Money and Finance

Money and Finance

27. A history of money - what makes the world go round

Money - it jingles in your pocket, it rustles in your wallet and it clinks in your piggy-bank. Money makes the world go round, but what's it? It's a store of value or a measure of wealth. Money is anything that is generally accepted as payment for goods and services. This is a wide definition and, over the centuries, money has appeared in all shapes and sizes; cowrie shells in ancient China, huge stone discs on a South Pacific Island or beads (Wampum) for the North American Indians.

Jingle = a zornai

Rustle = a fosni

Clink = a zangani

Piggy-bank = pusculita

Cowrie = scoica, ghioc

Beads = margele, matanii

Wampum = colier de scoici

From Chickens to Plastic

At the end of the day, of course, it doesn't really matter what shape or size the money takes, as long as everyone recognises it and accepts it in payment. But, over the course of history, money has predominantly been associated with metals, in particular gold, silver and copper.

Bartering (troc)

Before metal money become the usual means of exchange, people would swap (schimba) goods and services in a process known as bartering - "I'll swap you ten chickens for your goat". This kind of exchange does not really encourage trade, as all sorts of problems arise; are all the chickens of the same size? If I've only got five chickens, can I buy half a cow? Obviously, precious metals are a practical alternative to payment in kind (īn natura).

Four Essential Qualities

For money to be practical and efficient it should possess these qualities:

Durability - in prison, cigarettes may become a medium of exchange - but they're easy to break and quickly dry up; in other words, they don't last.

Portability - in some parts of Africa your wealth is measured in cattle. This is fine if you're trading locally, but if money isn't easy to carry, how can trade develop?

Divisibility - small units make life much easier - imagine trying to buy a hot dog in New York if the $100 bill was the lowest unit of currency!

Intrinsic value - money should have some worth in itself, otherwise it won't inspire confidence.

Coins

We first read of coins in the Kingdom of Lydia in the 7^th century BC. Their coins were of equal weight and therefore of equal value, simplifying trade. Stamping a design onto the coins is called "minting"; Alexander the Great introduced the practice of stamping a picture of the sovereign's head on the coins, an idea that was soon copied.

Coins however, were not always as 444g68e valuable as they seemed - they were often clipped or shaved by unscrupulous individuals or debased by the state. The Romans, with the economic pressure of the Punic wars, began a long process of debasement, mixing more and more copper in with the silver, so that the intrinsic value of the coin was far lower than the marked face value.

Mint = a bate moneda

Debase = a devaloriza

Debasement = devalorizare

Clipped = retezat, scurtat

Shaved = redus

Paper Money

Bank notes were first introduced by the Chinese in the 10^th century. They were later used by governments in dire financial straits (īn dificultati mari financiare) - caused by things like having to finance a war, for example. The English colonies in North America made important strides in the use of bank notes. For various political and economic reasons, the Colonists often found themselves short of coinage. To get round this problem, they used first wampum, then tobacco, rice and whisky or brandy - not exactly the most practical solution. The first paper money issue was by the Massachusetts Bay Colony in 1690. The practice was frowned upon and eventually banned by the mother country, but the inventive money-making instincts of the new United States of America meant that, during the 19^th century, most of the money used was in the form of paper dollars. The first fully printed note in England was issued in 1855 - until that time the cashier had to write the name of the payee and sign each note individually.

At first, bank notes were redeemable for gold - on Bank of England notes you will see written "I promise to pay the bearer on demand the sum of." If you took a ten-pound note to the Bank they used to have to give you ten pounds in gold coin. Britain left the gold standard in 1931 and thus the notes are no longer backed by gold.

Strides = progrese, pasi

Short of coinage = lipsa de monezi

Ban = a interzice, a scoate īn afara legii

Frown upon = a nu fi de acord cu ceva

Redeem = a compensa, rascumpara

Plastic money

Nowadays many transactions are carried out with "plastic money" such as credit cards. The newest are called "smart cards" and carry small silicon chips that can record every transaction on the card. Research into the cards of the future continues, but the latest development is e-cash, cash to be used across the Internet - you'll be able to spend money from the comfort of your armchair. If only earning the damn stuff was so easy!

