Concepts of the classical theory of money. Classical quantity theory
1.Metal theory of money………………………………………….page 3
2. Nominalistic theory of money…………………………………….... p.3
3. Quantitative theory of money. Monetarism……………………………p.4
4. Quantitative theory of money by I. Fisher……………………………... p.5
5.Modern monetarism. …………………………………………….. page 5
6.Cambridge quantitative version theory of money………………. p.7
Theories of money
There are three main theories of money - metallic, nominalistic and quantitative.
1.Metal theory of money.
Early metallism arose during the period of initial accumulation of capital in the 16th-17th centuries. This theory appeared in the most developed country of that time - England. One of the founders of the metal theory was W. Stafford (1554-1612). The early metal theory of money was characterized by the identification of the wealth of society with precious metals, which were credited with the monopoly of all the functions of money.
The disadvantages of this theory were the following:
Firstly, they did not provide for the need and regularity of replacing full-fledged paper money.
Secondly, the ideas of its supporters about the wealth of society were limited, since they did not understand that the wealth of society lies not in gold, but in the totality of material and spiritual wealth created by labor.
Later, in the 18th century. and the first half of the 19th century, the metal theory of money, which previously reflected the interests of the commercial rather than industrial bourgeoisie, was losing its position.
However, in the second half of the 19th century. German economist K. Knies (1821-1898) not only reproduced the views of the early metalworkers, but modernized them in relation to new conditions. He considered not only metal, but also banknotes of the central bank as money, since by this time credit began to play a significant role in the economy, which in turn served as the basis for the issue of banknotes. Recognizing banknotes, at the same time K. Knies opposed paper money, not exchangeable for metal.
The second metamorphosis of the metal theory of money occurred after the First World War, when adherents of metalism advocated maintaining the gold standard in the so-called “reduced” form, namely the gold bullion and gold exchange standard.
After World War II, some economists defended the idea of restoring the gold standard in domestic monetary circulation, and in the 60s. In France, the third metamorphosis of the metal theory took place in relation only to international monetary relations. This theory, called neometallism, supported the political action of the French government to convert most of its dollar holdings into gold.
2. Nominalistic theory of money.
The first representatives of early nominalism were the Englishmen J. Berkeley (1685-1753) and J. Stewart (1712-1780). Their theory was based on the following two provisions: money is created by the state, and the value of money is determined by its face value.
The main mistake of nominalists is the theory that the value of money is determined by the state. And this means denying the theory of labor value and the commodity nature of money.
The further development of nominalism (especially in Germany) occurred at the end of the 19th - beginning of the 20th centuries. The most famous representative of nominalism was the German economist G. Knapp (1842-1926). Money, in his opinion, has purchasing power, which is given to it by the state.
The evolution of nominalism was manifested during this period in the fact that G. Knapp based his theory not on full-fledged coins, but on paper money. Moreover, when analyzing the money supply, he took into account only state treasury notes (paper money) and small change coins. He excluded credit money (bills, banknotes, checks) from his study, which caused the inconsistency of his concept as credit money spread.
The main mistake of the nominalists was that, having separated paper money not only from gold, but also from the value of goods, they endowed them with “value”, “purchasing power” through an act of state legislation.
Nominalism played a major role in the economic policy of Germany, which widely used the issue of money to finance the First World War. However, the period of hyperinflation in Germany in the 20s. put an end to the dominance of nominalism in theories of money.
Modern economists do not share the basic views of G. Knapp. Having retained from nominalism the denial of the metallic concept of the theory of labor value, they began to look for a definition of the value of money not in state decrees, but in the sphere of market relations through a subjective assessment of their “usefulness” and purchasing power. As a result, quantity theory took the leading position in theories of money.
Early metalism arose during the period of initial accumulation of capital, the formation and development of capitalism in the 16th - 17th centuries. The birth of capitalism was associated with the decomposition of the natural-feudal economy and the development of markets. This theory appeared in the most developed capitalist country of that time - England. One of the founders of the metallic theory was W. Stafford (1554 - 1612).
