Money and credit - Ivanov V.М.


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. With the market economy, the process of selling the product occurs, and the price fulfills its role only when the goods are exchanged for money, i.e., money constantly "pushes" the goods out of the sphere of circulation. Consequently, they are necessary for the merger of single acts of exchange into a single process of circulation of goods. This function is performed only by cash. Money that is widely distributed gives its owner some general purchasing power, which is a very important advantage. The use of money allows for a flexible choice of types and quantities of purchased goods, time and place of purchase, and partners for the transaction. If some medium of circulation is used for a long time, then its acceptability becomes fairly stable. The acceptability of money depends on the willingness and willingness of the population to use them.

The value of money as a means of circulation can not be overestimated, since they allow you to get away from the barter form of trade. The cumbersome process of barter leads to a person who wants to buy potatoes and sell cabbage, is forced to combine acts of buying and selling. He will have to look for someone who wants to sell potatoes and buy cabbage. The exchange of barter by monetary exchange separates the act of sale from the act of purchase. If there is money, the cabbage vendor should only find someone who wants to buy his cabbage. Having received the money, the cabbage seller can buy whatever she wants.

In the United States, the function of the circulation facility is mainly performed by coins, paper money and check deposits (demand deposits). Demand for money before the execution of 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 presentation of these accounts for payment and the availability of borrowed funds. For example, the greater the volume of purchases and the less often the labor of a person is paid, the greater is the average amount of the monetary balance necessary for its financial operations. The volume of purchases depends on the level of development of trade and its specialization. Families with a subsistence economy almost do not participate in trade and practically do not need any means of circulation. At a time when most families in the US were engaged in farming, the need for means of circulation was significantly lower than today. As the development of commerce and industry intensified and specialization, the volume of transactions increased significantly. In the modern economic system, people usually earn money in the form of money, and then they buy everything they need for this money.

The replacement of the mechanism of barter transactions by a mechanism using money as a means of circulation led to a reduction in circulation costs. Money exchange required much less effort and time than barter. Reducing 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, which resulted from the growth of specialization, significantly influenced the growth of the general standard of living.

Although the use of money usually reduces transaction costs, barter is still preserved, and in some circumstances even revived in the modern world. For example, in countries with exceptionally high inflation rates, barter trade may be more preferable than the use of cash. As will be shown below, at high inflation rates, the costs associated with storing money for transactions can 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, medical 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 sold by this store, or a school that gives children their teachers the right to free education, are obvious examples of barter. Finally, in some areas of the United States there are so-called barter clubs that organize barter transactions using the latest computer equipment. These clubs became possible due to the fact that the computer information network allows you to radically reduce the costs of treatment, without resorting to the help of money.

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