The monetary system is a set of institutions through which the government provides money to the country's economy. Modern monetary systems usually consist of a national treasury, a mint, central and commercial banks. Types of the currency system can be distinguished as follows.
Commodity variety
A commodity currency system is a monetary system in which a commodity (such as gold) becomes a unit of value and is physically used as money. Money retains its value due to its physical properties. In some cases, the government may stamp a metal coin with a specific emblem or badge indicating its weight or confirming its purity. The value of such a coin remains unchanged, even if it is melted.
Aspects of
Commodity currency should be distinguished from representative money, which is a certificate or token. It can be exchanged for the main product, but only if trade is mutually beneficial for this source and product. A key feature of the presentation of the currency system is that value is directly perceived by users of this money, who recognize their usefulness. That is, the effect of holding a token should be as economical as the actual availability of money at hand. This principle drives modern commodity markets, although they use a more complex range of financial instruments.
Since payment for goods usually provides a certain benefit, a commodity currency is similar to barter, but differs from it by the presence of a single recognized unit of exchange.
Metals
In situations where the product is a metal, usually gold or silver, the state mint issues money in the form of coins. At the same time, a special mark is placed on the metal, which serves as a guarantee of the weight and purity of its composition. The characteristic of a currency system of this type is as follows. When issuing the above coins, the government often imposes a fee, which is known as seigniorage.
In situations where a commodity currency is used, the coin retains its value, even if it is re-melted and physically changed (that is, it will actually cease to be a monetary unit). Usually, in monetary terms, the price drops if the coin turns into metal, but in some cases the cost of the material in money is more than the face value of the coin.
Functions
The stages of development of the monetary system can be traced from antiquity. The use of barter methods involving commodity money could have taken place about 100,000 years ago. To organize the production and distribution of goods and services among the population at a time when a market economy did not exist, people relied on tradition, command or community cooperation.
Although some commodity denominations have been used historically in trade and barter (for example, barley in Mesopotamia around 3000 BC), in practice it may be inconvenient to use them as a medium of exchange or a standard for deferred payment. This is primarily due to transportation and storage problems. Gold or other metals are sometimes used in the price system as a way to save money that does not collapse due to environmental degradation and which can be stored for a long time.
Questions for today
The principles of this type of monetary system have changed over time. Today, the nominal value of the base metal coin is set by the government, and it is this price that must be legally accepted as payment. The value of a precious metal in its composition can give it another price value, which changes over time. The cost of metal is subject to bilateral agreement, even if they have not been monetized by any government.
Executive Currencies
Characterization of the types of currency systems is impossible without a description of the category “money for money”. They are one step away from commodity finance and are called representative. Many currencies consist of banknotes that do not have their own material value, but can be exchanged for a precious metal (such as gold). This rule is known as the gold standard. The silver standard was widespread after the fall of the Byzantine Empire and continued until 1935.
Another alternative that was tested in the twentieth century was bimetallism, also called the double standard, according to which both gold and silver were legal tender.
Representative money is any exchange rate that has a certain value, but has little or no value (internal). However, unlike some forms of financial money (which may not have anything of value in their composition), they should include something that supports the nominal value presented.
The term "representative money" was used in different ways:
- Claim for goods, for example, gold or silver certificates. In this sense, they can be called "commodity money."
- Any type of money that has a face value greater than its price as a tangible substance. Used in this sense, most types of fiat money are a type of representative currency.
Historically, the use of representative money precedes the invention of coinage. In the ancient empires of Egypt, Babylon, India and China, temples and palaces often had warehouses that issued certificates of deposit as evidence of a claim for some of the goods stored in warehouses, in that quality.
According to economist William Stanley Jevons (1875), representational money in the form of banknotes arose due to the fact that metal coins were often cut or depreciated during their use.
Fiat money
An alternative to the presentation of the currency system is cash, which is determined by the central bank and state law as legal tender, even if they have no intrinsic value. The original money was paper currency or a check coin, but in modern economies it mainly exists as data, such as bank balances and credit or debit card purchase records, and the share that exists as banknotes and coins is relatively small.
Money is mainly created, contrary to what is written in most textbooks, by banks when they lend to customers. Simply put, banking organizations that provide credit currency to customers create more deposits and scarce expenses.
In normal times, the central bank does not record the amount of money in circulation, and they, in turn, "do not multiply" by a larger number of loans and deposits. Although commercial financial institutions create funds through lending, they cannot do it freely without restrictions. Banks are limited by the amount within which they can lend in order to remain profitable in the competitive system. Prudential regulation also acts as a limitation of their activities to maintain the stability of the financial system. Both individuals and companies that receive money created by a new loan can take actions that affect currency funds - they can quickly “destroy” money or currency, using it, for example, to pay off their existing debt.
Central banks control the creation of finance by commercial organizations by setting interest rates on reserves. This limits the funds that non-state are ready to provide, and thereby create, since this affects the profitability of lending in a competitive market. This is the opposite of what many people believe in making money. The most common misconception is that central banks print all the money. This does not reflect what is actually happening.
Creation and regulation of money
The nature, types and elements of the monetary system should be considered, starting with the process of creating financial assets. The central bank injects new money into the economy by buying assets or providing funds to financial institutions. Then, commercial organizations will regroup or reorganize these basic assets by creating a loan through partial reserve banking, which expands the total supply of available money (cash and demand deposits).