The historical situation in which the metallic theory of money arose was characterized by the emergence of manufactures, the growth of commercial capital and the seizure by European states of the natural resources of overseas countries. Thus, the early metallic theory of money was characterized by the identification of the wealth of society with precious metals. Mercantilists recognized commodity essence of money, seeing their value in the natural properties of gold and silver, and therefore opposed the deterioration of coins, which often occurred at that time.
Early mercantilists(until the middle of the 16th century) the key function of money was considered to be the function of accumulation (formation of treasure). Their main theoretical positions were based on the idea of an active "money balance", ensuring an abundance of gold and silver in the country on the basis of a surplus foreign trade. Their policy was to carry out measures, firstly, to prevent the outflow of gold and silver from the country, and secondly, to stimulate the influx of gold and silver from abroad.
Late mercantilists(from the second half of the 16th century to the end of the 17th century) opposed the idea of “money balance” to the idea of “trade balance”, believing that in conditions of sufficiently developed and regular trade between states it is possible to allow the import of goods (subject to a positive balance) and the export of money for the purpose of profitable trade deals. They considered the key function of money to be that of a medium of circulation, primarily its use as a means of international trade.
Under these conditions, critics of the metallic theory of money appeared. Some critics argued that for internal circulation there is no need for full-fledged metal money; their functions can be performed by paper banknotes.
In the second half of the 19th century, German economists K. Knies, V. Lexis, A. Lansburg and others, without rejecting the possibility of circulating paper banknotes, put forward a requirement for their mandatory exchange for metal. Knis considered as money not only metal coins, but also banknotes of the issuing bank, which have a credit nature and are widely used in the economy. Recognizing banknotes, Knies opposed paper money that was not redeemable for metal.
After the First World War, supporters of metalism, recognizing the impossibility of restoring the gold coin standard, advocated maintaining the gold standard in its “reduced” form - gold bullion and gold exchange standards.
After World War II, some economists advocated the idea of restoring the gold standard in domestic currency circulation. In the 60s of the 20th century, French economists A. Thulemon, J. Rueff and M. Debreu, as well as the English economist R. Harrod, came up with the idea of reviving metallism (neometalism) in international circulation. Neo-metalists, unlike representatives of the old metallistic theory of money, did not deny the functioning of money in the form of irredeemable paper banknotes, but stood for a return to the gold standard with the free exchange of banknotes for gold.
Nominalistic theory of money
Nominalism can be found among ancient philosophers under the slave system, and then under feudalism. The first nominalists were adherents of defacement of coins. Having noticed the fact that worn-out coins circulate in the same way as full-fledged ones, they began to argue that it is not the metallic content of money that is important, but its denomination.
Nominalism was formed in the 17th-18th centuries, when monetary circulation was flooded with inferior coins. It was defective coins, and not paper money, that underlay the theory of early nominalism.
Nominalists view money as symbols and reject any connection with precious metals. Some experts argued that money is a creation of state power and therefore the state has the right to assign a “prescribed value” to money.
In the 18th century in England, nominalistic ideas were developed by the religious philosopher George Berkeley (1685-1753) and the prominent economist James Stuart (1712-1780). They viewed money as a conventional unit of account used to express exchange proportions as an ideal price scale. In their opinion, both metal and paper money are, in fact, simply "counting signs"
Nominalists proceeded from the following provisions: money is created by the state; the value of money is determined by what is written on it, its denomination (hence the name of the theory).
At the beginning of the 20th century, in connection with the collapse of the gold standard caused by the First World War, the nominalistic theory of money was further developed. The most prominent representative of nominalism during this period was the German economist G.F. Knapp (1842-1926), who published the famous book “The State Theory of Money” in 1905.
