Money As A Concept And Empirically

From an educational point of view the idea is to start simple (or fundamental) in a descri ptive way (POSITIVE ECONOMICS) and develop definition to a more sophisticated level. We will try to integrate this into the British experience with an outline of UK money and banking institutions, their role and how they developed.

MONEY DEFINED

A definition commonly used in the National Curriculum and most economists agree "money is as money does". Penguin dictionaries take a slightly more sophisticated stance "money is something that is widely accepted in payment for goods and services and settling debt".

Wikipedia offer an interesting and generic appraisal for the development of a definition of money and its role in society. MONEY can be understood as a means of trading WEALTH indirectly not directly as with BARTER. Money is a mechanism which facilitates this process.

From these definitions of the functions of money we can easily infer that money existed before written history, in that respect money is anything that performs the functions of money for example stones, shells, notes and coins, bank deposits.

We can also consider money from a VALUE perspective :

It may have INTRINSIC VALUE (COMMODITY MONEY) examples are beads, cattle, slaves. Legally exchangeable for something with intrinsic value (REPRESENTATIVE MONEY) such as receipts for gold deposits or NOMINAL VALUE as with TOKEN MONEY such as bank deposits (FIAT MONEY).

We can consider money through its functions as a STORE of VALUE : Money of account (debits/credits/ledger) which is dependant on the ability to record and count (UNIT OF ACCOUNT) and as such probably arrived later, or as a MEDIUM OF EXCHANGE (tangible, leather, clay, metal e.t.c).

Money as apposed to barter in a primitive economy enhances the DIVISION of LABOUR with it`s convenience amongst other qualities. An analogy could be describing money as the lubricant of the economy - like oil in an engine. Modern and sophisticated functions of money tend to develop around the spectrum of money based on liquidity. Their characteristics are PORTABILITY, DIVISABILITY, ACCEPTABILITY, DURABILITY, UNIFORMITY, Limited in SUPPLY (SCARCITY). In modern society we have FIAT CURRENCY, currency based entirely on trust. Another term is LEGAL TENDER.

MONEY and BANKING in the UK

BRITISH BANKING INSTITUTIONS include :

- The London Money Markets (LIFFE - London Financial Futures Exchange and others)

- COMMERCIAL BANKS (retail banking operating current accounts)

- MERCHANT BANKS (historically they were merchant s dealing with overseas trade)

- DISCOUNT HOUSES (financial intermediaries moving money from lenders to borrowers)

- The Banks of ENGLAND/SCOTLAND/WALES

We can also consider MONEY from the perspective of SUPPLY and DEMAND

The UK MONEY SUPPLY is difficult to define and is categorised by MONEY AGGREGATES. This consists mainly of bank deposits.

A chronology of events :

1844 the Bank Charter Act, note issue was removed from independent banks, the old Goldsmiths and given to the BANK of ENGLAND.

1966 - M0, M1, M2,£M3, M3, P.S.L (Private Sector Liquidity), P.S.L2

1976 to 1979 a more general measure of liquidity known as Domestic Credit Expansion (DCE) and takes the place of M1 and M3

1982 - M2 and P.S.L2 introduced to monitor measure of money stock sufficiently liquid for TRANSACTION PURPOSE

1983 - introduced the most narrow definition of money CASH or high powered money (notes and coins)

1988 - NARROW MONEY - M0, M1 (cash and SIGHT or bank DEPOSITS, very liquid) Broad money - £M3 (sterling M3 which includes TIME deposits and interest earning accounts), M4 (cash outside banks), M5.

MZM - money with zero maturity, financial assets redeemable at par on demand. The velocity of MZM is historically a predictor of INFLATION.

The US Federal Reserve and EU central bank have slightly different arrangements as to what is included in each of the MONEY AGGREGATES

MONETERISTS like MILTON FRIEDMAN consider a casual link between the supply of money and inflation.

Measuring changes in the value of money "When the price rises money falls in value, inflation describes changes in price". The UK used The Retail Price Index (RPI) and later Consumer Price Index (CPI) as a unit of measure of this.

THE FUDICARY ISSUE : Money not backed by gold or silver, these are notes issued in excess amounts backed by gold, old British bank notes have "I promise to pay the buyer on demand" written on them. Present UK banknotes cannot be exchanged for gold.

DEMAND FOR MONEY functions as a spectrum based on LIQUIDITY.

Maynard Keynes Britain`s last eminent economist defined 4 basic FUNCTIONS OF MONEY, SAMUELSON the British economist ranks the functions thus :

1. MEDIUM of EXCHANGE, 2. UNIT of ACCOUNT, 3. STORE of VALUE, 4. STANDARD of DEFERRED CREDIT.

Keynes also identified 3 motives for THE DEMAND FOR MONEY :

 ;1. TRANSACTIONS MOTIVE - money held as a medium of exchange for day to day purchases. This is dependant on REAL INCOMES, PRICE LEVEL, institutional factors such as time between paydays.

2. PRECAUTIONARY MOTIVE - money held for unforeseen emergencies, this can be merged with the TRANSACTION MOTIVE.

3. SPECULATIVE MOTIVE - money held and affected by the change in the interest rate, passive or idle money balances as a store of value or wealth.

LIQUIDITY PREFERENCE is a modern expression for the DEMAND for MONEY, it can be thought of as stemming from the above motives. It can be seen as the desire to hold MONEY rather than other forms of WEALTH.

In this article we have a hinted at the role of the British monetary system in THE INTERNATIONAL MONETARY SYSTEM within a modern historical perspective. Chronologically, 1916 to 1914 represented the first age of globalisation facilitated by the gold standard. The next significant period is 1944 to 1973 described as the era of Bretton Woods (J.M Keynes). The future is ours !

SOURCES : A history of Money from ancient times to the present day, author Glyn Davies 3rd edition (2002). Money, whence it came, where it went, author John Kenneth Galbraith (copyright 1995). GCSE Business Studies, Longman revision guides (1988), GCSE Business Studies (Renee Huggett 1998), GCSE Economics, Longman revision guides (1988), A Level course companion , Letts study aids (1986), A level Business Studies text book (Alan Hoskins 1990), ECONOMICS, Samuelson and Nordhaus (1992), MACROECONOMICS, The essential concepts (1992), Economics for professional students (L.W. Ross, J.R. Shackleton 1984), Dictionary of Economics, Penguin (1987), The Penguin Business Dictionary (1987), Economics essential topics for examination (J. Levick 1986), The Economic System in the UK (ed Derek Morris 1987).

Wikipedia !