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Money and credit - Ivanov V.M.


2.1. Money as a medium of circulation

When money serves as a means of payment for goods and services, we say that they are used as a means of circulation. In a market economy, the process of selling a product takes place, and price only plays a role in exchanging a product for money, that is, money constantly “pushes” goods from the sphere of circulation. Consequently, they are necessary for the merger of individual acts of exchange into a single process of circulation of goods. This function is performed only by cash. Widespread money provides its owner with some universal purchasing power, which is a very important advantage. Using money allows you to make a flexible choice of types and quantities of purchased goods, time and place of purchase, as well as partners for the transaction. If some means of circulation is used for a long time, then its acceptability becomes quite stable. The acceptability of money depends on the willingness and willingness of the population to use it.

The value of money as a medium of circulation can hardly be overestimated, since it allows you to get away from the barter form of trade. The cumbersome process of barter leads to the fact that a person who wants to buy potatoes and sell cabbage is forced to combine the acts of purchase and sale. He will have to look for someone who wants to sell potatoes and buy cabbage. Replacing barter with cash exchange separates the act of sale from the act of purchase. If money exists, then the cabbage seller should only find someone who wants to buy his cabbage. Having received the money, the cabbage seller can buy whatever he wants.

In the USA, the function of the medium of exchange is mainly performed by coins, paper money and check deposits (demand deposits). The demand for money before transactions primarily depends on such factors as the volume of purchases made, the frequency of payment of wages, the time allotted for payment of bills, the regularity of presenting these bills for payment, and the availability of borrowed funds. For example, the larger the volume of purchases and the less often the work of a particular person is paid, the greater the average amount of the monetary balance necessary for its financial transactions. The volume of purchases depends on the level of development of trade and its specialization. Families engaged in subsistence farming almost do not participate in trade and practically do not need means of circulation. At a time when most households in the United States were engaged in farming, the need for means of circulation was significantly lower than today. As commerce and industry developed, specialization also intensified, and the volume of transactions increased significantly. In the modern economic system, people usually earn money in the form of money, and then they buy with this money everything they need.

Replacing the mechanism of barter transactions with a mechanism that uses money as a medium of circulation has led to a reduction in distribution costs. Money exchange required much less effort and time than barter. By lowering the costs of circulation, money stimulated the development of specialization and trade and, thus, contributed to the overall growth of the welfare of society. The development of talents resulting from the growth of specialization has significantly affected the growth of the general standard of living.

Although the use of money usually reduces the cost of transactions, barter is still preserved, and in some conditions even revived in the modern world. For example, in countries with exceptionally high inflation, barter trading may be preferable to using cash. As will be shown below, at high inflation rates, the costs associated with storing money for transactions may exceed the losses and inconveniences of barter.

In addition to inflation, there are examples of barter transactions in normal economic conditions. Any additional payments, such as, for example, health insurance and pension insurance, are also examples of barter. In recent years, these benefits have developed quite rapidly, which was facilitated by the introduction of a more favorable tax regime. So, a store that gives its employees a discount when they buy goods that the store sells, or a school that gives the children of their teachers the right to free education, are obvious examples of barter. Finally, in some parts of the United States there are so-called barter clubs involved in organizing barter transactions using the latest computer technology. These clubs became possible due to the fact that the computer information network allows you to radically reduce distribution costs without resorting to money.

As an alternative to money exchange or barter, the government can resort to distribution of coupons - rationing. These coupons give their holders the right to purchase in certain quantities various products, such as, for example, bread, meat or gasoline. With this system, in retail stores, goods are exchanged for coupons rather than directly for money. As experience shows, sometimes it is very difficult to distribute coupons for all types of products produced in modern society. In addition, rationing limits consumer choice.