Money & Banking
Have you ever gone out without any money? Perhaps you forgot your bus fare or your school dinner money, or you went into a shop and found that you had no money to pay for your goods. We get into a mess very quickly without money, because we use it all the time.
LIFE WITHOUT MONEY
Before money was invented, people often exchanged goods that they had produced for other goods that they needed. This system is known as barter. For example, a farmer who needed new tools might have visited the local metal worker and exchanged some of his farms produce for tools.
The problem with bartering is that the person with goods to trade has to find someone else who wants to buy those goods, and who has something acceptable to exchange for them. This takes time and effort. The advantage of using money was that farmers could sell their produce for money to anyone, and then use the money to buy tools.
EARLY FORMS OF MONEY
We think of money as being coins and banknotes, but this does not have to be the case. Any item that people accept as a means of payment can be used as money. Shells, beads, elephant tusks, furs, and cattle are just some of the items used as money by various ancient peoples.
Metal coins were probably invented in the 6th-century bc in a place called Lydia, in modern-day Turkey. The first coins were made of a metal called electrum, which is a natural mixture of gold and silver. They were bean-shaped ingots (pieces of metal), marked to show the weight of electrum they contained. Metal coins worked well and they were soon being used around the world.
THE FIRST BANKS
Almost as soon as people started using coins, the first banks appeared. Each town or country issued its own coins, so anyone who wanted to trade with someone from another state needed to exchange their coins. By Ancient Greek times, there were money-changers who would exchange coins for a fee. They often made so much profit from this that they were able to lend money to other people. This was the start of banking.
The first modern banks were set up in the 17th century, and among the first was the Bank of England, founded in 1694. Banks offer two main services—saving and lending. People who have money to save (invest) can leave it in a bank, and the bank pays them some extra money, called interest, which makes their savings grow. The bank then uses the money people have invested in lending to other people. People borrow the money for a set period and then pay it back with some interest.
TOKEN COINS AND BANKNOTES
For many centuries, coins were made of valuable metals such as gold, silver or copper. The value of a coin was about equal to the value of the metal contained in it. Coins made of valuable metal are called “standard coins”.
The coins we use today are made of cheap metals, so the coins themselves are not valuable. They are known as “token coins”. The places where coins are made are called mints. The mints of most countries started making token coins during the 19th century. They were used alongside standard coins for many years, but by the 1940s standard coins had been withdrawn in most countries.
Paper money was first invented in China around the 9th century. It was not used in Western countries until the 16th century. In the UK, banknotes were introduced when the Bank of England was set up. The first people to invest money in the Bank of England were given receipts saying “I promise to pay the bearer on demand the sum of xxx pounds”. This meant that if they went to the bank and handed in the receipt, they could have their money back. These receipts were the first banknotes. The same promise is still printed on British banknotes today.
Token coins and banknotes are not valuable in themselves, but they are made acceptable through a government decree that people must accept them in payment of debts. The money is then known as “legal tender”.
MINTING AND PRINTING
Making coins is called minting. The metal is rolled into strips, then a machine punches out circular discs, called planchets. The planchets are checked carefully to ensure that they are exactly the correct weight. If they are too heavy, they have to be filed down; if they are too light they are melted and made again. Then the rims of the planchets are rolled to make them stick up slightly above the surface of the coins. This protects the coins from wear. Finally, the design of the finished coin is struck on to the planchets with special stamps, called dies. Around the edges of some coins, you can see a pattern of marks or serrations that are known as milling. They were important in olden times as coin-makers might clip away bits of precious metal from the edge and keep them for themselves. Milled coins meant you could see easily if your coins had been altered.
Banknotes are carefully designed to make them difficult to copy or forge. Notes are usually made from special high-quality paper, which often contains a faint design that you can only see if you hold it up to the light. This is known as a watermark. Other anti-forgery features may include a strip of metal running through the paper, and pictures or patterns that are intended to be particularly hard to copy. Each note also bears its own unique number, called a serial number.
CHEQUES AND CREDIT CARDS
If you go into a shop today, there are many different ways to pay for what you buy. You can use notes and coins. You can pay by cheque or with a debit card. These are both methods of taking money directly out of a bank account. You can also pay with a credit card. This allows you to borrow money from the credit card company to pay for your goods, but you have to pay back the money with interest over the next few months. These other ways of paying are becoming so popular that perhaps one day soon we will no longer use notes and coins at all.
Did you know?
• When coins were made of gold and silver, people used to clip tiny bits from the edges to keep some of the valuable metal. In the 17th century, ridges around the coin’s rim, called milled edges, were introduced to stop this happening. Our coins still have milled edges today.
• The different shapes and sizes of coins are designed to help blind people recognize the coins by touch.
• The ancient Chinese used miniature bronze knives, axes and other tools as a form of money.