Evolution of Economy and Monetary Standards - Essay Example

Name : xxxxxx Tutor : xxxxxxx Title : xxxxxxxx Institution : xxxxxxx @2015 Introduction To analyze the economic changes that have taken place in society, money is the forefront keeping track of all the changes. Money has a historical background in human society as a means of measure of the value of the commodity. Money got universally accepted as it facilitates trade that help achieve a much noticeable standard of living. Evolution of economy and monetary standards The economies of scale which accompanies division of labor results to enormous gains. For many years most trade has taken place as barter even in the modern economies barter trade as practice though at a tiny percentage as it got replaced with money. Barter trade exists as bilateral as it involves only two people However, any multi-commodity market most of the time requires clearing mechanism, when money plays no role in the transaction, a seller is dictated by each commodity. It is awkward as all the traders would have to come carry with them inventories of many goods in each market. One could consider using intrinsically tokens that are valueless during a market session to facilitate barter for example poker chips considering scorekeeping in stake less poker game. The tokens ease pricing each commodity in a common numerical as opposed to every numerous other product. Otherwise, one would fear to leave the market the valuable commodities for selling useful products for token. If the tokens are going to be acceptable tenders in all the markets in the future well, then taken to be money. Society’s money is made acceptable to it by the social convention, and this practice reinforces the same agreement, on the other hand. The bearer of the goods accepts money from the other party who needs good because of confidence. The circulation of the money in the economy causes it to fluctuate; this fluctuation causes enables a significant inter-temporal exchange to happen. Different valuable are used as money. Wages and rents were paid using major grains and also in other transactions. Other independently valued commodities of monetary role being used as money play a role in production and consumption. There are different ways in which commodity money and token money derive their value from convention that makes them as money. Commodity money gets the value partly while token money is wholly The sovereign government in modern states determine the money used by the society. For example in United States, the federal government is assigned by the United States Constitution to determine the foreign coin money (1974). Similarly they define: • The monetary unit • Media taxes • Government debts paid • And the legal tenders and contract. Treasures in form of gold and silver over the past centuries have also gets valued as money by many societies and also internationally as a medium of exchange. Copper got used but when it became abundant being found in many parts of the world was relegated to be a subsidiary coin. The current coins used in many countries is made from copper as it is precious and durable and can get divided into other small denominations. However, for the past few years, gold acquired high value and had extensive use. Many countries provide token coins minted from the metals that are convenient for small transactions negligible in intrinsic value gets converted into primary money. For instance, United States monetary unit was a silver dollar in the Spanish American. Silver became of more dollar value and prevalent than gold until late 19th century. In England, silver and gold were coined but at another period when bimetallism degenerated into a standard of one of them. The metal took undervalued later with the offset of ‘Gresham’s law’. The recent considered money took over, and the other disappeared from the circulation as it was overpriced. In England, without intentions gold was overvalued; this led to silver being driven out of the circulation thus England being on the gold standard (1717) under the leadership of Isaac Newton. In 1816, it was formalized, and this got followed by other countries like the United States. In the year 1888-1914 all nations converted their currencies into gold at fixed rates and silver was demoted its status as coin same as copper. Gold is currently a well-known and standard metal in the whole world having highest value. Different countries define their account using a unit of their currency. For example in United States, all the prices of anything is quoted using dollars with all the accounts being kept in dollars. Although other countries like in Japan has quoted the prices of items in foreign currencies. Other societies have kept their account using more than one money i.e. silver and gold. In the current economy, some nations may accept different jurisdiction means of payment. These may be due tourist activities that has become one of the biggest and important source of revenue in different many countries. Hyperinflation is another cause of this as countries turn to higher foreign currency as a unit of account. In England, state came up with paper currency that was redeemable besides token coins that could get redeemed for gold and silver. It added to the ordinary banks that offered their notes. Later government settle the issue by offering paper currency in their central banks. The most common media of exchange in the modern economy are cheques. Cheques get deposited in banks and gets transferred to the third party. The current economy 20th century the government is working to replace paper money replacing it with fiat money. In 1971, gold was internationally dethroned as the medium that got used in settling imbalances in payment between countries. Although gold is freely traded all over the world but due to fluctuation of prices as the speculation of the future by individuals about the value of gold. Despite this, United States was unwilling to fix the price of selling the gold at the free market. Different