Money and Credit

Lecture 1. Essence and functions of money

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Content

1. The object and purpose of the course "Money and Credit“

2. The Money: the necessity and the concept of origin

3. The specific nature of the value of money

4. The development of forms of value

5. Functions of money

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Main definitions:MoneyCreditValueConsumer valueExchange valueRelative valueLiquidityAbsolute liquidityBarterCommodityCurrency………

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1. The object and purpose of the course "Money and Credit"

The subject of the course "Money and Credit" is a detailed description of the basic categories of the theory of money and credit, banking.

Course description - give to the future specialists knowledge of the nature and mechanism of functioning of categories such as money, credit, money market interest; form the theoretical and methodological base for the next practice of the use of monetary instruments, as well as the ability to evaluate and analyze the monetary policy conducted in the country.

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Typical features of money:

*«product of goods» for each commodity that shows its value in money;

*Money - a specific product that acts as the general equivalent;

*the main subject» in a market economy;

*«market language».

Concepts of money origin

Rasionalist

AristotelP. Samuelson

Evolutionary

А. SmithD. Ricardo

K. Marx

2. The Money: the necessity and the concept of origin.

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Objective arguments of money appearance:

*it is the market causes the objective need of money, which the state should be considered;

*market imposes stringent requirements for carrier of monetary functions, and the state should choose the carrier that is able to fully meet these requirements;

*amount of money in circulation is determined by objective laws that should be considered by the State in its regulatory activities.

Money are not decreed by the state, but are caused by the actual market economy. The role of government is not the determine, but to correct their creation.

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The exchange value - the ability to exchange goods for other goods in certain proportions and quantitative comparisons them.

Money - a general equivalent of all other goods, that they are a means of expressing value.

Money - specific product.

Essential features of a specific commodity - MONEY

Money is not able to directly meet any physical

or spiritual needs of people, but only indirectly - through the purchase of

ordinary goods and services

Having the ability to share in any value, money

converted into an abstract medium value, in absolute

liquidity as an abstract value or wealth

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Liquidity is defined as:

*the use of certain assets as a means of payment;

*the ability of the asset to preserve their nominal value unchanged.

Absolute liquidity - the ability to instantly share asset to any good.

Portfolio approach:

*Cash;

*Securities;

*Real estate;

*………

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Characteristics of money

*Recognizability;

*Durability;

*Homogeneity;

*Divisibility;

*Portability;

*Cost effectiveness.

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3. The specific nature of the value of moneyThe money is a commodity that has its own intrinsic value at its inception and development of market relations.

Current money (bills or check deposits) have relative value.

Modern monetary theory comes from the fact that the relative value of money is connected with the characteristics of their economic utility.

The economic utility of money

Money has a unique feature - connection between present and future

Money is the most convenient form of wealth accumulation and storage in a form that requires

minimum costs

With absolute liquidity, money can be exchanged for other goods

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Evolution of moneyStage 1: The Barter System

Stage 2: Commodity Money

9000 - 6000 B.C.: CATTLE

1200 B.C.: COWRIE SHELLS

1000 B.C.: FIRST METAL MONEY AND COINS

500 B.C.: MODERN COINAGE

118 B.C.: LEATHER MONEY

A.D. 800 - 900: THE NOSE

Stage 3: Currency Debasement 

806: PAPER CURRENCY

Stage 4: Metal Money

1816: THE GOLD STANDARD

1930: END OF THE GOLD STANDARD

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Evolution of money

Stage 5: Fiat Currency

Stage 6: Creating of a New or Modified Monetary System

THE PRESENT

THE FUTURE: ELECTRONIC MONEY

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4. The development of forms of valueSimple form of value

C1 – C2 C2 – C3

C3 – C4 CX – CY

Connected with barter exchange of commodities of different consumer values

Expanded form of value

Appertain on a higher development of division of labor. The exchange is regular.

General form of value

One commodity, which is systematically exchanged on others, becomes the general equivalent. Other commodities are equal to it.

Monetary form of value

The commodity of C1 in general form of value has characteristics of monetary unit.

C1

C2

C3

C4

CX

C1

C2

C3

C4

CX

M

C2

C3

C4

CX

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5. Functions of money

Medium of exchange.A unit of account.Store of value

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1. Medium of exchange

*The most important job of money is to serve as a medium of exchange

– When any good or service is purchased, people use money

– Money makes it easier to buy and sell because money is universally accepted

– Money, then, provides us with a shortcut in doing business

*By acting as a medium of exchange, money performs its most important function

*Money facilitates exchange by reducing the cost of trading.

*Without money, we would have to barter.

*Money does not have to have any inherent value to function as a medium of exchange.

*All that is necessary is that everyone believes that other people will exchange it for their goods.

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2. Measure of value

Money serves as a common measure of value in

terms of which the value of all goods and services is

measured and expressed. By acting as a common

denominator or numeraire, money has provided a

language of economic communication. It has made

transactions easy and simplified the problem of

measuring and comparing the prices of goods and

services in the market. Prices are but values

expressed in terms of money.

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3. A unit of account

The standard of deferred payments is the thing of value

in which, by the law or by contract, the amount of a

debt is expressed. A credit transaction is a lengthened

exchange; one party fulfils his part of the contract, the

other party promises to give an equivalent at a later

date.