MONEY TALK - the language of cash

Money is so central to our lives that it has spawned (a prolifera) a wealth of specific terminology, idioms and sayings. Great thinkers in all ages have had something to say about it; governments are elected on the strength of how they plan to manage it, empires rise and fall because of it.

The Root of All Evil

Money is so important to us - people even say it makes the world go round - that it has acquired many nicknames, such as bread, dough, dinero, mazuma, spondulicks, rhino, gravy, dosh, lucre or simply the necessary. Small amounts of it are chickenfeed or peanuts. (īn slang: lovele, bistari, parale, bani, cāstig)

So what are you thinking about now? A penny for your thoughts! Oh, I see, you like the look of that new jacket - it'll cost you an arm and a leg. I'm afraid, or, to put it another way, you'll have to pay through the nose for it.

You may like it so much you insist that money's no object - but don't forget: money doesn't grow on trees, so don't live beyond your means! If you do go ahead and buy that jacket, your friends will tell you that you might as well flush it (the money) down the toilet. So, if you can't afford it, buy the cheapo version: you can bet your bottom dollar that nobody will be able to tell the difference.

Of course your attitude to money depends, to a certain extend, on how well off you are. You may be experiencing a liquidity problem or a cashflow problem at the moment; in other words, you're strapped for cash, broke, or even flat broke. Perhaps you don't have a dollar to your name, you don't have a red cent and you haven't got a bean, in which case you're as poor as a church mouse!

If, on the other hand, you've got plenty of money then you're filthy rich, or stinking rich or rolling in it - perhaps you had some good business ideas and put your money where your mouth is or cashed in on a golden business opportunity and managed to get rich quick, so now you're laughing all the way to the bank.

You've got money to burn; you're earning megabucks and, now that you know its power, you believe what people say - money talks! In spite of this, you might be so careful with money that people think you're mean or stingy (zgārcit). Perhaps they'll call you a miser behind your back; in the US you'd be called a tightwad (calic, avar).

You might reply that money doesn't grow on trees - but then others might say that you can't take it with you (when you die) and so they spend money as if it were going out of fashion. In this case, money burns a hole in their pocket, and you would be the first to remind them that a fool and his money are soon parted. If, on the other hand, you look after the pennies, then the pounds will look after themselves.

The profits of labor

Roman soldiers were given part of their pay in salt, as it was so valuable - at least that's the excuse the Senate gave!

At the time it was called their salario, and it is for this reason that we still use the word salary to describe the regular monthly payment made to employees - especially white-collars workers. If you receive your pay every week, then you receive wages on payday, in the form of a paycheck in the US, or a paypacket in the UK.

You may find that some of your money is taken from you before you even see it, that is it is deducted at source; in the US these deductions are known as deducks or ducks. They may be for tax and also, in the UK, National Insurance, which means that your take-home pay may be a lot less than you expected!

Those who are unlucky enough not to have a job will be on the dole - receiving unemployment benefit in the UK or on welfare in the US. If you pay money for your retirement then your company runs a pension scheme. If you work more than your normal hours, then you're paid overtime. If your company has been doing well, you may get a bonus.

If you're one of the bosses of a newly-privatised monopoly, your employees may call you a fat cat, and part of your pay may take the form of share options; when you started to work for the company you were given a golden hello and, regardless of the company's performance, you will be given a golden handshake when you leave.

Perhaps you're the kind of boss that never stops complaining about your employees; if so remember: if you pay peanuts you get monkeys!

You and your fellow top-managers are likely to enjoy a range of fringe benefits or perks - like a free car, house and even private education for your children. This is in lieu of money, and means that you have a high standard of living without having to declare hundreds of thousands of pounds at the end of the tax year. All the expenses the company incurs on your behalf are also tax deductible for the company, so it doesn't lose out either.

