Why money is needed: history, myths, reality

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

A Brief History of Money

Initially, barter relations were common. Over time, this began to create certain inconveniences, since the exchange was not always equivalent. Thus, the first metallic money appeared, 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 BC.

Money gave rise to a new characteristic of the commodity – value. It expressed the usefulness of a thing recognized by society. Prices remained fairly stable, unless there was an urgent need or exotic. But there were also situations when the cost changed due to the depreciation of metals. So it was, for example, during the conquest of America by Great Britain and Spain: there was much more gold, but the volume of production did not change.

The era of commodity money ended with the issuance of paper notes that had no real security behind them. All value came down to the degree of trust of the issuer. Mass distribution began in the second half of the 17th century in Sweden. Gradually, more and more countries mastered the issuance of banknotes. The simplicity of printing has repeatedly led to a collapse in cost, because the production of natural material values ​​​​required much more effort. The general trend was strengthened by the growth of credit funds, representing money as a kind of abstraction. 

The evolution of the function of money

The replacement of barter relations with commodity-money relations determined the main function of money – a universal medium of exchange. But the very appearance of money created another, not so obvious, opportunity for savings and accumulation.

Money divided the operation of exchange into two acts – buying and selling. Previously, barter closed the need to replace one product with another in one stage. Now the difference between buying and selling became more significant. Funds for some time were delayed by the owner, creating savings. It became possible to save them for future periods, thereby creating wealth that can be used for potential spending in a deferred time period. That is, money allowed us to take care of ourselves in advance.

It turns out that the emergence of money, on the one hand, has simplified the receipt of the necessary goods. And on the other hand, it created a misunderstanding of a clear need for their number and an incorrect idea of ​​​​the true "owners of the world." 

Money and property: two main myths

There are two main opinions, which in fact have little to do with reality. This is:

• financial slavery of the population from banks due to loans;
• uncontrolled emission of money at the request of central banks.

To understand their fallacy, let's start with the basics. Obtaining any property is possible only in one case – as a result of labor activity. 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, profits, is positive. But everyone's potential is different. Therefore, in practice, an interesting situation develops – the Pareto law in action: 80% of assets are at the disposal of 20% of the population. A great opportunity for the theory of confrontation between the poor and the rich. However, it is not so much the amount of savings that is important, but the ability to create them under any conditions. So, a modest living within his means will be richer than someone who has credit real estate.

The desire to preserve and increase personal funds looks logical. The main tool is the temporary transfer of property for someone else's use for some agreed payment. Existing assets begin to work, increasing the wealth of their owner. Naturally, one cannot do without assessing the abilities of those who borrow funds.

With the growing demand for such services, a business arose that became an intermediary in the transfer of ownership, providing effective capital management. Banks became such an intermediary. They have all the resources to evaluate a potential borrower: specialized specialists, established processes and the right to receive property in case of non-compliance with loan repayment conditions. This is what gives rise to the myth that control over all property belongs to banks.

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

The partnership of the lender and the borrower is the conditions under which a share of the profit goes towards payment for the funds provided. The form of profit sharing and the basis of competition is the rate on the loan. There is risk on both sides. But the company has a choice – to issue a loan or issue shares. A private person borrows money to acquire valuables for which he has not actually earned. And here, too, the payment for such an opportunity becomes a percentage.

Reasoning about the basics of lending makes it clear that all the property of the world does not belong to banks. It is owned by persons whose balance of income and expenses 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 its amount will be less than the contribution due to partial reservation. The size of the reserve is determined by the state central bank. 

The transfer of money from one person to another is called a money multiplier. The higher it is, the more times the 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. Since the main intermediary in the redistribution of money is the bank, the fractional reserve affects the value of the credit multiplier.

In a crisis, confidence in the economy falls, creditors are trying to return the funds. This leads to a decrease in the money supply, the value of assets falls, delinquencies on debt payments grow, and the income of the population decreases. In such a situation, the central bank may conduct a direct or indirect issue of money. The first is the redemption of bad debts from banks. The second is a reduction in the refinancing rate. Both options will save the amount of money, but will lead to inflation. An important task is to find a balance between rising prices in the future and social problems in the present.

Printing money just like that does not make any sense – history has proven this more than once. However, both myths can be clearly seen on the example of the United States. The developed economy of the United States has made the dollar a universal currency, and now the country's Fed faces a difficult task: to find a middle ground between the amount of money issued and the reliability of the dollar. After all, the uncontrolled printing of banknotes significantly weakens the world currency.

Another myth is also clearly visible in the American example. At the beginning of 2019, the external public debt of the United States amounted to almost 22 trillion dollars. For example, China is one of the main creditors of the States, but for some reason there is no control over their property. And maintaining the dollar is important to maintaining the value of debt. It turns out that non-payment of the debt does not entail significant consequences and losses – the borrower does not directly affect the state of the creditor. 

Essence and functions of money briefly

Money is a universal medium of exchange that determines the value of any good or service. They provide an opportunity to buy and sell products, accumulate and increase wealth. The money supply is created at the time of issuing a loan, where the bank is not always the lender. To reduce the risks of the banking system, fractional reservation is used, which is determined by the central bank of the country. It is also responsible for the amount of money, providing a high level of confidence in the economy and stimulating an improvement in the quality of life.

A sober assessment of the economic situation and understanding of what is happening in it is the key to human well-being. How to get out of any situation for the benefit of finances, read in the Open Journal. We are always happy to help!