Leaving Barbados a few months ago, a Pacific friend of mine found some Bajan bills in her wallet and sent them back in a book for me. Curious about the gift, I asked what it was for.
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By: Michelle Cave
Leaving Barbados a few months ago, a Pacific friend of mine found some Bajan bills in her wallet and sent them back in a book for me. Curious about the gift, I asked what it was for.
Curtly and to my thinking, as respectfully as she could sound, she asked me what I thought she should do with it, since she couldn’t change it into real money.
I couldn’t beat her logic.
Continuing, she pondered what one currency, used everywhere, would bring. This would certainly eliminate much of the nonsense time wastage associated with travel – and trade for that matter.
It got me thinking about the headache involved in harmonising currencies [that heads of] the African Union, ASEAN, the Gulf states and CARICOM face.
Our OECS saw its necessity and practicality decades ago and have the deepest and least problematic of unitary currencies the world knows.
Europe has this decade, followed its lead.
CARICOM has not been so fortunate.
But why, it seems such a reasonable, utilitarian solution.
To get at those roots we need to look again at why money as currency has evolved and created in the first place.
Money originated from non-economic causes: from tribute and trade, from blood-money and bride-money and barter, from ceremonial and religious rites and commerce, from ornamentation and trade between economic”men.
Many cultures around the world developed the use of commodity money. The Cowrie shell was used in China and Africa. Trade in Japan’s feudal system was based on the Koku – a unit of rice per year.
Mesopotamia circa 3000 BC charts the first use of the term, “money”, and it referred to a specific weight of barley, relating other values in a metric such as silver, bronze, copper and so on. A barley/shekel was originally both a unit of currency and a unit of weight.
Any soft metal can be tested for purity on a touchstone, allowing one to quickly calculate the total content of a particular metal in a lump. Gold is a soft metal, which is also hard to come by, dense, and storable. As a result, monetary gold spread very quickly from Asia Minor, where it first gained wide usage, to the entire world.
Coinage evolved into representative money – a token or certificate made of paper (legal tender). This piece of paper might “represent” or be a claim on a commodity also, such as gold certificates or silver certificates. This evolved into Fiat money – money that is not backed by reserves of another commodity.
The money itself is given value by government fiat (Latin for “let it be done”) or decree, enforcing legal tender laws, previously known as “forced tender”, where debtors are legally relieved of the debt if they (offer to) pay it off in the government’s money.
By law the refusal of “legal tender” money in favour of some other form of payment is illegal, and has at times in history invoked the death penalty.
Governments through history have often switched to forms of fiat money in times of need such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed.
In economics, “currency” can be coins and banknotes – the physical aspects of a nation’s money supply. The other part of a nation’s money supply consists of money deposited in banks, ownership of which can be transferred by multiple means – card, cheque and so on. Deposit money and currency are money in the sense that both are acceptable as a means of exchange, but money need not necessarily be currency.
Historically, money in the form of currency has predominated. Usually coins of intrinsic value commensurate with the monetary unit have been the norm. The prevalence of one type of currency over another in commodity money systems has arisen.
For centuries, the currencies of the world were backed by gold. In the 1930s, the United States set the value of the dollar at a single, unchanging level: 1 ounce of gold was worth $35. After World War II, other countries based the value of their currencies on the US dollar. Since everyone knew how much gold a US dollar was worth, then the value of any other currency against the dollar could be based on its value in gold.
A currency worth twice as much gold as a US dollar was, therefore, also worth two US dollars.
Unfortunately, the real world of economics outpaced this system. The US dollar suffered from inflation, meaning its value relative to the goods it could purchase decreased, while other currencies became more valuable and more stable.
Eventually the value was officially reduced so that 1 ounce of gold was worth $70. The dollar’s value was cut in half. In 1971, the United States took away the gold standard altogether. This meant that the dollar no longer represented an actual amount of a precious substance – market forces alone determined its value.
Today, the US dollar dominates many financial markets. Exchange rates are often expressed in terms of US dollars. There are two main systems used to determine a currency’s exchange rate: floating currency and pegged currency.
The market determines a floating exchange rate, which suggests that a currency is worth whatever buyers are willing to pay for it, which is determined by supply and demand, that is driven by foreign investment and other economic factors.
Generally, countries with mature, stable economic markets will use a floating system.
Virtually every major nation uses this system.
We don’t. Floating exchange rates are considered more efficient, because the market will automatically correct the rate to reflect inflation and other economic forces.
The floating system isn’t perfect, though. If a country’s economy suffers from instability, a floating system will discourage investment. Investors could fall victim to wild swings in the exchange rates, as well as disastrous inflation, as we have seen.
A pegged, or fixed system, is one in which the exchange rate is set and artificially maintained by the government. The rate will be pegged usually to the US dollar. The rate will not fluctuate from day to day.
A government has to work to keep its pegged rate stable.
Its national bank must hold large reserves of foreign currency to mitigate changes in supply and demand. If a sudden demand for a currency were to drive up the exchange rate, the national bank would have to release enough of that currency into the market to meet the demand. They can also buy up currency if low demand is lowering exchange rates.
Countries that have immature, potentially unstable economies usually use a pegged system. Developing nations use this system to prevent out-of control-inflation, but if the real world market value of the currency is not reflected by the pegged rate, the currency will be traded at its market value, disregarding the government’s peg.
When people realise that their currency isn’t worth as much as the pegged rate indicates, they may rush to exchange their money for other, more stable currencies. This can lead to economic disaster, since the sudden flood of currency in world markets drives the exchange rate very low. So if a country doesn’t take good care of their pegged rate, they may find themselves with a worthless currency.
In other words, national currencies are vitally important to the way modern economies operate, though less complicated systems can be found in simply having one currency. All of these different national currencies allow us to consistently express the value of an item across borders of countries and cultures. We need exchange rates because one nation’s currency is not always accepted in another.
You can’t walk into a store in Japan and buy a loaf of bread with Swiss francs. First, you’d have to go to a bank and buy some Japanese yen with your Swiss francs. Even though the bakery and the bank may be owned by the same corporation. (Nation News)
