The Mechanism of Exchange
With the cash received for goods sold other goods or services are purchased. The result is an indirect exchange of goods for goods in which the third thing, the medium is used to facilitate the exchange. Money then is a medium of exchange and anything which acts as a medium of exchange fulfills one part of the money function.
With the cash received for goods sold other goods or services are purchased. The result is an indirect exchange of goods for goods in which the third thing, the medium is used to facilitate the exchange. Money then is a medium of exchange and anything which acts as a medium of exchange fulfills one part of the money function.
BARTER-
In the very good old days, remote
in fact when one person wished to exchange a commodity that he possessed for a
commodity that another person possessed, the two bargained together till it was
agreed what quantity of the one commodity was the equivalent of other and then
the goods changed hands on that basis. The difficult issue would arise when one
who wished to exchange, say , a sack of corn , or alternatively , could not
find a person with cloth who wanted corn but had no cloth for exchange, The direct exchange
was of goods for goods is called Barter. Barter is a common method of trade in
schools where boys exchanged penknife for some pencils. A modified form of
barter is quite common in today’s international commerce, making international
payments. But this modern form of barter is based upon estimation in terms of
money payments are actually made by the two countries that transact business on
this basis. Trade agreements between two countries whereby they agree to
exchange certain quantities of goods with each other are known as Bi-literal. Such
agreement are contrary in spirit to the multi-literal trading envisaged at Breton
Woods, but they are expedient in times exchange difficulties. The major
objection to them is that they create rigidities in the international trade
mechanism.
A MEDIUM OF EXCHANGE-
As the world civilized in
advancement and trade grew the primitive system of barter became too cumbrous.
An alternative was needed to act as a go –between or medium to facilitate the
increasing need for exchange for goods provided the owner clearly only be
acceptable was certain that he could again exchange the money received for them
for other goods required. Thus the fundamental criterion of money, then as now
was and is its acceptability. The more generally acceptable the selected medium
of exchange the more effective is its use as money. A variety of things have
been adopted as the medium of exchange at various levels of human culture egg
cattle. But in settled communities the choice has fallen upon the metals and
finally upon the two metals, so attractive to the eyes when refined and polished,
gold and silver.
MEASURE OF VALUE-
Besides fulfilling the function
of a medium of exchange, money is also a measure of value. The hard part of
measuring the value of a commodity, say wheat in terms of commodity like cloth,
needs no emphasis. But if the value of the commodities is assessed in terms of
a third commodity generally acceptable in exchange and one can form an equation
e.g. pure silver =1 bushel of wheat
=2yards of cloth and so on for every commodity and grade of commodity , the difficulty is greatly
lessened. A measure of value thus performs the same function as a yardstick
does in the comparing length scope.
Standard of Deferred Payments-
A third function of money is to provide a standard of deferred payments. If a man borrows £100 now to repay at the end of month, he knows exactly what to repay on the due date, so far at least as the amount is concerned. If the purchasing power of money is the same when repays the £100 as when he borrowed it, neither lender nor borrower suffers anything. Unfortunately, the purchasing power of money does vary as between one period and another. If at the time of repayment the purchasing power of the £100 is less than it was borrowed, the lender suffers; if more, the borrower suffers. This variation in the value of money has been the theme of discussion from time years back. The great objects that a government must always pursue are to preserve the purchasing power of the national currency at a stable level, since a stable currency is vital to the economic well being of a people.
STANDARD AND TOKEN COINS-
At first, the metals used for the
purpose of exchange were uncoined. They were assayed for purity and weighed.
Watch cowboys documentaries and movies, even music videos of cowboys, like the
good the bad and ugly, ghetto cowboys by Bone thugs n harmony from Cleveland ,
Ohio, notice the type of money used, they are nothing but coins , even some uncoined.
The further step of coining metals into pieces of defines weight, shape and
value and stamping them as symbols of sovereignty was an obvious development.
It is proposed to trace the history of coining age here. Suffice it to mention
that until not very long, the actual period varies from country to country most
countries had standard coins and token coins. In some cases the standard coins
were in circulation, in others they were not.
A Standard coin is one the metallic content of
which is equal in value to its original value in exchange. In 1920's the
sovereign was a standard coin in the U.K but it was not in circulation. The
considerably less than their face value. At present time the whole currency is
token in character. The intrinsic value of the coinage is very small and that
of the notes is virtually nil.
The metal used
for standard coins had to conform to certain requirements. It had to be
(a)Acceptable
(b)Capable
(c)Durable
(d)Stable in
value
(e)Easily
recognizable
(f) Portable
(g)Homogeneous
(h)Possesses the
utility the satisfied requirements.
Gold and to less extent , silver came nearest to so doing and so the standard coins of most countries were gold , silver, being used in a few cases like Mexico, Costa Rica and India where the inhabitants had for centuries been accustomed to the use of that metal. The issue and care of a country’s currency is prerogative of the Government. In this and many countries, no charge is made either for minting or for the preservation of currency. The cost is defrayed out of the derived from the issue of the token coinage. In former times a charge termed Mintage, also called Brass age, and was made for the cost of manufacture. The profit on the token coinage known as Seignior age passes to the state.
MONEYS OF ACCOUNT-
The term the money of account
signifies the monetary denominations used to record the values of monetary
transactions. Thus in the country monetary transactions are recorded in pounds
shilling and pence. In France, the moneys of account are francs and centuries
(decimals of a franc); in Germany, marks and Pfennig (decimals of a mark).
GRESHAM’S LAW-
When debased standard coins
circulated side by side with coins circulated side and debased coins remained.
The explanation is simple. The full-weight coins and debased coins were of the
same value in exchange, but the full weight coins were worth more as metal.
Hence people hoarded or melted down the full weight coins and the government
was to put to the expense of fresh issue of full weight coins. Sir Thomas
Gresham was Finance minister to Queen Elizabeth 1.He was to put the first to
put into compact statements certain tendencies in connection with currency, as
for example that overvalued money drove under –valued money out of circulation.
GOLD STANDARDS-
A country is said to be on a gold
standard when its international indebtedness is required, payable in gold.
There are three varieties of the gold standard;
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