Money, money circulation and credit

As can be seen from the above the system of metal money circulation became a thing of the past. Nowadays the fractional coins are minted from different alloys and aluminum.

1.2.2. Paper money and their circulation consistency

Paper money is relatively new for the world of money. The paper monetary units are token money, only symbols. Usually they appeared in the periods of acute state needs during the wars and revolutions when the other sources of financing (taxes, lendings, etc.) ran out. One more reason of the paper money issue was a chronic deficit of an external state account, in order to avoid the gold drain abroad the government was forced to implement the inconvertible to gold money provided with a forced rate of exchange.

For the first time it was issued in the VII^th century in China in the form of large denominations in order to replace the inconvenient fullbodied copper coins. And while the notes could be freely exchanged onto the full-bodied they were popular in circulation. Later in the XIII^th century paper money was issued in Persia and in the XIV^th century in Japan.

However in other countries the substitutes of «real money», i.e. coins were widely spread. Their nominal was verified with the sovereign’s stamp or a sign and a personal stamp of a merchant or a banker. Initially in the form of complementary means of exchange the deposit receipts of stocked items, taxes payments, loans granting were used. Their circulation increased the trade opportunities but at the same time frequently complicated the exchange of these paper duplicates onto the metal coins.

Among the west countries the first who began to issue paper money were the North American States. In 1690 such monetary units were issued in Massachusetts State.

In Europe the first who decided to adopt the American practices was France: in 1716-1720 the famous economist and banker John Law (1671-1629) began to print the notes of the Royal Bank. Hereafter when the world economy followed the way paved by John Law and began to create the central banks he was granted with an exclusive right of the banknotes issue.

On the territory of Kazakhstan the paper monetary units appeared in the end of the XVIII^th century and mainly these were the Russian monetary units.

In Russia the emission of paper money – assignats for the first time began in 1769 r. It was supposed that like in other countries who risked implementing paper money they could be freely exchanged onto silver or gold on request. But all turned otherwise. To the end of the century already the excesses of assignats forced to freeze the exchange, in the nature of things the rate of assignated ruble began to fall and the prices of goods increase.

Money separated on «bad» and «good». According to the law of Thomas Graham bad money drives out good: the money commercial value of which rises in respect to bad money and official exchange rate disappears from the circulation. It simply «put by» at homes and bank safes.

In the XX^th century the performers of the «bad» money role were the banknotes which drove out of circulation gold. Since the First World War the tendency for the banknotes exchange on gold termination became a frequent practice. Whereupon the bank bills became almost undistinguishable from the treasury notes – the second type of paper money. The Central Bank faced the matter of the money circulation unfaltering watch. Actually paper money itself doesn’t have any useful value.

Paper money is a sign, symbol of value. How come the refusal of gold happened which became so widespread and settled subsequently? The simplest explanation is that paper money is convenient in circulation and easy for transportation. It is useful to remember the words of the famous Englishman – Adam Smith who said that paper money should be considered in the quality of the cheaper instrument of circulation.

Actually during the circulation the coins abrade and a part of precious metal disappears. Besides growths the demand of gold in industry, medicine and among supplies. And the main the goods circulation on a scale of trillions of US dollars, tenge, franks and other monetary units is impossible to cover by gold.

A transfer to a fiduciary circulation sharply widened the commodity exchange limits. Paper money – banknotes and treasury notes – are obligatory for acceptance in the quality of a payment mean on the territory of the State. Its value is determined only by the quantity of goods and services which could be purchased on it.

Thus the XX^th century is marked by a transfer to a paper money circulation and gold and silver conversion into the commodity which could be purchased at a market price.

Paper money should be understood as a monetary unit which is issued directly or indirectly by the Treasury Department for the budget requirements and provided with a compulsory purchasing power. They include the treasure notes, different types of substitutes (government bills, government bonds, some kinds of consolidated stocks and token money).

Paper money is a monetary unit inconvertible on metal supplied with a compulsory nominal and issued by government to cover its expenses.

Modern money is a social phenomenon appointed by the governmental authorities. Its color, size and artistic features are not important for buyers and sellers. A trust to money is determined by a trust to a credibility of some or another governmental authority. The society represented by the government can easily appoint the other in form and images paper or plastic notes to perform the functions of money and the individuals will use them as money to cover their needs. That’s why nowadays money is called fiat money».

The government keeps control of the circulation emission of currency. If the money issue was unlimited or could be done by everyone thus the prices would grow sharply, money would devaluate and wouldn’t be used. The society would return to an exchange in kind.

Paper money is unstable in itself, i.e. as a rule it devaluates because it is issued for the budget deficit coverage. It is not exchanged on gold and does not have its own inmost value thus the mechanism of spare money withdrawal from circulation the «mechanism of trea- sure» does not work here. Consequently paper money issued above the norm is stuck in the channels of circulation and devaluates. The depreciation of money is an exchange of one paper monetary unit purchasing power (but not all the paper monetary stock).

There are two forms of the monetary depreciation:

Internal is a depreciation in respect to the goods on domestic market, i.e. the increase of prices;

External is a depreciation of money in respect to the foreign currency, i.e. an exchange fall (drop) of the national currency.

1.2.3. Credit money

Credit money is a collective term appeared on the basis of the private individuals’ or government’s real obligations substitution. It occurred due to the money function as a mean of payment where money acts as an obligation which should be redeemed by a real money according to a due date. Credit money includes bills, banknotes, cheque, electronic money.

Banknote is a perpetual debenture guaranteed by the Central Bank of the State. Initially the banknotes had a gold guarantee of exchange onto the gold. They are issued with a strictly defined denomination and in principle are concerned as a national money on all the State territory.

Till 1990 in the Soviet Union circulated as the treasury notes so the USSR banknotes. The first included the monetary units with small denominations of 1, 3 and 5 rubles issued by the Treasury and marked as the «treasury notes». The notes with nominations more than 10 rubles were issued by the USSR State Bank, i.e. were the banknotes.