Money, money circulation and credit
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The gold, silver and copper coins were used in circulation. The basic type of the monetary units was the State Bank credit notes which on 92 % were ensured by gold. The basic part of the monetary stock consisted of the nominal instruments of circulation which could be freely exchanged on the full-bodied money – gold coins and thus they had the population’s credibility.
Having an inmost value the full-bodied money depends on neither the other types of wealths nor the market conditions in which it circulates. All the types of commodity money belong to the full-bodied money – gold and silver coins.
The token money (the substitute of real money) is money the nominal value of which is higher than real, i.e. its purchasing power exceeds the intrinsic value of the commodity which plays role of the monetary relations bearer. The purchasing power of this money is determined by the market conditions exceptionally whereby the inmost value of token money doesn’t influence on it. The token money includes all the types of paper money, credit notes and metal symbols of value (billion coins – small coins manufactured from copper and aluminum).
In the course of historical development first of all the system of metal circulation formed which was based on the metal coins usage.
Initially (in particular in the XVIth-XVIIIth centuries) the system of bimetallism existed.
Bimetallism is the system where the role of the total equivalent is played by two metals – gold and silver. It means that these two metals circulated on equal basis and had a fixed correlation.
The unlimited circulation, free issue and two prices determination on one good are supposed. This system existed in the XVIth– XVIIIth centuries and in some countries of West Europe even in the XIXth century. However such system didn’t provide the stability of money circulation.
There are three systems of bimetallism:
Of the parallel currency where the correlation between the gold and silver coins is spontaneous.
Of the double currency where the government fixed the correlation between metals and the gold and silver coins issue and their popularity were made by this correlation.
Of the limping currency where the gold and silver coins were the legal means of payment but with unequal terms. For example if the silver coins issue was made privately thus practically they played role of the gold symbols.
In the result of silver production cheapening in the end of the XIXth century and its devaluation the gold coins began to go out of circulation to treasures, i.e. «bad money drives out good».
In the XIXth century the system of bimetallism was replaced by monometallism which was based on only one metal, i.e. only one metal plays role of the total equivalent. The silver monometalism existed in Russia (1843-1852), in India (1852-1893) and in China (till 1935).
The gold coin standard most closely met the requirements of capitalism of the free competition period, promoted the development of production, credit system, world trade and capital export. Sometimes the age of gold coin standard is associated with the fast industrialization and economic prosperity.
Since the First World War little by little gold was drove out of circulation by paper money and credit notes; the process of gold demonetization began which subsequently captured the international circulation.
First of all gold stopped performing the function of the instrument of circulation and payment in the domestic circulation and then in 1976 the function of the world money. For the detailed information look through the chapter «The international currency and credit rela- tions».
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 VIIth 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 XIIIth century paper money was issued in Persia and in the XIVth 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 XVIIIth 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.