BANKING SYSTEM

Ashburton Guardian, Volume 55, Issue 298, 30 September 1935, Page 7

BANKING SYSTEM

THE EVOLUTION OF MONEY.

FROM THE STAGE OF BARTER. The purpose- of this series of bulletins is purely educational, they being written in everyday language with a view to providing elementary and fundamental information on points of interest to members of the general public. In this bulletin the evolution of money is traced from medieval times up to the present day. Actual circulating currency only has been dealt with, and the position as it developed in New Zealand has been explained. Cheques, bank deposits and advances will be dealt with in a later bulletin.

Money plays such an important part in our everyday life that we are apt to view it as something which has always been in existence, but in primitive ages there was no such thing as money. Therefore in studying the functions and) nature of money it is both interesting and useful to trace briefly the evolution of money and the stages through which the monetary system of the world has passed in reaching its present form and character.

Barter and the Evolution of Money. From earliest times there has existed both the desire and the need to exchange one article or commodity for another, and there naturally evolved a custom of transferring possessions from person to person according to mutual desires and needs. This method of negotiation is known as barter anatfre difficulties accompanying this primitive method of trading may be readily imagined. Every transaction involved “a double coincidence of wants and possessions,” and the progress of civilisation demanded a more practicable method of effecting the exchange of goods.

The idea was then conceived of choosing and agreeing upon some commodity which would be universally accepted) within a community in exchange for goods and services—in other words a “medium” waS required, and at this stage it is possible to define money as “a commodity chosen by common consent to be a measure of value and a means of exchange between all other commodities.”

It as a great step to have advanced as far as obtaining a medium to act as a measure of value, for the acceptance of a common standard was infinitely preferable to barter in its simplest form with its attendant haggling and bargaining. But history shows that a remarkable range of commodities has at different times and in different places been utilised to serve the purpose of money, e.g., oxen in ancient Greece, cowrie shells on the African Coast and bricks of tea in Tibet. No doubt these forms of money were more or less satisfactory for the purposes for which they were intended, but the progress of civilisation and of international trade revealed their many disadvantages and, as the result of a clearer understanding of the functions and characteristics of a good money material, various metals began to be utilised for money purposes, until the stage was reached when gold and silver assumed their rightful places as money materials.

Functions and Characteristic of Money.

In the definition of money quoted above, two functions are mentioned.— (a) A medium of exchange; (b) A measure of value; but as civilisation developed, a third function gained in importance, namely (e) A standard of value for deferred payments. The necessity for money carrying put this third function will be readily appreciated when one’s thoughts turn to debts and contracts. In order that coined money should satisfactorily perform these tnree functions it was essential that the money material should possess certain attributes. For example, the material required to be (1) Acceptable. (2) Valuable, or representative of real value. (3) Recognisable. (4) Durable. (5) Portable. (6) Divisable. (7) Stable in value. It came to be recognised that gold possessed these characteristics to a greater degree than did other commodities, and most countries eventually adopted gold as the standard of value, and employed silver and copper coins for purposes of small payments.

Coinage. The problem of supplying large numbers of coins accurately made and of such perfect design as to carry their own guarantee against fraud and debasement presents no difficulties in this mechanical age, but this was a major difficulty in the early development of metallic currency when rough pieces of metal circulated, marked and punched in various ways by different dealers to indicate their weight and purity. Experience showed, however, that it was essentially a duty of the Government to issue and care for its country’s coinage and that extreme watchfulness was necessary to guard against fraud. Thus in modern times in all progressive countries the issue of coins is subject to very rigid regulations as regards size, weight and nature and purity of metallic content. Legal Tender Coins and Token Coins. Most countries adopted a system whereby coins of one metal, and that usually gold, should be the standard of value, and declared by law that they must be accepted by a creditor up to any amount when offered in final discharge of debts or in full payment for commodities. In other words, coins of that particular metal were declared to be unlimited legal tender, and in New Zealand the gold sovereign was the standard of value and unit of account, and therefore unlimited legal tender. But, obviously, the high value of gold precluded its being used for payments of small amounts, and to overcome this difficulty subsidiary coins in silver and bronze were issued. Now the value of the metal content of these silver and

bronze coins is less than the money value which they are coined to represent, and they are therefore known as token coins, and the legal tender for only limited amounts. Under normal circumstances the Government or issuing authority reaps a handsome profit from the issue of such token coins. Paper Money. Up to the present no mention lias been made of what constitutes easily the greatest proportion of money in circulation, namely paper money in the form of bank notes. (Currency in the form of cheques does ot come within the scope of the term “money” as used here.) Everyone is aware that bank notes in New Zealand pass freely from hand to hand in discharge of obligations and, in fact, very satisfactorily perform the essential functions of money previously referred to. -But paper money in itself is really of no value and might be described as “token” money in that its face value is materially greater than the value of the material of which it is composed, One might well ask how ic is that a bank note possesses a money value, and to answer this it is again necessary to consider the subject historically.