When the time comes to retire, sooner rather then later, for the lucky few who can choose early retirement, you may decide to take your company pension in a lump sum - and finally you can go on that world cruise!

White-collars workers = functionari

On the dole = ajutor de somaj, subventie de la stat

On welfare = ajutor social

Share options =

Fringe benefit / perks = beneficiu suplimentar

In lieu of money = īn loc de bani

Incur = a face, a crea

Lump sum = suma globala / unica, plata unica

Borrowing

Many of us go to the bank at some point to ask for a loan - it is often said that a bank manager is someone who lends you an umbrella when the sun is shining and who asks for it back when it starts to rain.

The simplest way to borrow is with an overdraft, or by using the facilities offered by a credit card; but to borrow large sums you'll probably negotiate a loan with your bank; you can either borrow a fixed amount or agree a credit limit.

If you're buying a house, then you'll want a mortgage. If the bank refuses to lend you money, you might resort to borrowing from a finance company or even the local loan shark to pay off your IOUs (I Owe You). For any loan, you should look at the Annual Percentage Rate which takes into account the various charges which will be included in your repayments.

Borrowing from a loan shark can involve exorbitant interest rates. If you're being gouged in this way, then you may end up being unable to make the repayments. Your debt may be sold to a debt collector or you may receive a visit from the bailiffs in the UK. If you've been buying something in instalments or on a hire purchase (HP) scheme, defaulting on the repayments will probably lead to a visit from the dreaded repo (repossesssion) man.

Gouged = escrocat, tras pe sfoara

Bailiff = inspector

Dreaded = de temut

Forgery

With the invention of money came forgery. Modern counterfeit notes can be extremely difficult to spot and new developments in the production of notes are soon copied by the forgers. Here's a quick guide to recognizing a counterfeit Bank of England note:

The feel of the paper: it should be crisp and slightly rough in the heavily printed areas.

The watermark: you shouldn't be able to notice it until you hold the note up to the light; then you can see a picture of the Queen.

The thread: all genuine notes have a thread embedded in the paper. Recent notes have a "windowed" thread which does not appear as a continuous line until the note is held up to the light.

Quality of printing: pure, clear colours and sharp, well-defined lines.

Spot = a identifica, a distinge

Counterfeit notes = bancnote contrafacute

Forgers = falsificatori

Crisp = fragil

Embedded = introdus

IDIOMS

Hard Times

If you've fallen on hard times, you might tell people that you need to watch your spending, your money or your pennies. In the States, you might say that you have to watch every dime. Perhaps your bank account is in the red, so you decide to control your spending and keep track of your expenses more closely. This will certainly involve cutting down on expenses in general, budgeting your money, tightening your belt and saving your pennies.

Almost certainly you will have to cut the frills (unneccessary expenditure), trim (reduce) the budget and go back to basics. If an unexpected expense comes up that you have to meet, you might decide to dip into your savings, or scrounge the money somehow.

If, on the other hand, you splash out on something extravagant, you might justify the expense by telling people that you've got enough saved up, that you've been saving for a rainy day or that you're lucky enough to have a nest egg that you've finally decided to use.

Frills = fasoane, lucruri care nu sunt necesare

Scrounge = a saprli, a sterpeli

Splash out = a se arunca

29. Accounting and financial statements

Vocabulary

a.       Match up the terms on the left with the definitions on the right.

