Money is of interest to economists, entrepreneurs, employees, every social group and every single person. A well-known proverb says that money does not buy happiness, and yet it is difficult to imagine living in persistent scarcity of what symbolises all the things we may wish to consume.
What is money? What causes the loss of its value reflected in inflation? This text is intended to provide the reader with an outline of the answers to these questions.
The very idea of money can be viewed from two perspectives: the material from which it is made and the function it performs in the economy. As for the material, it has evolved over the centuries from commodity money (cattle, salt, shells, etc.) to precious metals (silver, gold) to paper money and even to digital money at present. The importance of the material money is made from comes down not only to the convenience of use in exchange transactions, but also, what may seem more important, to the difficulty of increasing its quantity in circulation. The supply of commodity and precious metal money was characterised by the scarcity of natural resources, which prevented governments from creating a medium of exchange under the influence of political rather than market factors. On the other hand, paper money from the physical point of view can be put into circulation in almost unlimited quantities, which gives the monetary authorities (i.e. central banks) a tool to exert an impact on the economy, which is an important sphere of everyone’s life. This means that “modern money, unlike precious metal money and other forms of full value or commodity money, is a financial instrument. (…) It has the character of directed money, i.e. the size of its issue (circulation) depends on how it is controlled by man (in practice, the monetary authorities).” As a result, even “legal guarantee given to the issuing bank of the greatest possible level of independence from government pressure will never eliminate the temptation to abuse.”
So what are the functions of money? As already mentioned, money can be described as a medium of exchange, so its basic function is to act as an intermediary in purchase and sale transactions. “Although the exchange of goods takes place with money, in real terms, it is an exchange of goods for goods, in which money performs only a passive role of an intermediary.” In addition, money is a store of value, as evidenced by our desire to accumulate it as a form of wealth accumulation. It also fulfills the function of a measure of value, without which it is difficult to imagine any comparison of value of various goods and services, which are subject to exchange. The price expressed in money turns out to be the most convenient solution.
Bearing in mind the aforementioned idea of money, it is easier to understand the specificity of the determinants of its value. Although according to some classics of economics, the value of money is only the denomination printed on a banknote, we identify it today with purchasing power.” Inflation means a decline and deflation means an increase in the purchasing power of money, which is commonly measured by the price index. If the price index rises, then the purchasing power of money falls or inflationary conditions appear. If, on the other hand, the price index falls, then one can speak about the increasing purchasing power of money or about deflationary conditions.” The amount of money in circulation in relation to the volume of production is undoubtedly one of the key factors affecting purchasing power (according to the quantitative theory of money), as shown by facts from economic history (e.g. inflation in Europe after the influx of gold as a result of geographical discoveries, inflation after World War I, current inflation initiated by limited production in the pandemic period, with an increase in government spending and low interest rates, etc.).
The amount of money in circulation affects the price level directly, but there are other factors that must also be taken into account. It is, for example, the velocity of money circulation (the number of transactions in a period of time, e.g. a year), which is an expression of the payment habits of the population: the greater the propensity to consume on credit, the greater the velocity of money circulation affecting the increase in the price level, i.e. the decrease in the purchasing power of money. Another factor is access to raw materials, which translates into the volume of production (if raw materials are expensive, production falls, and this together with an unchanged amount of money in circulation can lead to inflation). A whole list of determinants of the purchasing power of money could be listed, but a remark on the complexity of the issue is enough to realise that it is difficult at any moment to say explicitly which of the factors plays a dominant role in creating inflation. One thing is certain: the value of money is not determined by the material from which it is made. Money, whose value is unstable, itself determines the social position of people, and therefore favours the emergence of various types of inequalities perpetuated by the financial system.
This system enables the flow and creation of money in the economy, which determines people’s standard of living no less than their productivity. Are we right to fear the instability of the financial system? It turns out that this is not so obvious: “Financial stability petrifies existing social relations and consolidates the advantage of the rich, destabilisation promotes social mobility and opens up opportunities for advancement to ambitious people who want to earn money. The basic social division in financial matters runs between those who have already become rich and are interested in stability, and those who want to earn money even at the expense of lower security standards. The latter should not be confused with the poor. For the poor, destabilisation can be as severe as stabilisation, but they are generally not a party to the dispute. The dispute over the shape of the financial system is more often a dispute between old and new elites rather than between the rich and the poor. “
If a revolution in the international financial system appears on the horizon (e.g. caused by the introduction of central bank digital currencies), we may witness an exchange of elites. Money is not necessarily the paper that has some value, but it certainly is the most subtle instrument of power in the hands of those who control its issuance…
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