Forex Trading

24 1 What Is Money? Principles of Economics

Refers to the motive of individuals for holding cash to make out benefit from the movements of market regarding the change in interest rate in future. The precautionary and speculative motive acts as the store of value with different purposes. Paper money was invented as the supply of metallic coins, such as silver and gold, was very less as compared to its demand.

However, in order to properly understand the current
monetary system, it is important to distinguish between states’
issuing versus underwriting money. Most credit money
in modern economies is actually issued by commercial banks through
their lending operations, and the role of the state is only to
guarantee the convertibility of bank deposits into cash (Pettifor
2014). Monetary history may be viewed as a process of improvement with regard
to these functions of money (Ferguson 2008, Weatherford 1997). For
example, some early societies used certain basic necessities as money,
such as cattle or grain. Other societies settled on commodities that
were easier to handle and to tally but with more indirect value, such
as clamshells and precious metals.

Therefore, funds
who claim that they can do this for a fee are basically cheating their
clients (cf. Hendry 2013, Kay 2015). A philosophically interesting question is whether there is such a
thing as an “intrinsic” value of financial assets, as is
often assumed in discussions about financial crises. The rational answer seems to be that this depends
only on the discounted value of the underlying future cash
flow—in other words, on (i) and not (ii) above. However, someone
still has to assess these factors to compute a price, and this
assessment inevitably includes subjective elements. As just noted, it
is assumed that different investors have different valuations of
financial assets, which is why they can engage in trades on the market
in the first place. The commodity theory of money was defended by many classical
economists and can still be found in most economics textbooks (Mankiw
2009, Parkin 2011).

  1. (We will get to its definition soon.) First, money serves as a medium of exchange, which means that money acts as an intermediary between the buyer and the seller.
  2. People generally hold the view that citizens have a legitimate duty incumbent upon them to honor the payment systems stipulated by the authorities.
  3. They can be converted to currency, but generally they are not; they simply serve as a medium of exchange.
  4. During this time period, economists, governments, and investors eagerly jumped at every new money supply statistic.
  5. But this opens up new
    ethical problems that are due to the conflicts of interest inherent in
    financial intermediation.

M1 refers to the money stock that includes coins, currency notes, and demand deposits. M2 refers to the money stock that includes coins, currency notes, demand deposits, and time deposits. M3 refers to the money stock includes coins, currency notes, demand deposits, time deposits, and post office deposits. Money can act as a temporary abode of purchasing power if it is kept in the form of cash, demand deposits or any other asset which is close to currency, i.e., time deposits.

Approaches of Money Supply

Monetary policy is the way through which government can regulate the supply of money in the economy. If the reserve requirements are raised, the supply of the money increases and vice-versa. Fiduciary media are types of money substitutes introduced into circulation that aren’t fully backed by the base money held to back money substitutes. For example, paper checks, token coins, and electronic credit represent contemporary examples of fiduciary media. This use of money substitutes can increase the portability and durability of money, as well as reduce the cost of storage. Banks may print more bills than they have money to redeem, a practice known as fractional reserve banking.

Criticisms of Monetary Theory

However, in modern days, only three functions of money, such as a medium of exchange, measure of value, and a store of value are taken into consideration. Radcliffe Committee approach or liquidity approach provides much wider view of the concept of money supply. In this approach, the concept of money supply is viewed in terms of general liquidity of the economy. Defined on the basis of its functions as a medium of exchange, a nation’s total stock of money would comprise those things which are generally accepted as the means of payment. That being said, monetarist interpretations of past economic events are still relevant today. Ben Bernanke, former Fed Chairman, cited the work of Friedman in his decision to lower interest rates and increase the U.S. money supply in order to boost the economy during the global recession that began in 2007 in the United States.

In the
financial system that we currently see, the principle that individuals
are to be held financially accountable for their actions, and that
they will therefore be “disciplined” by markets, is patchy
at best. In addition, current legal systems find it difficult to
impose accountability for complex processes of divided labor, which is
why there were very few legal remedies after the financial crisis of
2008 (e.g., Reiff 2017). This perspective is typically taken to prefer more
progressive investment practices, such as pushing management to adopt
more ambitious social policies and/or seeking out environmentally
friendly technology firms (Mackenzie 1997, Sandberg 2008).

