Money in the economy is an indispensable component of the existence of modern society, the need for which haunts each of us throughout life. However, not everyone knows where they came from. The role of money in a market economy today is hard to overestimate. It turns out that this concept came to us from distant antiquity.
How to buy goods without money: from history
In primitive social relations, the market as such has not yet been approved. The predominant form of mutually beneficial acquisitions was natural exchange. At that time, not a single monetary unit was an intermediary with such a barter. Both acts (sales and purchases) were carried out almost simultaneously. Problems with establishing proportions in ancient civilizations also did not arise: a particular product was evaluated according to the degree of need for it.
Over time, the boundaries of exchange expanded. In many respects this was facilitated by the division of society into classes, according to employment in a particular sphere of labor. For the standard barter procedure at that time, many difficulties arose due to the variety of goods. This largely played a decisive role in giving special status to single goods for exchange. The emergence of a common equivalent for specific product groups, determined by the consent of public assemblies, was given a name in a particular territory. For example, in Russia, the monetary unit was called “kuna”, since expensive fluffy marten furs were taken as the exchange equivalent.
There was no money in the world: fur, gold, and those that we use to this day - paper. The times of gold and commodity denomination have sunk into the summer, today money in the economy is banknotes, checks, credit cards, etc.
Functions of money in economic development: theoretical aspect
The functions and role of money in today's market economy are difficult to overestimate. Their essence is more accurately expressed in the processes of circulation and production of goods.
The main functions that money performs are considered to be the forms they take in a particular system of financial relationships. Money matters like:
- The measure of value.
- Accumulative tool.
- Subject of appeal.
- Payment instrument.
Money is a subject of circulation
For the common man, there is one, the most important function and purpose of money - their use to pay for purchased products or provided services. In this case, cash is a special group of goods with universal purchasing power. The exchange of money that has come to replace barter in the economy allows us to highlight its advantages:
- The act of sale from the act of purchase is significantly different. Figuratively speaking, the buyer first needs to sell his product, receive money for it, and then purchase the necessary products. Under conditions of market barter, the process of exchanging goods made each of the participants in these relations both a buyer and a seller.
- It opens up a lot more options for choosing goods, in comparison with its complete absence during barter.
- The general purchasing power of money allows them to be used in specific territories.
Although at the moment it is impossible to categorically declare that barter is not relevant. The most striking example of the use of this method of acquiring goods is trade barter exchange between some CIS countries, for which it is more advantageous than the circulation of a depreciated ruble and payment with such an “unstable” currency.
In most cases, when talking about money, people imagine what are called banknotes. Colored papers and coins of different denominations that have entered into cash circulation are the money supply of cash. In addition, the means of circulation also mean bank loans, deposits and demand deposits. Cash, i.e. real money, and household deposits in banks, in contrast to government securities and loan and savings investments, are used as a means of universal circulation.
Money is a measure of value
Separately, it is worth considering money as a measure of value. In order to measure and compare the various values of goods and services in the modern market, it is necessary to recognize a single monetary unit. In addition, the total value of the goods, expressed in cash, directly depends on its quantity, distance, volume. The task of government bodies in Russia is also to establish a national measure of value.
Based on this indicator as a single relative measure of value, it is much easier to calculate the price of other goods and establish equivalent ratios between them.
In the absence of a fixed measure of value in market conditions, it would be impossible to determine the price of any product. In this case, it would be necessary to carry out calculations based on the proportions of the exchange of one product for another. That is, it would be incredibly difficult to calculate the cost of the goods.
How does the price of money change during inflation?
Monetary units as a measure of value are absolutely incompetent during periods of rapid depreciation of the national currency exchange rate. Inflation, expressed in a decrease in the value of the common good, is reflected in the prices of goods, which cannot be called static even without that. They are in constant economic motion, as a result of which experts distinguish two types of prices: nominal and real. The first is the number of monetary units that may be required to pay for a particular good at the price that has developed at a particular point in the market. The second, real price, implies payment of the same value, but already in the base period.
Of course, there is a clear interdependence between the price of goods and money. Prices for various groups of goods rise when purchasing power decreases, and when the price drops, everything happens exactly the opposite.
Money is a way to save
Money in the economy is an indispensable means of accumulation. The money withdrawn from circulation is an accumulating financial mechanism, the turnover of which is increasing, depending on the duration of their removal from trade. The role of money in a market economy in this sense is to provide its owner with the opportunity to use his purchasing power after a certain time. Absolute liquidity, which is endowed with money, allows you to apply them at any time, performing the functions of a means of payment.
In addition, the advantage of money as an accumulative element is their ability to maintain their original nominal value. The price of money in the economy is largely due to accumulation. Although, in most cases it is impossible to extract substantial profits from owning money as such. If you save jewelry, antiques or real estate, securities, you will not be able to achieve any income. But, when you turn on accumulation in circulation, the following financial transactions become available:
- Buying and selling jewelry.
- The acquisition of property and things with guaranteed constant demand.
- Purchase of obligations given by debtors.
- The acquisition of stock securities that successfully compete on the financial exchange.