The main provisions of his theory are as follows:
Money is a “product of law and order”, a creation of state power, its purchasing power is determined by legislative acts states;
- “The essence of money lies not in the material of signs, but in the legal norms governing their use”;
The main function of money is to serve as a means of payment;
The state gives money the power of payment.
Nominalism played a large role in the economic policy of Germany, which made extensive use of money creation to finance the First World War. Knapp initially gained many supporters. However, during the period of hyperinflation in Germany, when 80 factories worked to produce rapidly depreciating paper money, practice itself revealed the inconsistency of the statement that “the state does not know the change in the value of money.” The hyperinflation of the 1920s in Germany put an end to the dominance of nominalism in bourgeois theories of money.
Quantity theory of money is an economic doctrine that explains the relationship between the amount of money in circulation, the level of commodity prices and the value of the money itself. Its essence lies in the assertion that the amount of money in circulation is the root cause of the proportional change in the level of commodity prices and the value of money. This provision was first applied to metallic money, and then to paper money.
The quantity theory of money arose in the 16th-18th centuries. Its founder is the French economist Jean Bodin (1530 - 1596), who tried to reveal the reasons "price revolution", linking the growth to the influx of precious metals into Europe. In the XVI - XVIII centuries. The world's gold and silver production is approximately 16 times greater than the supply of precious metals that Europe had in 1500. This is due to the export of gold from Mexico and South America.
These ideas in the 17th and 18th centuries are reflected in the works of the English philosophers J. Locke (1632-1704) and D. Hume (1711-1776), the French philosopher C. Montesquieu (1689-1755) and other thinkers.
The quantitative theory of money was further developed in the works of representatives of the classical school of political economy - D. Ricardo (1772-1823) and J. St. Mill.
However, the quantity theory of money also had its opponents. K. Marx criticized its main postulates, noting as one of the fundamental shortcomings of this theory the reduction of money only to the function of a medium of exchange while ignoring its function as a measure of value. He believed that the main error of the quantitative theory is rooted in the hypothesis that goods enter the circulation process without a price, and money without value.
In his opinion, money has value even before it comes into circulation, and depending on the value of money, on the one hand, and the value of goods, on the other hand, the prices of goods are set. Marx saw another flaw in the quantity theory of money in the erroneous initial premise that anything can come into circulation. arbitrarily set amount of money. Marx argued that the amount of money in circulation is determined by the action objective economic law, according to which the amount of full-fledged money that is necessary for circulation comes into circulation.
Transactional version of the quantity theory of money. The American economist, statistician and mathematician I. Fisher (1867-1947) denied labor value and proceeded from the “purchasing power of money.”
I. Fischer believed that the amount of commodity exchange transactions for a certain period can be expressed in two ways:
1. As the product of the amount of money (M) by the average velocity of its circulation (V);
2. As the product of the number of goods sold (Q) by their average price (P).
From this he derives the following exchange equation:
MV = PQ
Fischer believed that in this formula V And Q over a short-term period are constant values, and therefore their influence can be excluded. Then there is only one dependency left: between M And R, which is the essence of the quantity theory of money. However, practice shows that the velocity of money circulation and the number of goods sold are far from constant values and have a significant impact on money circulation, which cannot be neglected.
Cambridge version of the quantity theory of money. The founders of this concept are the English economists A. Marshall, A. Pigou, D. Robertson, who, unlike Fisher, focused not on the circulation of money, but on its accumulation by business entities (due to which this theory was also called the theory cash balances).
The principle of this option is expressed by the formula:
M = КPQ,
where M is the amount of money;
P - price level;
Q is the physical volume of goods included in the final product;
K is the share of annual income that participants in the turnover wish to store in the form of money.
Since K is the reciprocal of the velocity of money (K = 1/V), then substituting this value into the formula, we obtain the exchange equation of I. Fisher:
Those. MV = PQ.
Thus, there are no fundamental differences between the two versions of the quantity theory of money, there is simply a different way of writing the equation of exchange.