countries with their sovereign have benefited from the monopolies of their money. Government in USA pays their bills easier by making their current bear a zero interest to be easier than taxation and cheaper than the interest. Public expenditures are financed majorly by printing money in less developed countries due to implicit taxation by inflation. In 1945 with established Bretton Woods’s regime, the world currencies of the world were linked the gold by USA using their fixed dollar to avoid foreign governments converting dollars to affixed gold price. It was different from the gold standard established before 1914 in the currency exchange rates that frequently changed. Exchanged fixed by discipline imposed by economy and government. The gold-dollar parity later gave way in 1971 when the subject became too much in for the US itself. International monetary system leads to a period of fiat money. This system was seen to have prevented hyperinflation as it proved right anchor for nominal prices. During the period of gold prices standardization, there were high rates of deflationary and inflationary. Economic activities were so volatile to an extent of rejection at this time (Cooper 1982, 1991). The United feared privatizing money by allowing supply of money even for derivative money. National banking system got established in 1864 the only paper money in the United States were the private notes. The issue of bank notes become so significant since there was no central bank to control this. The Congress intervened save the situation by establishing a system where all the bank notes were taxed making them go out of existence. Charted banks got the mandate to issue notes. Private, state and national banks continued to accept bank notes. Government guaranteed deposit in banks and financial institutions after 1864 although 1980`s, the guarantees became expensive and burdened the federal taxpayers. The theory of value The theory of value has long been the central question of the economist in their discipline. Consumer right considered as wages of labor produce determining the value of land the reflection of the prices. The future of the commodities delivered in the current times defines the terms of trade. The standard theory considers that something have positive value if positive it results in is seen in marginal utility in consumption by individuals, and also positive marginal in productivity in production of goods and services generate marginal utility. For the case of fiat money, it has no intrinsic non-monetary genesis of value. It cannot produce service valued by consumers. The value of commodity money expressed in terms of services and goods gets derived from the standard value theory. Relative prices of gold at the mint and market had to be the same as the relative prices in times of gold standard regime. Gold being circulated in terms of coins or jewelry doesn’t matter. These is are indicator that there is the absence of arbitrage profits. Although this doesn’t make a conclusion that during this period the gold given its price will not be same as gold being money. Pure economic theory minimizes the worry by politicians, financiers, and business managers worry about policies, monetary institutions and the consequences they can cause in any economic activity. The burden of any proof put by the theory of any other person who contends monetary inflation and money do much ill or healthy. Money is a veil without obscuring the real scenario as put by the classical economist. Others have argued that monetary policies and events have nothing to do with economic developments that are of concern to the societies. Different types and list of products gets produced if the economy gets confined to barter trade. Much time would be spent searching people to buy other than searching for the production process leisure and consumption. The difference in real outcomes for an institution with a barter economy and that economy with monetary institutions is distinct. The results are independent of purely nominal parameters of the two systems. It is convenient to determine the absolute price level and reciprocal of the value of the monetary unit. In most cases, it is a representative of goods of the consumer being split out of the determination of prices and real quantities associated with it. The social efficiency of trade and market might be affected by the choice between fiat money and commodity money, possible product standards and derivative money arrangements. The quantity theory of money assumes that all nominal commodity prices would rise in the same proportion as increase nominal quantity of money with real quantities and relative prices remaining unchanged. The same theory also equated in proportion the change of the monetary unit with amount of money increase. Money is not being the only assets leading in the monetary unit in an excellent number of economies. Moreover, there was no scaling of debts taken as dollars, or naturally private goods made the same way. Thirdly is that the denominated assets are not raised or lowered by in the same proportion with change in quantity of money due to changes in the normal operations of the central banks, government or any other events. Another big question that has existed and bring many questions about money is its price. A durable product is commonly viewed to have two prices that are, buying and selling price, with service rate assumed to be a unit time. The purchasing power of money is the first price of money. The services it offers can be classified into two categories. First as capital gain, store of value or its purchasing power. Secondly, it may be classified as medium of exchange, risk reduction and effort saving. Conclusion The introduction of money into the economy has seen tremendous changes. The barter trade could not sustain the change due to the introduction of policies and monetary events. Bibliography HORWITZ, S. (1992). Monetary evolution, free banking, and economic order. Boulder, Westview Press. Read More