- Purchase of foreign currency.
- Making a deposit in a bank in local currency (using non-cash funds).
How to turn savings into income?
The accumulated money in the economy is its extremely important component. It is impossible to achieve an increase in economic indicators without accumulation. However, if a single condition is not fulfilled (the level of purchasing power should remain unchanged for a sufficiently long period), real money will not bring their owner any income.
In addition, money also cannot serve as a means of accumulation during periods of rapid inflation. Their depreciation will eventually lead to bankruptcy. The optimal solution in this situation is to save only small amounts for some time, and it is important to manage to invest in significant accumulations before inflation. The best investment is the purchase of real estate or other equally valuable assets that, even if they do not have such confident liquidity, will not lose their value. You can also maintain your savings in conditions of inflationary growth by exchanging the national currency for a more stable, foreign currency.
Cash as a payment instrument
Money in the economy is a payment instrument that first emerged, as already mentioned, with the development of commodity exchange. Its concept includes the alienation of goods, separated from the time of sale, i.e., sale on credit. From here comes the payment function of money. When selling deferred goods, money also fulfills this important economic function. However, they do not play any role as a means of circulation for credit purchases. Meanwhile, in determining value and prices, money works as a perfect mechanism.
In practice, this happens as follows: the buyer pays the appropriate amount upon the onset of the control period for the payment. It turns out that the money does not come into circulation immediately, only after the period agreed upon by the contract. This function clearly reflects the subsequent development of industrial and trade relations between participants in market relations. As a payment instrument, money is valuable not only as a means of purchase, but also as a universal embodiment of wealth, so it is not possible to limit this function to the scope of commodity circulation.
Loans and borrowings in today's economy
The development of the payment system in the modern world, as expected, led to the emergence of credit funds. The concept of “bill of exchange”, introduced into the financial mechanism of the international economy, has become important and indispensable in the conditions of lending, which generates debt obligations. Goods purchased by installments or a loan automatically become the object of a debt payment. In the process of repaying a loan or by installments, cash is a payment instrument.
Cash is increasingly being replaced by bills over time. A written document guaranteeing the return of debt funds is an absolutely legal form of guarantee for the borrower. After the deadlines, the debtor, of course, is obliged to pay the fixed amount. The development of commercial credit is a fundamental factor influencing the distribution of bills in market relations. Most often, this form of debt is allocated to each other by producers.
Features of the functioning of money in the Russian economy
Money in the modern economy of Russia over the past decades is a powerful tool for payment, value, accumulation and circulation. At the same time, the imperfection of the trading system in the country, which is also reflected in its foreign partnerships, impedes the development of industry, an increase in the standard of living of the population, and an increase in socio-cultural and demographic indicators. In the search for the causes of constant economic difficulties in the state, several factors are clearly expressed.
The development of the country's economy is associated not only with money circulation. A lot of money plays an important role in the Russian economy. Meanwhile, during the years of independence and independence in our state, the money supply has increased by more than 770 times. Experiencing a tangible deficit in the developing market economy for consumers and producers, several times a decision was made to introduce additional cash into the national turnover. Naturally, cash emissions lagged significantly behind inflationary growth, which led to the expected consequences.
Being in unequal conditions, the real flows of the national currency rapidly dried up. Trying to slow down the development of this economic “pathology”, entrepreneurs intensified private issuing activities. Most business entities of the Russian Federation created various payment mechanisms aimed at holding assets in the existing sector. In particular, money in a market economy still remains for a long time due to a successful system of netting of non-payments, circulation of bank bills, corporate bonds, etc.
The outflow of funds outside the state is one of the many reasons for the failure of the Russian Federation in attempts to build a full-fledged model of highly developed market and economic relations. The determining place here belongs to savings and their investment. Regular investment of money by interested business entities contributes to an increase in the turnover of revenues, but in reality everything happens differently. The leakage of funds from circulation negatively affects the consumption process as a whole.
At the same time, household accumulations that have passed into the savings group (cash on hand are not implied) represent investment. An additional source of capitalization contributes to the stable provision of high GDP indicators.
Conclusion
To summarize all of the above, one can easily determine the role of money in the public economic sector. They are a truly historical criterion inherent in commodity productivity. Money in the economy is the universal equivalent, a product with a special status. Thanks to them, the circulation of goods and services in the “seller-buyer” chain has become much easier, in comparison with the barter model of trade relations.
The essence and importance of money in the country's economy can clearly be seen through the prism of their functions.
Firstly, they serve as a means of circulation, thanks to which the inconvenience of barter transactions can be completely avoided.
Secondly, money performs the function of a measure of value, providing the opportunity to measure the value and value of the goods.
Thirdly, the accumulation function is characteristic of funds temporarily withdrawn from circulation, which allows one to observe wealth. At the same time, the advantage of today's model of a market economy is the provision of the opportunity to profit from wealth itself.
Fourth, money is an important payment tool. Normalizing the circulation of cash and non-cash funds is a chance for the successful development of any economic sector, since only the diversified use of money in the state will help strengthen the economy of the whole country.