The fundamental errors of the quantity theory of money in general are the ignorance of such functions of money as a measure of value and treasure, and the denial of the law determining the amount of money in circulation.
Neoclassical approach to the interpretation of the theory of money is based on the quantity theory of money. This theory can be simplistically formulated as follows: an exogenous change in the quantity of money leads to a proportional change in the absolute price level. When we say exogenous change, we mean changes that occur outside the economic system.
This external force usually means the government (state), sometimes more exotic reasons are given, such as rain from banknotes. All these external reasons can lead in this case to an increase in the amount of money and, consequently, to an increase in prices.
The founders of the quantity theory of money were economists think David Hume(1711–1776) - a famous English philosopher, economist and historian, while others give priority to his compatriot and contemporary D. Hume Jacob Vanderlint(? – 1740). As stated, the quantity theory expresses the direct dependence of the prices of goods on the total amount of money. The active side in this tandem is the money supply. The condition for maintaining and preserving the value of money is to limit its quantity. Let us consider the main approaches to the analysis of the quantity theory of money in neoclassical theory.
The neoclassical economists' analysis of the demand for money is based on the assumption that money is only a medium of exchange and, as such, is held by economic agents only to facilitate exchange. Because there is a time lag between earning income and purchasing goods, people are forced to hold cash balances for a certain period of time. Suppose someone receives his income at the beginning of the period (month) and does not spend it immediately because the necessary purchase must take place only at the end of the month. Thus, the “sole cause” of the demand for money in the classical theory is the presence of a time gap between receiving and spending income. Money is kept in the form transaction balances to finance future transactions (deals). This approach to the demand for money is called version of transaction balances. The transaction balances hypothesis does not consider the factors that shape individuals' desire to hold cash. It takes into account the factors that determine the need to save money. These factors include: the amount of income, the frequency of receiving income and the specifics of spending the funds received. This approach is expressed by the so-called exchange equation, formulated by Irving Fisher in 1911:
Where M– money supply; V– velocity of money circulation; R– absolute price level in national economy; Y– level of real income.
This equation shows equilibrium in the money market. This variable is similar to the variable k and relates to it in inverse proportion V = 1/k, those. The faster money circulates, the less money should be in the hands of the population. This equation focuses on the idea that the primary function of money is as a medium of exchange, in contrast to the Cambridge equation, discussed below, which focuses on the storage function. This is confirmed by the fact that in the Cambridge equation there is a coefficient k, showing the proportion between nominal income and desired cash balances. In other words, it shows the relationship between the part of money that will be in circulation and the part that will be accumulated by private individuals.
I. Fisher's formula for the equation of demand for money was quickly recognized by the entire economic community, but it seemed too mechanistic to many economists. “Indisputable, but meaningless,” as M. I. Tugan-Baranovsky defined the Fisher equation, it did not answer the question of the motives for the alternative use of money by individual participants economic relations. This equation expressed the function of money only as a medium of circulation and a measure of value, but not as a means of storing value. Economists have noticed this Cambridge school.
The next version of the equation of the quantity theory of money was called the Cambridge approach; it was presented in 1923 by A. Marshall in the published part of the treatise “Money, Credit and Trade”. In addition, independently of Marshall, he formulated his hypothesis of the quantitative theory of money (almost identical to Marshall’s) and A. S. Pigou, and it was called the version cash balances or Cambridge approach. In contrast to the hypothesis of I. Fisher, who proceeded from the primacy of the factors of the need to save money, the Cambridge school examines the factors of demand for money. In other words, this approach is focused on analyzing the propensity of individuals to hold onto money. The Cambridge approach assumes that individuals want to hold money because it is able to provide them with certain services. Firstly, money has absolute liquidity, therefore, they can be quickly and without loss exchanged for any good. Secondly, having money allows individuals to choose the optimal time for purchases and/or postpone purchases to the future. Based on the above, the individual faces the problem of balancing the consumption of various types of services. An individual must determine the portion of his income that he wishes to keep in cash. For the above-mentioned balance, in every society a certain part of income must be kept in the form of money. The quintessence of this approach is the famous Cambridge equation:
This equation is a formal expression quantity theory of money, where all variables are the same as in the I. Fisher equation. Changes affect only the variable V(money circulation velocity), instead of which the coefficient appears k, representing the proportion between nominal income and desired cash balances or, in other words, an indicator of the share of cash in real income. This coefficient was later called the “Marshall coefficient”.