Bookkeeping

A calculating an individual's or a company's liability for tax -

Accounting

B writing down the details of transactions (debits and credits) - 

Managerial accounting

C keeping financial records, recording income and expenditure, valuing assets and liabilities, and so on

Cost accounting

D preparing budgets and other financial reports necessary for management

Tax accounting

E inspection and evaluation of accounts by a second set of accountants - audit

Auditing

F using all available accounting procedures and tricks to disguise the true financial position of a company

'creative accounting'

G working out the unit cost of products, including materials, labour and all other expenses

b.      Match up these words with the definitions below

Assets

A a company's owners

Depreciation

B all the money received by a company during a given period

Liabilities

C all the money that a company will have to pay to someone else in the future, including taxes, debt, and interest and mortgage payments

Turnover

D the amount of business done by a company over a year

Creditors (GB) accounts payable (US)

E anything owned by a business (cash investments, buildings, machines, and so on) that can be used to produce goods or pay liabilities

Debtors (GB) accounts receivable (US)

F the reduction in value of a fixed asset during the years it is in use (charged against profits)

Overheads (GB) overhead (US)

G sums of money owed by customers for goods or services purchased on credit

Revenue or earnings or income

H sums of money owed to suppliers for purchases made on credit

Shareholders (GB) stockholders (US)

I (the value of) raw materials, work in progress, and finished products stored ready for sale

Stock (GB) inventory (US)

J the various expenses of operating a business that cannot be charged to any one product, process or department

Reading

Insert the words in vocabulary b) in the gaps in the text below.

Accounting and financial statements

In accounting it is always assumed that a business is a 'going concern', i.e. that it will continue indefinitely into the future, which means that the current market value of its assets is irrelevant, as they are not for sale. Consequently, the most common accounting system is historical cost accounting, which records (1) .... at their original purchase price, minus accumulated depreciation charges. In times of inflation, this understates the value of appreciating assets such as land, but overstates profits as it does not record the replacement cost of plant or (2) ... . The value of a business's assets under historical cost accounting - purchase price minus (3) .... - is known as its net book value. Countries with persistently high inflation often prefer to use current cost or replacement cost accounting, which values assets (and related expenses like depreciation) at the price that would have to be paid to replace them (or to buy a more modern equivalent) today.

Company law specifies that (4) .... Must be given certain financial information. Companies generally include three financial statements in their annual reports.

The profit and loss account (GB) or income statement (US) shows (5) ..... and expenditure. It usually gives figures for total sales or (6) .... And costs and (7) ... . The first figure should obviously be higher than the second, i.e. there should be a profit. Part of the profit goes to the government in taxation, part is usually distributed to shareholders (stockholders) as dividend, and part is retained by the company.

The balance sheet shows a company's financial situation on a particular date, generally the last day of the financial year. It lists the company's assets, its (8) .... , and shareholders' (stockholders) funds. A business's assets include (9) ... as it is assumed that these will be paid. Liabilities include (10) ... , as these will have to be paid. Negative items on financial statements, such as creditors, taxation, and dividends paid, are usually enclosed in brackets.

In accordance with the principle of double-entry bookkeeping (that all transactions are entered as credit in one account and as debit in another), the basic accounting equation is Assets = Liabilities + Owner's (or Shares') Equity. This can be rewritten as Assets - Liabilities = Owners' Equity or Net Assets. This includes share capital (money received from the issue of shares), share premium (GB) or paid-in surplus (US) (any money realised by selling shares at above their nominal value), and the company's reserves, including the year's retained profits. Shareholders' equity or net assets are generally less than a company's market capitalisation (the total value of its shares at any given moment, i.e. the number of shares times their market price), because net assets do not record items such as goodwill.

The third financial statement has various names including the source and application of funds statement, and the statement of changes in financial position. This shows the flow of cash in and out of the business between balance sheet dates. Sources of funds include trading profits, depreciation provisions, sales of assets, borrowing, and the issuing of shares.

Applications of funds include purchases of fixed or financial assets, payment of dividends, repayment of loans, and - in a bad year - trading losses.

