Money, money circulation and credit
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In the modem economic literature these two functions of money are usually united. It is hard to overshoot the significance of money as a mean of circulation because it allows avoiding a barter form of trade. An exchange of barter on a money trade separates the act of sales from the act of purchase.
If money exists the seller should find somebody who’d like to buy his good and then after money receipt he will buy everything that he’d like. An exchange of barter trade mechanism on a mechanism which uses money as a mean of circulation leads to a circulation cost improvement.
A money exchange demands rather less forces and time then barter. Decreasing the circulation costs money stimulates the development of specialization and trade. Money which performs well the function of a mean of circulation is gladly admitted by everyone. Money gives its owner some purchasing power which is very important advantage.
Money allows making a flexible chose of types and quantity of the purchased goods and either of places and time of shopping and the dealing partners. If some mean of circulation is used for the quite long time period thus its usage becomes stable and depends on the readiness and desire of population to use it.
These are some examples of money unacceptability. In 1970 the U.S. Treasury for two years issued the two dollar banknotes which were suspended from 1966. The Americans didn’t admit these banknotes. One of the reasons was that a two dollar banknote could be easily misrecognized as a one dollar. People obviously preferred the banknotes with a bigger nominal difference, for example between 1 and 5 dollars, but not 1 and 2. Besides many people found the two dollar banknotes unlucky.
In 1979 the U.S. Treasury tried to decrease the emission costs again by a one dollar coin issuing with an image of Susan B. Anthony. A great saving was planed because the coin’s service life is equal to 15 years in average, but the paper notes serve not more than 18 months. Either the U.S. Treasury supposed that the usage of one big coin is much more convenient then of some little. And again this effort was neglected by the population: first of all because this coin was similar to a quarter of a dollar coin by size and they could be easily misrecog- nised; secondly paper money is more preferable than coins.
The function of world money. It is a function of money used on the world market for international relations support. The world money performs three functions:
Of an international mean of purchase – money is used for the goods purchase and sale on the world money for cash;
Of an international mean of payment – money covers the international debts;
Of an international standby fund – money performs the role of an international mean of payment stock. The state gold reserve stock performs this function.
Historically the gold played role of the world money as an external account mean of control. The Paris agreement of 1867 declared only this metal. And such situation kept for quite a long time.
After the World War Ist some other national currencies of different countries joined the rank of world money – the US dollar, the British pound, the French franc. In 1922 it was formalized in legislation by the international agreement in Genoa when the British pound and the US dollar were announced as the equivalents of gold and introduced into the international circulation.
After the World War IInd the leaders of the biggest states tried to avoid the mistakes which lead to the World crisis of 30th. On July 1944 in Bretton Woods they created the system of stable exchange rates which was called a «Bretton Woods system».
The member governments of the International Monetary Fund which was created on the same international conference along with the International Bank for Reconstruction and Development fixed their currencies rates in dollars and gold, and the dollar from its side was linked to gold (35 dollars for 1 ounce of gold).
Thanks to the fact when for long years USA purchased and sold gold, i.e. created or destroyed dollars the price of gold became stable on the level of 35 dollars and almost eliminate the inflation. Dollar’s credibility and American economic monetary policy stability were incredible moreover the foreign exchange banks at any time could change their dollars on gold.
During the «Bretton Woods system» action the World economy and World trade quicksteped to new peaks. Simultaneously the inflation index kept steady state (about 3 %). Only slight deflections were observed in most of the countries. However this system was fraught with some danger. Because the industrial productivity in USA in 1969-1970 was lower than European and Japan, the American goods’ competiveness on the World market fell. The dollar exchange rate revaluation was unavoidable. To save the system of stable foreign exchange rates was impossible. The sharp floating because of instability in dollar led to the «flight of the dollar» and its following fall in exchange. The dollar stayed a leading currency. And on April, 1972 the «Common Market» Nations came to a decision to establish between themselves more narrow range limits of their currencies and for this purpose created a so called «monetary snake».
In order to decide the problem of an international liquidity the International Monetary Fund constituted the special drawing rights (SDR). Initially in 1970 for one SDR a fixed gold content was hardly as for US dollar – 0.888671 g of pure gold. On Decenber, 1971 one more attempt was tried in order to stabilize the foreign exchange rates. The US dollar was devalued in relation to gold: from 35 U.S. dollar an ounce to 38 U.S. dollar an ounce.
On February, 1973 the US dollar was devalued for the second time and an exchange market should be closed for several weeks. In this regard most of the countries came to the system of floating rates. However after two devaluations of the US dollar and the «floating» foreign exchange rates introduction from July 1st 1974 the SDR unit value began to be determined on the basis of «currency basket:, i.e. the average weighted foreign exchange rate of the 16 leading capitalist countries the share of external trade of which constituted not less than 1 % of the world trade quantum.
From January 1st, 1981 the quantity of currencies in the «currency basket» was decreased to five after what its content is subject to review every five years. However the countries of EES were not satisfied with the SDR system functioning and its close link with the US dollar.
From March 13th, 1979 the European Monetary System began to function which consisted of 8 countries of the «Common Market» (Germany, France, Benelux, Italy, Ireland, Denmark). For the European Monetary System member countries a European Currency Unit ECU was introduced.
ECU is a paperless monetary unit in a type of account record in the member countries’ central banks. The value of ECU is determined on the basis of the average weighted exchange rate of these 12 governments. In order to determine a share ofthis or those currency in ECU the GNP (gross national products) of the member countries were matched.
A new stage of the West European integration development was the program of the currency and economic union creation which was established by Jacques Delors’s committee in April, 1989. Delors’s plan stipulated the creation of the Common Market, the EU competition motivation, the coordination of economy, budget and tax policies in order to control the inflation, to stabilize the prices and economy growth, the general government deficit minimisation and the cover methods improvement. On the basis of Delors’s plan to December, 1991 the Maastricht Treaty about the European Union was worked out which stipulated a stagewise formation of a currency economic union.