It is assumed that k And y – const, i.e. constant values, this assumption is based on the hypothesis of stationary economy. This is a hypothetical economy in which the constancy of real income is based on the national product being at the full employment level, i.e. at the highest possible level. Now remember that national income is equal to national product, therefore, the level of national income is maximum in a stationary economy, where there is no population growth and technical progress. Coefficient k is constant because the overall structure of transactions is assumed to be constant. Therefore, given the constancy at And k, a change in the nominal quantity of money must lead to a proportional change in the absolute price level.
In this formula for the demand for money, we see that it places special emphasis on the function of money as a means of accumulation, since it introduces the concept of cash balances, i.e. a preserved monetary fund intended for accumulation. Coefficient k represents the proportion of that part of real income that is saved and does not participate in circulation, the Cambridge equation is a shortened equation and it is derived from three equations:
Neoclassical theory did not create a comprehensive theory of money, but its merits in the development of ideas about them are obvious. Firstly, in the formulation of both Fisher and representatives of the Cambridge school, especially A. Marshall, there is a radical break with the classical ideas that the value of money is determined by the value of the metal from which money is made. In general, neoclassicists came to the idea that in their contemporary economy, gold had lost its exclusive rights to be money. Secondly, the problem of the formation of monetary prices was clearly separated from the problem of the formation of relative prices. In other words, on commodity market Relative prices of goods are formed, and then quantitative proportions formed in the money market are superimposed on them, and as a result, money prices are obtained.
The connection between money and production has been noticed for a long time. Money is an important element of any economic system, facilitating the functioning of the economy.
Depending primarily on the assessment of the role of money and the monetary system in the development of the economy, there are various theories of money. At the moment, there are three main theories of money: metallic, nominalistic and quantitative.
Metal theory of money. This theory arose in England during the period of primitive accumulation of capital in the 16th–17th centuries. One of the founders of the metal theory was W. Stafford. The metal theory of money was characterized by the identification of the wealth of society with precious metals, which were credited with the monopoly of all the functions of money. Supporters of this theory did not see the need and logic of replacing full-fledged money with paper money, so later they opposed paper money that could not be exchanged for metal.
Nominalistic theory of money. The first representatives of this theory were the Englishmen J. Berkeley and J. Stewart. Their theory was based on two principles: first, money is created by the state; secondly, the value of money is determined by its face value. The main mistake of representatives of nominalism is the position that the value of money is determined by the state. This denies the labor theory of value and the commodity nature of money.
The further development of this theory occurred at the end of the 19th and beginning of the 20th centuries. The most famous representative of this theory was the German economist G. Knapp. In his opinion, money has purchasing power, which is given to it by the state. Thus, when analyzing the money supply, he took into account only state treasury bills and small change coins, excluding credit money from it.
The main mistake of the nominalists was the separation of paper money from gold and the value of goods, but they endowed them with “value”, “purchasing power” through an act of state legislation.
Quantity theory of money. The founder of this theory was the French economist J. Baudin. It was further developed in the works of the Englishmen D. Hume and J. Mill, as well as the Frenchman C. Montesquieu. Proponents of the quantity theory saw money only as a means of exchange. They erroneously argued that in the process of circulation, as a result of the collision of the money and commodity masses, prices are allegedly set and the value of money is determined.
The foundations of the modern quantitative theory of money were laid by the American economist I. Fisher, who denied labor value and proceeded from the “purchasing power of money.”
