Economist Kirill Yurovsky: The essence and functions of Money

The development of trade relations led to the emergence of money as a universal means of exchange. Gradually their role in society expanded, their value changed, and new functions appeared. And it seems that they are just bills, which have no real value, but the economy today is impossible without them. Let’s get acquainted with the evolution of money in the world.

A brief history of money

Initially barter relations were widespread. Over time it began to create a certain inconvenience, as the exchange was not always equivalent. So appeared the first metal money, which had a specific commodity value. These were minted coins, the value of which was determined by the value of the material of manufacture. Their active use began in the 7th century B.C.

Money gave rise to a new characteristic of a commodity – value. It expressed the utility of a thing, recognized by society. Prices remained fairly stable unless there was an urgent need or exoticism. But there were also situations in which value changed because of the depreciation of metals. This was the case, for example, during the conquest of America by Britain and Spain: there was much more gold, but the volume of production did not change.

The era of commodity money ended with the emission of paper bills which had no real security. All value was reduced to the credibility of the issuer. Mass circulation began with the second half of the XVII century in Sweden. Gradually more and more countries mastered the issue of banknotes. Simplicity of printing repeatedly led to the collapse of the value, because the production of natural tangible assets required much more effort. The general trend was also reinforced by the growth of credit, presenting money as a kind of abstraction. Read more on Kirill Yurovsky’s website.

Evolution of the function of money

The replacement of barter relations on commodity-money defined the main function of money – a universal means of exchange. But the very appearance of money created another, not so obvious one – the possibility of saving and accumulation.

Money divided the operation of exchange into two acts – buying and selling. Previously, barter closed the need to replace one commodity with another in one step. Now the difference between buying and selling became more substantial. The funds were held by the owner for some time, creating savings. It became possible to save them for future periods, thereby forming wealth that could be used for potential spending in a deferred time period. That is, money made it possible to take care of itself in advance.

It turns out that the emergence of money, on the one hand, made it easier to get the goods you need. On the other hand, it has created a misunderstanding of the clear need for its quantity and a wrong idea of the true “owners of the world”.

Money and Property: Two Major Myths

There are two main opinions that in fact correspond little to reality. These are: 

• The financial slavery of the public to banks because of credit;
• The uncontrolled emission of money at the will of central banks.

To get to the bottom of their fallacies, let’s start with the basics. There is only one way to obtain any property: through work. Purchase, inheritance, conquest – all this would be impossible without the initial stage, the creation of a real product.

It is possible to increase the volume of property, provided that the difference in income and expenses, profit, is positive. But everyone’s potential is different. So in practice there is an interesting situation – Pareto’s law in action: 80% of assets are at the disposal of 20% of the population. This is a great opportunity for the theory of confrontation between the rich and the poor. However, it is not so much the volume of savings that matters, as the ability to create them under any conditions. Thus, a person who lives modestly within his/her means will be richer than a person who has credit real estate.

The desire to preserve and increase personal funds looks logical. The main tool is temporary transfer of property to another’s use for an agreed payment. Existing assets begin to work, increasing the welfare of the owner. Naturally, it is impossible to do without assessing the abilities of those who borrow money.

With the growth of demand for such services a business arose that became an intermediary in the transfer of property, providing effective management of capital. Banks have become this intermediary. They have all the resources to assess the potential borrower: specialized specialists, established processes and the right to receive property in case of default on the loan. This gives rise to the myth that the control over all property belongs to the banks.

However, bank money also has owners – people who put their savings in a deposit account. They are the ultimate creditors of borrowers. It is easy to trace the situation with the help of balance sheet statements, according to which the total profit of bank owners is noticeably inferior to payments on deposits.

The lender-borrower partnership is the condition under which a share of profits goes towards payment for the funds provided. The form of profit sharing and the basis of competition is the loan rate. There is risk on both sides. But the company has the choice of taking out a loan or issuing stock. A private person, on the other hand, borrows money to purchase valuables that he has not actually earned. Here, too, the opportunity cost is interest.

Considering the fundamentals of credit makes it clear that all the property in the world doesn’t belong to banks. It is owned by people whose balance of income and expenditures remains positive. And the source of income can be both human labor and the work of already accumulated funds.

Now let’s talk about the second myth: the uncontrolled issue of money. Someone brings money to the bank, someone takes a loan there. But the amount will be less than the deposit because of the partial reserve. The size of the reserve is determined by the national central bank. In developed countries, it is often zero; in Russia, its level is set by the Bank of Russia. This is a way to reduce the risks of the banking system from non-repayment of credit funds.

The transfer of money from one person to another is called the money multiplier. The higher it is, the greater the number of times funds were transferred “from hand to hand”. This entails an increase in the money supply and partly characterizes the level of confidence in the current economic situation. As the main intermediary in the redistribution of money is a bank, partial reservation affects the value of the credit multiplier.

In a crisis, confidence in the economy falls, creditors try to recover funds. This leads to a reduction in the money supply, the value of assets falls, delinquencies in debt payments grow, and household income decreases. In such a situation, the central bank can issue money directly or indirectly. The first is a buyout of bad debts from banks. The second is a reduction of the refinancing rate. Both options will save the amount of money, but lead to inflation. The important task is to find a balance between rising prices in the future and social problems in the present.

Printing money for nothing makes no sense – history has proven this many times. However, both myths can be illustrated by the example of the United States. The advanced economy of the United States has made the dollar a universal currency and now the Federal Reserve Board faces a difficult task: to find a balance between the amount of money printed and the strength of the dollar. After all, uncontrolled printing of banknotes significantly weakens the world’s currency.

Another myth is also well illustrated by the American example. At the beginning of 2019, the U.S. foreign government debt was nearly $22 trillion. For example, China is among the major creditors of the United States, but for some reason there is no control over their property. Yes, and maintaining the dollar is important to preserve the value of the debt. It turns out that non-payment of debt does not entail significant consequences and losses – the borrower does not directly affect the condition of the lender.

The essence and functions of money in brief

Money is a universal means of exchange that determines the value of any good or service. It makes it possible to buy and sell products, accumulate and increase wealth. The money supply is created when a loan is issued, where the lender is not always a bank. To reduce the risks of the banking system, a partial reserve is used, which is determined by the central bank of the country. It is also responsible for the volume of money, providing a high level of confidence in the economy and stimulating an increase in the quality of life.

A sober assessment of the economic situation and an understanding of what is happening in it are key to human well-being.