Currency

By John Shi Pd. 6

What is Currency?• A System of Money in Common Use

• Banknotes plus coins

• Physical Tokens used for Money

• Used as a Medium of exchange

• Currency vs. Money

Origin of Currencies

• Bartering System

• Commodity Money

• Standardized Coinage

• http://www.youtube.com/watch?v=FuHQhGqZvY0

Strong & Weak Currencies

• Strong/Hard Currencies – Globally traded currency expected to serve as a reliable store of value– US Dollar, Euro, Swiss Franc, British pound

sterling, Japanese Yen

• Weak/Soft Currencies – Expected to fluctuate erratically and depreciate against others

Reserve Currencies• Currency held by many governments as part

of foreign exchange reserves

• Used for pricing commodities on the global market– US Dollar used for the price of a barrel of oil

• Most reserve currencies are strong currencies.

Appreciation of Currency• Increase in a currency value relative to other reference

currencies.

• Causes:

– High exports, need currency to pay for exports

– Increased interest rates

– Foreign exchange market

– Employment increase

• Effects:

– Lower exports

– Higher imports

– Increase in supply of currency

Depreciation of Currency• Decrease in a currency value relative to other reference

currencies.

• Causes:

– Decreased demand for currency

– Low interest rates

– High Imports

– Low exports

• Effects:

– Higher exports

– Lower imports

– Decrease in supply of currency

Currency Manipulation

• Freely Floating Currencies – currencies determined by market forces

• Currency Manipulation – keeping currency at a set value relative to another currency– China can make its currency a set % of the US

dollar to promote trade– Prevents the RMB from being a reserve

currency

Inflation• Rise of general level of prices in an

economy over a period of time• Around 2-3% per year• Causes:

– Demand Pull Inflation– Supply Shock Inflation– Monetary Supply– Wage earners + Producer Costs

Inflation Cont.

• Effects:– Elderly on fixed incomes– Gold Standard– Wage + Price Controls– Fixed Exchange Rates– Higher interest rates– Slow Growth of Money Supply

The US Dollar• Most used in international transactions and dominant

reserve currency

• Used today to trade for commodities such as gold and petroleum

• Created by the Coinage Act of 1792

• 1857 – Half cent removed due to high costs

• 1971 – US leaves the gold standard

• Believed to be an estimated $1 in counterfeit currency for every 12500 in genuine currency

The Euro• 1999 – Introduced in nonphysical form

• 1999 – Stability and Growth Pact passed

• 2002 – Euro replaces nation’s currency

• 2004 – Euro peaks in value

• 2008 – First official recession of the Euro (negative growth)

• 2009-2010 – Agreed Bailout of Greece and other members

• Current Rate: 1 Euro = 1.3 US Dollars

British Pound• 4th traded in the foreign exchange market• Oldest Traded Currency in the World• 1940 – US Agreement at Bretton Woods, 1 pound

= $4.03.• 1967 – Severe Devaluation of British Currency to

$2.4• 1971- Decimalization

British Pound Cont.• 1972 – Free floating pound• 1979-1989 – Conservative party enters. $2.4 ->

$1.03 -> $1.7. • 1980- Recession due to high exchange rates• Current Rate: 1 British Pound Sterling = $1.52

Russian Ruble• 1885 – 1 Ruble = 0.774 grams gold• 1920s- Gold Standard dropped due to WWI• 1922 – Second Ruble (1 for 10000)• 1923-24- Third Ruble (1 for 100). Issuing

of the first Soviet currency• 1924-1947 – Gold 4th Ruble (1 to 50000)• 1947-1961 – Soviet attempt to reduce

money in circulation (5th Ruble)

Russian Ruble Cont.• 1961 – 1997 – 1 6th Ruble =

0.9874 g gold

• 1991- Fall of Soviet Union, Currency stays

• 1998 – 7th Ruble (1 for 1000 old)

• 1 1st ruble = 2 E-6 7th Ruble

• 2010- Putin and Wen Jiabao agree to use own national currency for bilateral trade over dollar

• Current Rate: 1 ruble = $0.03

Chinese Yuan / RMB• Referred to as “Renminbi”,

“RMB”, “Yuan,” “Kuai”

• 1 Yuan divided into 10 “jiao” or “mao”

• 1 Mao divded into 10 fen

• 1948 – First series issued by Bank of China

• 1 yuan = 10000 old yuan

China Yuan / RMB Cont.• 1955 – Second series of banknotes issued

• Command Economy led to Unrealistic exchange rates

• 1978 – Opening of Chinese Economy. RMB only used domestically

• 1980s-1990s – Exchange rate brought to more realistic levels, Dual system abolished

• 2005 – Fixed rate abolished

• Currently 1 RMB = $0.16

Chinese Currency Series

• 1955 – Second Series – Featured Uyghur, Tibetan, Mongolian and Zhuang languages

• 1962 – Third Series – Phased out in 1990s

• 1987-1997 – Fourth Series – Still Used Today

• 1999 – 5th series – Featuring Mao Zedong only

Chinese Phasing Out Currency

• Due to inflation, China has stopped using cent coins (1 fen, 2 fen)