A variation of the quantity theory of money is monetarism.
Monetarism– an economic theory according to which the money supply in circulation plays a decisive role in the stabilization and development of a market economy. The founder of this theory is M. Friedman. In accordance with the monetarist concept, modern market relations are a stable, self-regulating system that ensures economic efficiency.
A holistically defined theory of monetary relations. In the theory of money, separate currents and directions have formed that develop on their own methodological foundations or compete with each other.
1. Quantity theory of money.
The first attempts to theoretically comprehend the essence of money were made by ancient thinkers Xenophon, Plato, and Aristotle. Aristotle's studies contained hypotheses about the origin of money, the content of its functions, and the rationale for the place of monetary relations in the system of economic relations.
Aristotle's ideas were reflected in the quantitative theory of money, which was formed in the 16th and 17th centuries.
The initial methodological principles of the quantitative theory of money were argued in most detail by the English scientist D. Hume (treatise “On Money”, 1752). The theory establishes a functional relationship between the level of commodity prices and the amount of money in circulation. The main postulate of this theory: any change in the quantity of money leads to a proportional change in the absolute level of prices for goods and services, and hence to a change in nominal GNP. Hume identified a relationship that has become classic: doubling the quantity of money leads to a corresponding doubling of the absolute level of prices expressed in that money.
Hume's quantitative theory created a methodological basis for characterizing the principles of formation of the value of money. The value of money in D. Hume's concept is a conditional concept. As an instrument of circulation, they do not have their own cost basis. The value of money has a representative (fictitious) nature, that is, it is determined through the quantitative ratio of goods in circulation and the money supply serving this circulation.
At the end of the 19th - beginning of the 20th centuries. the ideas of the quantity theory of money continued to develop in the context of the rapid progress of the neoclassical school of political economy. In its structure, 2 types of quantitative theory were formed:
Transaction option (I. Fisher “Purchasing power of money”, 1921).
M - amount of money in circulation
V is the velocity of money circulation, i.e. the average number of times a monetary unit changes ownership over a given period
P - average unit price (GNP deflator)
Y - the number of units of products manufactured over a certain period
This equation (I. Fisher's equation of exchange) shows the close connection between the amount of money, the speed of its turnover and the price level.
Cambridge version (A. Pigou, A. Marshall).
k is the Cambridge coefficient, which determines the relationship between nominal income and that part of the money that makes up cash balances. Therefore, the Cambridge version of determining the demand for money is called the theory of cash balances.
The Cambridge version is considered more flexible. Differences between the two options:
The Fisher equation considers the dynamics cash flows at the macro level; The Cambridge school examines the motives for accumulating money by specific subjects of a market economy (microeconomic analysis).
In the Fisher equation, money is essentially a medium of exchange; in the Cambridge version, this function is complemented by the function of a store of value.
The Cambridge version also takes into account the subjective basis of the functioning of money, the psychological reaction of business entities in relation to the use of cash.
Fischer only considers the offer of money; in the Cambridge version, the central problem becomes the demand for money, determining the motives for its accumulation in cash registers and in the accounts of business entities.
2. Classical theory of money.
Of particular importance for economic theory was the scientific substantiation in the works of A. Smith of the position on the spontaneous origin of money. A special section of his work “Research on the Nature and Causes of the Wealth of Nations” (in 1776) is devoted to the analysis of this issue, in which, based on broad factual material, the position is argued that the development of money is connected with the historical process of the social division of labor and the socialization of production. In accordance with this, Smith follows the concept that the progress of monetary relations is determined by the action of objective economic laws. Legal norms and the monetary policy of the state must reflect the requirements of these laws and create a mechanism for their implementation.