Massachusetts Money

This Research Paper aims at bringing together most of the prominent contributions of greatest philosophers of money and clearly demarcates various schools of monetary thought be it the Classical, Neo-Classical or the Heterodox. Abstract In this paper, I propose an overall model of the semantic and semiotic functions of money and capital forms, based on an ecological view of human activity. The meaning of money is replaced in a structured human perspective, and a critical discussion is outlined on the grounds of the material and capital flows and functions identified. In this paper, I propose an overall model of the semantic and semiotic functions of money and capital forms, based on an ecological view of human activity.

Despite this similarity, the Gurley and Shaw approach is, however, different from the Chicago approach in its analysis. The Gurley and Shaw approach to the definition of money is akin to the Chicago approach in its objective. Money stays the same in shape and size over a long period and hence serves the characteristic of durability. Because of its durability, individuals are willing to take it as a form of payment as it can be further used for purchasing other goods or services. Money as a unit of account makes it possible to account for profits and losses, balance a budget, and value the total assets of a company. Money should be easy to carry and divide so that a worthwhile quantity can be carried on one’s person or transported.

initiative that seeks to remedy these problems is
“microfinance”, that is, the extension of financial
services, such as lending and saving, to poor people who are otherwise
“unbanked”. The initiative started in some of the poorest
countries of the world, such as Bangladesh and India. One root cause of the financial crisis of 2008 was the very high
levels of risk-taking of many banks and other financial agents. When
these approaches to definition of money risks materialized, the financial system came to the brink of
collapse. Many banks lost so much money that their normal lending
operations were hampered, which in turn had negative effects on the
real economy, with the result that millions of “ordinary”
people around the world lost their jobs. Many governments stepped in
to bail out the banks and in consequence sacrificed other parts of
public spending.

The History of American Money

We saw in the chapter that introduced the concept of inflation that inflation reduces the value of money. In periods of rapid inflation, people may not want to rely on money as a store of value, and they may turn to commodities such as land or gold instead. A medium of exchange is anything that is widely accepted as a means of payment. In Romania under Communist Party rule in the 1980s, for example, Kent cigarettes served as a medium of exchange; the fact that they could be exchanged for other goods and services made them money. Liquidity is a measure of how quickly an asset can be converted into legal tender.

Let us express the fraction of income that should be held by individuals ask. This is because holding a large amount of cash as idle cash would be a loss or danger for the individual On the other hand, cash balances held by individuals should also not be very low, so that contingencies cannot be overcome. Prof. Fisher has explained that in short run, there are no or negligible changes in the economic factors, such as population, consumption, production, production techniques, technology, customer’s tastes and preferences, and circulation of money. Just as in the cases above, it is difficult to give an exact
definition of insider trading, and the scope of its operative
definition tends to vary across jurisdictions. Indeed, some argue that
even stock analysts or journalists can be regarded as insiders if they
trade on information that they have gathered themselves but not yet
made publicly available. It is also debatable whether an actual trade
has to take place or whether insider trading can consist in an
omission to trade based on inside information, or also in enabling
others to trade or not trade (Koslowski 2009).

The total quantity of money in the economy at any one time is called the money supply. We want to include as part of the money supply those things that serve as media of exchange. The term money, as used by economists and throughout this book, has the very specific definition given in the text.

When Margaret Thatcher was elected prime minister in 1979, she also implemented a set of monetarist policies to combat the rising prices in the country. But spending alone is not limited to the amount of money in existence rather it is related to the amount of money people want to hold either by receipts of income or disposal of assets or by borrowing. General economic conditions affect the confidence of the public in bank money. Although cryptocurrencies are rarely used in everyday transactions, they have achieved some utility as a speculative investment or a store of value.

In an economy with inflation, money loses some buying power each year, but it remains money. And so it was that the “Swiss” dinar for a period of about 10 years, even without government backing or any law establishing it as legal tender, served as northern Iraq’s fiat money. Economists use the word “fiat,” which in Latin means “let it be done,” to describe money that has no intrinsic value. Over the last few decades, especially as a result of high interest rates and high inflation in the late 1970s, people sought and found ways of holding their financial assets in ways that earn interest and that can easily be converted to money.

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