In a primitive society, before market relations became established, economic relations were based on the principle of exchange, when some goods were directly exchanged for others. Over time, the first intermediaries (the prototype of money) appeared between the products, and the exchange began not only between them, but according to the formula Product-Money-Product. But their turnover was spontaneous, the law of money circulation at this stage was not known.
With the advent of modern paper money, new trends have emerged in the exchange of goods and money directly. The number of notes grew, leading to higher prices and the depreciation of banknotes. There was a need for constant control over the amount of money, which, in fact, were only symbols, without any useful value. There was a need to explain the ongoing processes, which led to the discovery of a new economic law.
The law of money circulation can be explained as follows. Money in the performance of its function as a means of circulation and payment are constantly in motion. At any given time, a certain amount of money is in circulation in the country, depending on the volume of goods on the market, the level of prices for them, the degree of development of cashless payments and credit relations, and the speed of circulation of the money itself. The higher this speed, the less bills are in circulation at one time. The speed of money circulation is the average number of turns that make money in the performance of its two main functions - means of payment and circulation.
Thus, the law of money circulation is an objective law of economic relations, according to which the amount of money that is necessary for circulation under certain conditions and in a specific period of time is determined. It was formulated by Marx.
The amount of money should be equal to the sum of the prices of goods that were sold on credit minus the amounts of mutually repayable payments, taking into account the amounts that must already be paid by the due dates. The result of these calculations is divided by the average number of revolutions that the corresponding currency units make. According to this scheme, you can calculate the amount of money that at some point is necessary for circulation.
The formula, which obeys the law of monetary circulation, can be expressed simplistically as follows: D = MhTs / So., while M is the total mass of goods; C - their average price; S. o.– average turnover rate (their number per year).
Under the gold standard, money circulation was regulated by the withdrawal of coins from circulation, when their demand was reduced, and by their release in the reverse picture. Today, in the conditions of paper money circulation, often the channels of movement of funds turn out to be crowded, which leads to inflation (depreciation of banknotes).
The law of monetary circulation explains inflation as a fall in the price of money because of its redundancy, which were put into circulation. This amount exceeds the required for normal turnover. As a result of this, a rise in prices begins, which leads to a redistribution of gross product in favor of monopolists (state enterprises) and the shadow economy. This is made possible by keeping salaries and other incomes of the population at the same level.
The law of monetary circulation determines the interdependence of money supply and inflation. The issue of surplus money necessarily leads to a drop in production volumes and imbalances in the development of various sectors of the economy, a lag in production from the demand secured by the payment ability, and budget deficit. With the wrong policies of the state, banks and enterprises, these imbalances can further increase.