In the modern economy, a relatively small portion of the supply of affordable money is in physical currency. For example, in December 2010, out of $ 8,853.4 billion in the form of broad money in the United States, only 915.7 billion (about 10%) consisted of physical coins and paper money. The production of new banknotes and coins is usually the responsibility of the central bank, and sometimes the state treasury.
Inflation
The adoption of fiat currency by many countries, starting from the 18th century onwards, led to large fluctuations in the supply of money. Since then, in a number of countries there has been a significant increase in the supply of paper finances that caused hyperinflation - episodes with extreme inflation rates are much higher than in previous periods of commodity money.
Economists generally believe that high inflation and hyperinflation are due to excessive growth in the money supply. Its low level reduces the severity of economic downturns, allowing the labor market to quickly adapt to new conditions, and reduces the risk that the liquidity trap will prevent the stabilization of the monetary policy economy. However, money supply growth does not always cause a nominal increase in prices. It can lead to stable prices at a time when they would otherwise fall. Some economists argue that in the face of the liquidity trap, large cash injections are like “string pressure.”
The task of maintaining low inflation and stabilization is usually given to monetary authorities. Typically, these government bodies are central banks that control monetary policy by setting interest rates and open market operations, taking into account the requirements of a bank reserve.
Loss of support
What is a currency system? As you can see from the above, today it is a process of issuing and circulating fiat denominations. The fiat currency significantly loses its value if the issuing government or central bank either loses its ability or refuses further guarantees of its value. Hyperinflation is a common consequence. Some examples of where this happened are the Zimbabwean dollar and the Chinese currency in 1945.
But this does not necessarily happen: for example, the so-called Swiss dinar continued to maintain value in Kurdish Iraq even after the central government of that country revoked its legal tender status.
Description of currency systems of our time
The use of currency is based on the concept of lex monetae. This means that each sovereign state decides which unit it will use. Currently, the International Organization for Standardization is introducing a three-letter code system (ISO 4217) for determining the currency (as opposed to simple names or characters) to eliminate confusion. It is connected with the fact that there are dozens of monetary units called the dollar and the franc. Even the name "pound" is used in almost a dozen different countries. Most of them are tied to the pound, and the rest have different meanings. In general, a three-letter code uses the ISO 3166-1 country code for the first two letters and the first letter of the currency name. An exception is the American currency, which is called the US dollar worldwide and is written as USD.
Alternative currencies
If you give descriptions to the types of currency systems, you should not lose sight of alternative monetary units. Unlike centrally controlled state currencies, private decentralized trust networks support digital denominations such as Bitcoin, Litecoin, Monero, Peercoin or Dogecoin. Brand currencies also fall into this category, for example, commitment-based values such as the quasi-regulated BarterCard, loyalty points (credit cards, airlines) or gaming credits (MMO games) based on the reputation of commercial products. The concept of a currency system of this type also includes highly regulated alternative financial units, such as mobile money schemes (MPESA or E-Money).
Currency can be network (Internet) and digital. For example, bitcoin is not tied to any particular country and is not based on a basket of currencies (and on held assets).
Control and production
The role of the monetary system in modern conditions is obvious. In most cases, the central bank has a monopoly on the issue of coins and banknotes (cash) for its own circulation area (country or group of countries). It regulates the production of denominations by banks (credit) through monetary policy. The elements of the types of the fiat currency system include the exchange rate. This is the price at which two units can be exchanged for each other. This element is used for trading between two currency zones. Exchange rates can be classified as floating or fixed. In the first case, current movements at exchange rates are determined by the market, in the second, governments intervene in the market to buy or sell their currency to balance supply and demand at a fixed rate.
In cases where a country controls its monetary unit, this control is carried out either by the central bank or the ministry of finance. The institution that oversees this policy is called the monetary authority. Such government representatives have varying degrees of autonomy from the governments that create them.
Names and denominations of monetary currencies
The nature and types of the monetary system can be derived from the name and distribution of monetary units. Several countries may use the same name for their individual currencies (for example, the dollar in Australia, Canada and the United States). On the contrary, several countries may also use the same currency (for example, the euro) or one state may declare a unit of another legal tender. This usually happens with some types of world monetary systems. For example, Panama and El Salvador stated that the US currency was legal tender, and from 1791 to 1857, Spanish silver coins were such in the United States. At different times, countries either reprinted foreign coins, or used the currency board, issuing one unit for each note of a foreign government, as Ecuador does.
Elements of the currency system of the form fiat
Each currency usually has a base unit (for example, a dollar or a euro) and a fractional component, often defined as 1/100 of the main block: 100 cents = 1 dollar, 100 centimes = 1 franc, 100 pence = 1 pound, although sometimes 1 / 10 or 1/1000. In some currencies, in general, there are no smaller units (for example, Icelandic krina).
Mauritania and Madagascar are the only countries today that do not use the decimal system. Instead, the Moorish uguya is theoretically divided into 5 godfathers, and the Malagasy artery is theoretically divided into 5 iraimbilanja. In these countries, signs like the dollar or the pound were simply names for a given weight of gold. Due to inflation, khoums and iramimbilanja became unusable in practice.
Currency conversion
After analyzing the nature and types of the world monetary system, we can conclude that in fact they are dependent on each other. Currency convertibility determines the ability of an individual, corporation or government to transfer its local unit to another or, conversely, with or without the intervention of the central bank or government.
Based on the above restrictions or free and easily convertible functions, world currency systems of the fiat type can be divided into:
- Fully convertible - when there are no restrictions on the unit that can be sold on the international market, and the government does not artificially impose a fixed or minimum value in international trade. The US dollar is an example of such a currency.
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