• Vendors now only deal in multiples of 10 cents

Mexican Peso• 1863 – First issue of the Peso (of coins measured in

centavos)• 1866 – Coins denominated by Pesos• Peso was used in US until 1857• 1900s – Mexican Peso most stable in Latin America• 1970s – Severe devaluation of Currency• 1993- Second Peso (Nuevo Peso). 1 2nd peso = 1000

old pesos• 1 peso = $0.08

Peso Crash• 1970s – Mexico borrowed money for industrialization

• 1980s – Increased oil prices, attempt to improve oil refineries

• 1989 – Interest rates in US and Europe increase

• 1982 – Defaulted on external debt

• Resulted in capital flight, hyperinflation and devaluation

• Banks restructure their loans and IMF involvement

• 1993 - Stability and Economic Growth Pact

• Current Mexican Debt: $274800 Million

Iranian Rial• 1798 – introduction of rial as 1250 dinar (1/8th of a toman)

• 1825- Rial ceased to be used

• 1932 – Rial replaces Toman at a rate of 1 toman = 10 rials

• After the Islamic Revolution, Rial design removes Shah’s effigy

• Reported CIA manipulation of the rial

• 2002- removal of preferred rate and market rate for a market driven rate

• 1 Dollar = 12275 Rial

Nigeria Naira• 1973 – Introduced Naira, replacing the pound at a 2:1 ratio• Rampant Inflation over the existence of the Naira. Annual

Inflation rate above 10%• 2007 – Naira appreciates against the US dollar due to high

oil reserves• 2008 – Redenomination of Naira with 100 old = 1 new• 2011 – Central bank increases interest rates to 12% to

reduce inflation• Foreign Currency in Nigeria regulated by local auctions,

Central Bank sets exchange rate • Current Rate: 1 Dollar = 100 Naira

• Massive Depreciation of Currency Value

• High “Unstoppable” Inflation Rates

Causes:

• Supply Shock

• Increase in Money Supply

Solutions:

• Dollarization

• Shock Therapy

Hyperinflation

Effects:

• No purchasing power

• Price Controls

• Hoarding and Fleeing country

Germany after WWI

• Hyperinflation (1 dollar = 4 trillion German Marks) from 1921-1924

• Causes:– War debt – demanded in 1921

• Solution: Introduction of the Retenmark in 1923 (cutting 12 zeroes)

• http://www.listenonrepeat.com/watch/?v=uV-GcYwCy-U#t=1m20s

Zimbabwean Dollar

• Causes: Political Turmoil, Dollarization, Money Supply

• 1980 – Highest Valued currency units: 1 ZWD = $1.47

• 2007 – ZW$600000 to 1 US DollarDate of

redenominationCurrency

codeValue

1 August 2006 ZWN 1 000 ZWD

1 August 2008 ZWR 1010 ZWN= 1013 ZWD

2 February 2009 ZWL 1012 ZWR= 1022 ZWN= 1025 ZWD

Anti-counterfeiting Measures• Traditionally involves finer detail on bills

• Coins are milled or reeded

• EURion constellation – 1996

• Counterfeit Deterrence System

State Quarters/Special CurrenciesState Quarters

– Enacted in 1997, Quarters from 1999-2008– 2009 – DC and US Territories program– Started to support new coin collectors– America The Beautiful Quarters – 2010 -2021

• Depicting national parks and sites

• Presidential Dollars - 2005

Special Currencies Cont.• Olympic Currencies – Bills made to

celebrate the Olympics– 6 million Chinese bills made – 2008– UK Olympic 50p pieces– Russian Olympic note (10 million) - 2013

Melting Currency• 2006 led to a jump in metal prices:

– Penny worth ~.26 cents more as metal– Nickel worth ~2.7 cents more as metal

• New Mint Rules: illegal to melt coins, illegal to export to melt coins

• 5 years in prison and fine of $10,000

Currency Investments• 95% Copper pennies (pre 1982) worth more

than pennies today– 0.02-0.03 cents for a copper penny (metal)– Price of 95% copper > copper + zinc pennies

http://www.youtube.com/watch?feature=player_embedded&v=GSaJQZxhcqo

31.95 dollars for $15 worth of pennies

Penny Debate US• Should we keep minting the penny or get

rid of it?For Removal:

• Pennies are worthless

• Wastes Taxpayer money (7.4 billion pennies made per year) and Time

•Pennies < minimum wage (6.15 seconds to pick up a penny)

For Keeping It:

• Prices round up

• Charities need pennies

• Nickels cost more to make (7.7 cents per nickel, 1.26 per penny)

• Pennies are sentimental

Bibliography• http://usatoday30.usatoday.com/money/2006-12-14-melting-ban-usat_x.htm• http://globalpapersecurity.com/how-the-eurion-constellation-protects-banknotes.htm• http://coins.about.com/od/uscoins/i/penny_debate.htm • http://usatoday30.usatoday.com/money/2006-12-14-melting-ban-usat_x.htm • http://en.wikipedia.org/wiki/Zimbabwean_dollar • http://en.wikipedia.org/wiki/Chinese_yuan • http://nbnl.globalwhelming.com/2008/07/18/the-very-limited-and-rare-beijing-olympic-currency-get-yours-now/ • http://en.wikipedia.org/wiki/Hard_currency • http://en.wikipedia.org/wiki/Zero_stroke • http://en.wikipedia.org/wiki/Pound_sterling • http://en.wikipedia.org/wiki/United_States_dollar • http://en.wikipedia.org/wiki/Bretton_Woods_system• http://en.wikipedia.org/wiki/Soviet_ruble • http://useconomy.about.com/od/criticalssues/p/US-Economy-Collapse.htm • http://en.wikipedia.org/wiki/Latin_American_debt_crisis • http://en.wikipedia.org/wiki/Iranian_rial • http://coinmill.com/IRR_USD.html • http://en.wikipedia.org/wiki/Iranian_toman