized the issuance of $5 million of treasury notes, redeemable within one year, and paying 5 2/5 percent interest. The following years saw authorizations for additional issues, $5 million in 1813, $18 million in 1814, and $8 million in 1815. The notes circulated as money and were acceptable in payment of federal government taxes.

Trapesite Banking

Trapesite banking is the term for private banking that arose during the mid-fourth century in ancient Greece. The trapesite bankers themselves were called trapezitai, and the banking concerns were called trapezai. The Greek word trapeza means “table,” a reference to the moneychangers’ tables of the ancient world. The modern English word bank can be traced to the moneychangers’ bench of the Middle Ages.

Our information about trapesite banking comes largely from speeches delivered in lawsuits arising out of the banking business. No less of a person than Demosthenes, the most famous orator of classical Greece has passed down speeches that shed light on the trapesite banking in his time. The most famous trapesite banker was Pasion of Athens, who came to Athens as an alien resident, and won his citizenship for the value of his services to the city of Athens. In one reference to Pasion’s banking, Demosthenes says: “Of the deposits of the banks, eleven talents were interest-bearing” (Westermann, 1931).

Trade Dollar

In 1873 Congress authorized the coinage of the trade dollar, a special silver dollar coin intended to facilitate trade between the United States and China, and to furnish a market demand for rising silver production in the Western states. At first the coin was legal tender only for up to $5, but Congress later withheld its legal-tender status. The Treasury stopped minting the trade dollar in 1877 and Congress officially discontinued the coin in 1887.

Trade between the United States and the Far East, particularly China and Japan, accelerated around 1869 through 1870, and a popular medium of exchange in the Pacific Basin was the Mexican silver dollar containing 416 grains of silver. The American silver dollar, containing 412 1/2 grains of silver (before discontinuance on 1873), was not competitive with the Mexican dollar. The state of California petitioned Congress to coin a silver dollar containing 420 grains of silver, hoping to draw to California the Chinese and Japanese trade then flowing to Mexico.

Touchstone

Touchstones were stones used to test the purity of precious metals such as gold and silver. Touchstones were also called Lydian stones, after the country of Lydia, the birthplace of precious metal coinage and the first country credited with the use of touchstones. The spread of gold coinage particularly increased the profits that could be earned from adulterating and alloying gold coinage, and touchstones offered an inexpensive and useful test for purity of gold coinage. Both individuals and governments were known to reduce the purity of precious metals by alloying them with cheaper metals.