The History, of Bank Notes. Prior to the establishment of the Bank of England in 1694 it had become customary for people in England to deposit their money and valuable with the goldsmiths who, for purposes of their own trade found it essential to provide accommodation of a substantial nature for the safe keeping of valuables. Receipts were issued for money so lodged, and the practice developed of passing these receipts from person to person in satisfaction of debts so that they became part of the currency of the country. They were in reality a substitute for the coinage and besides increasing the portability of money they prevented the wear and tear of the coins which arose from frequent circulation. It is important to note that at this stage the practice was for sufficient gold to be held by the goldsmiths or private bankers to meet every receipt or note issued by them. When the Bank of England was es-

tablished in 1694, as part consideration for granting a loan of £1,200,000 to the Government of the day, the bank received the privilege of issuing bank notes to that extent. From time to time the loan to the Government was increased and the note-issuing power of the Bank of England was correspondingly added to. Private banking continued to flourish in the country, with many private bankers issuing

notes containing promises to pay on demand. But the dangers inherent in note issues were not fully appreciated and some of the private bankers were not as sound: as they should have been with the result that disturbances were not infrequent; and in the years 1836 and 1839 through the issue of notes, a period of inflation was brought about followed by the inevitable collapse which was so great that it became apparent that radical changes were necessary in the banking system of England. This change was effected through the Bank Act of 1844 which provided, that notes to the value of £14,000,000 were to be issued by the Issue Department of the. Bank of England against Government securities, beyond which sum every note issued by that Department was to be backed by an equivalent amount of bullion. Through bank amalgamations and other causes, country banks gradually lost their right of issue and in 1920 the last country note issue lapsed: ami the Bank of England’s fiduciary issue gradually increased from £14,000,000 to £19,750,000. It will be shown in a later article that the advent of the Great W T ar completely changed the character of the note-issue of England, but the point to be remembered is that the Bank of England is now the sole note-issuing authority in England, its notes are legal tender and have completely replaced gold coins as the chief circulating medium.

Bank Notes in New Zealand. The issue of bank notes in New Zealand has always been the subject of strict Government regulation, and as typical of the limitation imposed on the trading banks in this respect a section cf an Act incorporating one of our banks may be quoted: “The total amount of bank notes issued and in circulation in New Zealand shall not at any time exceed the amount of coin, bullion and publje securities held by the bank within the Dominion; nor shall the proportion of coin be less than one third of the amount of such coin, bullion and

securities.” In addition the note holders were given special legal protection to the effect that all hank notes were declared to be a first charge on all the assets of the relative issuing hanks, whilst the Government has in effect appropriated to itself the profit on trading bank note issues by levying a special tax thereon —the present rate on trading bank notes being 4& per cent, per annum on the average circulation. For a long period prior to 1914, bank notes were not legal tender in New Zealand although they circulated freely together with gold coin, but upon the outbreak of war it became necessary to conserve the Dominion’s gold holdings and trading bank notes were declared legal tender and the export of gold coin was prohibited. Naturally this legislation resuited in the gradual withdrawal of gold coin from circulation and its replacement by bank notes. This State of affairs continued after the war and in fact until August 1, 1934, when the Reserve Bank of New Zealand commenced operations, replacing the trading banks as the authority for the issue of bank notes and l taking over, with legis lative authority, the total gold coin holdings of the trading banks at face value in New Zealand currency, although the market value in New Zealand currency was approximately twice the face value. The profits resulting from realisation of this gold accrue, however, to the Government. Thus the six trading banks of New Zealand have lost their right ol note issue and may now redeem their outstanding notes only in Reserve Bunk notes, or in subsidiary coin to the extent to which such coin is legal tender :n New Zealand. Further, on August 1, J-93G, the trading banks will he called upon to nay to the Reserve Bank an amount equal to the value of their notes then outstanding, the liability the-efor ceasing to be the care of the trading hanks and being assumed by the Reserve Bank. In this connection it is interesting to note that an amount probably running into some hundreds of thou-

sands of pounds will eventually accrue to the Government as unclaimed money in respect of notes lost or destroyed during the long period in which the trading hanks have so very satisfactorily provided the Dominion with paper currency.

Reserve Bank Notes. Under modern conditions the use of gold coin as an internal circulating medium lias steadily decreased and so in New Zealand the main circulating medium now consists of Reserve Bank notes, convertible, upon presentation not into gold but into sterling—in amounts of not less than £IOOO New Zealand currency and at a rate of exchange fixed by the Reserve Bank. Progress in monetary affairs has reached a stage where internal gold circulation is considered not only an unnecessary luxury from the point- of view of New Zealand but actually inimical to the best interests of the Dominion. In this connection it is interesting to refer back to the report made in 1931 on the banking and currency system of New Zealand, in which. Sir Otto Niemeyer said: “In past days, when notes were a much larger proportion of the total circulating media, when international financial connections were much more limited, and when notes represented usually the private liabilities of

numerous competing banks, the position was different. A bank had no means of meeting its liabilities to noteholders except by payment ot coin, and an individual bank could not afford vis-a-vis its competitors the risk of a run which it could not face. But in countries with an adequate central banking system in which the Central Bank is responsible for the maintenance of the currency and must always be prepared to provide against proper securities, legal tender for internal obligations, the internal need_ for payment in com has ceased to exist.”

As a general rule the Reserve Bank of New Zealand is required at all times to maintain a minimum reserve of not less than 25 per cent, of the amount of its notes in circulation and other demand liabilities, in the form of gold coin or bullion, sterling exchange m specified liquid forms, or net gold exis the present-day basis of New Zealand’s internal circulating medium a basis which provides security, flexibility and liquidity.