The profit and loss account (GB) or income statement (US) - calculul rezultatelor, al pierderilor si a profitului

The balance sheet - bilantul contabil

Net Assets - activul net

Share capital - capitalul actinilor

Share premium (GB) or paid-in surplus (US) - prima suplimentara din actiuni

Company's reserves - rezervele firmei

The year's retained profits - profitul pastrat dintr-un an

Goodwill - clientela; fondurile comerciale; vad

Source and application of funds statement / the statement of changes in financial position - situatia surselor si a aplicarii fondurilor / situatia schimbarilor din situatia financiara

Vocabulary

There are ten gaps in the two statements which follow. According to the information in the previous text, decide where the following headings should appear:

Called-up share capital cash in hand and at bank

Corporation tax debtors depreciation turnover

Freehold properties historical cost net assets overheads

The Arsenal Football Club PLC

Profit and Loss Account for the Year Ended 31^st May 1994

₤

15,341,689

income from football and related

activities: gate receipts, broadcasting,

ground advertisements, prize money)

Costs and [2 .........], (14,951,737) (12,804,538)

less other income (costs include

salaries, [3 .......], auditors'

remuneration, and lease payments; other

income includes Interest Receivable)

Profit on Ordinary Activities before

Transfer Fees  2,537,151

Transfer fees payable (889,588) (54,259)

Profit on Ordinary Activities before

Taxation  2,482,892

Taxation (1,596,226) (750,000)

Profit after Taxation Retained for

The Financial Year  1,732,892

Arsenal Football Club PLC - Balance Sheet 31^st May 1994

₤

Fixed Assets  18,982,931

(including [4 .......],

leasehold properties, plant and

equipment, and motor vehicles;

all recorded at [5 .....]

minus depreciation)

Current Assets  7,991,088

Stocks; (including [6 .....],

Instalments on executive boxes);

and [7 ......]

Creditors  (9,863,457) (8,755,491)

Amounts falling due within one

year (including [8 ......]

and social security)

Total Assets less Current Liabilities 18,218,528

Long Term Liabilities

Amounts falling due after more than

One year (including debenture

Subscriptions) (17,893,500) (11,923,100)

10,329,557 6,295,428

Capital and Reserves

56,000 56,000

Share premium account 237,201 237,201

Building reserve 846,000 846,000

Profit and loss account 9,190,356 5,156,227

(year's profit added to previous balance)

Shareholders' Funds  6,295,428

30. Exchange rates

While reading the text, decide which paragraph could be given the following headings.

Floating exchange rates

Intervention and managed floating exchange rates

Supporters of fixed and floating rates

The abolition of exchange controls

The period of gold convertibility

The power of speculators and the collapse of the EMS

Why many business people would prefer a single currency

The Bretton Woods agreement of 1944 established fixed exchange rates, defined in terms of gold and the US dollar. Between 1944 and 1971, many currencies were pegged against (fixat, stabilizat dupa) the US dollar, i.e. their parties with the US dollar were fixed. In this period, a US dollar was a promissory note issued by the United States Treasury. If anybody requested it, the Treasury had to exchange the note for 1/35^th of an ounce of gold. Under this system, overvalued or undervalued currencies could only be adjusted with the agreement of the International Monetary Fund. Such adjustments are called devaluations and revaluations. The Bretton Woods system of gold convertibility and pegging against the dollar was abandoned in 1971, because following inflation, the Federal Reserve did not have enough gold to guarantee the American currency.

Gold convertibility was replaced by a system of floating exchange rates. (Today, the US dollar - the unofficial world currency - is merely a piece of paper on which is written 'In God We Trust.' God, not gold!) a freely (or clean) floating exchange rate is determined purely by supply and demand. Theoretically, in the absence of speculation, exchange rates should reflect purchasing power parity - the cost of a given selection of goods and services in different countries. Proponents of floating exchange rates, such as Milton Friedman, argued that currencies would automatically establish stable exchange rates, which would reflect economic realities more precisely than calculations by central bank officials. Yet, they underestimated the impact of speculation, and the fact that companies and investors frequently follow short-term money market trends even if these are contrary to their own long-term interests.

In the late 1970s and early 1980s, the American, British and other governments deregulated their financial systems, and abolished all exchange controls. Residents in these countries are now able to exchange any amount of their currency for any other convertible currency. This has led to the current situation in which 95% of the world's currency transactions are unrelated to transactions in goods but are purely speculative. Enormous amounts of money move round the world, chasing high interest rates or capital gains, as investors - including rich individuals, companies and pension funds - seek to maximize the value of their assets. In London alone, over $300 billion worth of currency is traded on an average day - the equivalent of about 30% of the value of the goods Britain procedures each year. Banks make a profit from the spread (marja) between a currency's buying and selling prices.

Few governments, however, leave exchange rates wholly at the mercy of market forces. Most of them attempt to influence the level of their currency when necessary. Managed (or dirty) floating exchange rates are more common than freely floating ones. In 1979, most Western European governments joined the EMS (European Monetary System), with its ERM (Exchange Rate Mechanism). This established parties between member currencies, and a margin of plus or minus 2 ¼ %. If the rate diverged by more than this amount from the central parity, governments and central banks had to intervene in exchange markets, buying or selling in order to increase or decrease the value of their currency.

Yet, government policy can easily be defeated by the combined action of international speculators. For example, on a single day in September 1992 the Bank of England lost five billion pounds in a hopeless attempt to support the pound sterling. For weeks, all the world's financial institutions and rich individuals had been selling their pounds, as everyone except the British Government believed that ever since it joined the ERM in 1990, the pound had been seriously overvalued. When the British central bank ran out of reserves and could no longer buy pounds, the currency was withdrawn from the ERM and allowed to float, instantly losing about 15% of its value against the D-mark. The next year, speculators attacked the French franc, the Belgian franc, the Danish krone and the Spanish peseta. In August 1993, the European Monetary System was more or less suspended.

Many manufacturers are in favour of fixed exchange rates, or a single currency. Although it is possible to some extend to hedge against (a se asigura īmpotriva) currency fluctuations by way of futures contracts, forward planning is difficult when the price of raw materials bought from abroad, or the price of your products in export markets, can rise or fall by 50% in only a few months. (Since exchange controls were abolished, currencies including the US$ and the pound sterling have in turn appreciated by up to 100% and then depreciated by more than 50% against the currencies of major trading partners.)

Other supporters of fixed exchange rates or a single currency include extreme conservatives who want to return to something like the gold standard, as well as people on the left who believe that speculators have too much power. Supporters of flexible rates include monetarists who want countries to follow strict monetary rules, as well as Keynesians who want to be free to devalue in the attempt to reduce unemployment. These are both rather surprising alliances, which put into doubt the planned timetable for the introduction of a Single European Currency.

Comprehension

Are the following statements True or False?

1 Gold convertibility was abandoned because there was too much gold.

2 It is now impossible to exchange dollars for gold.

3 Only a pegged currency can be devalued or revalued.

4 A floating currency can either appreciate or be devalued.

5 Central banks sometimes attempt to decrease the value of their currency.

6 The EMS was designed to stabilize exchange rates.

7 To speculate is to take risks; to hedge is to try to avoid risks.

8 Under the system of floating exchange rates, currencies can depreciate 100% in a short time.

Vocabulary

Match up the half-sentences below.

To 'peg' a currency against something means to

A.     the amount of a country's money that residents were able to change into foreign currencies.

A clean floating exchange rate

B.     fix its value in relation to it.

Exchange controls used to limit

C.     make a profit by making capital gains or by investing at higher interest rates.

Speculators buy or sell currencies in order to

D.     is determined by supply and demand.

'Market forces' means

E.      trying to insure against unfavourable price movements by way of futures contract.

'Hedging' means

F.      the determination of price by supply and demand (the quantity available and the quantity bought and sold).

Which six of these verbs are defined below?

Abolish adjust appreciate convert diverge

Establish  fluctuate peg suspend revalue

1 to make changes to something

2 to change something into something else

3 to end something permanently

4 to end something temporarily

5 to go up or down (in quantity, value, etc.)

6 to move away from what is considered normal