Smith and Ricardo argued several important points regarding the definition of the commodity nature of money. In their opinion, money is a commodity that is no different from other goods. At the same time, their theoretical positions regarding the nature of paper money were of great scientific importance. In particular, Ricardo, pointing out that essential condition increasing national wealth is the stability of monetary circulation, the achievement of which is possible only on the basis of the gold standard, while at the same time emphasizing that the functioning of the latter does not necessarily involve the circulation of gold money. In order to reduce unproductive expenses, they can and should be replaced by paper money.
Another line in determining the nature of monetary relations: the essence of money was determined as a technical instrument for the circulation of goods. Representatives of the classical school paid attention only to the intermediary role of money, its function as a means of circulation. They ignored one of the main functions of money - its purpose in commodity circulation to serve as a universal value equivalent. “Gold and silver are like kitchen utensils” (A. Smith).
The idea that gold and silver perform monetary functions only as technical instruments of exchange was also shared by later representatives of the classical school. J.S. Mill argued that money is a special mechanism for quickly and conveniently accomplishing what could be done without it, although not so quickly and conveniently.
This deficiency in the interpretation of the functions of money was eliminated by K. Marx. The most significant thing in his theory is the definition of the essence of money as a universal value equivalent. Money began to be viewed as not just a commodity, but a special commodity that performs a specified function.
3. Modern theories of money.
Keynesian theory of money.
J. M. Keynes "Treatise on monetary reform"(1923), "Treatise on Money" (1930), "General Theory of Employment, Interest and Money" (1936).
All classical and neoclassical literature was based on the idea of the neutrality of money in the economic system. The neoclassical concept of a market economy was essentially a model of a barter economy in which money performed mainly auxiliary functions. In contrast to this, Keynes put forward the position that money plays its own special, independent role in the reproduction process, acting as a source of entrepreneurial energy, an intermediary between current and future economic activities, production costs and its final results. Keynes believed that it is impossible to foresee the development of economic events, either in the short or long term, unless one takes into account what will happen to money during the corresponding period.
According to Keynesians, the velocity of money is volatile and unpredictable. It varies directly with the interest rate and inversely with the money supply.
Based on the thesis “money matters,” Keynes developed the theoretical concept of “regulated money,” which is based on a system of broad government regulation and use to stimulate effective effective demand, and, accordingly, the investment process. According to Keynes, money, on the one hand, is an object of state regulation of the economy, and on the other, a direct instrument for implementing such regulation.
Keynes became the founder of one of the areas of the theory of money - the theory of state monetary policy. The main postulates of this policy are directly embodied in the system of state regulation of economic processes in leading Western countries (especially the USA and Great Britain).
Particularly significant is Keynes’s position on the principles of implementing the policy of “cheap money” and preferential credit. He developed the concept of regulated pricing and controlled inflation. The central position of the theory: insufficiency of money demand is one of the determining reasons for the development of crisis processes, the decline in production and the growth of unemployment. Therefore, the money supply should be stimulated through the application of a policy of “cheap money” and the corresponding use of interest rates. Keynes’s commitment to the policy of “cheap money” became the reason that he began to be called a “born inflationist.” According to Keynes, inflation stimulates economic activity, acting as a means of weakening the position of the economically passive rentier layer - it reduces the rentier’s propensity to save.
At the same time, Keynes not only did not deny, but also defended a strict credit and emission policy in conditions of economic recovery. Thus, the policy of “regulated money” is flexible and adjusted in accordance with the development of the economic cycle.
Modern monetarism.
The ideas of monetarism, as one of the forms of the neoclassical direction of the Western economic thought, originated in the 20s. XX century. As an integral system of economic views, monetarism was formed in the 60s. One of the most famous representatives of this theory is a professor at the University of Chicago, laureate Nobel Prize in Economics 1976 M. Friedman.
Monetarism as an economic theory has ramifications, which gives rise to ambiguity regarding the definition of its main content.
In general (broad) application, monetarism is a theory that studies the influence of money and monetary policy on the state of the economy as a whole.
Monetarism in a narrow (more specific) definition is interpreted as a system of theoretical views, according to which regulation of the money supply is a determining factor in influencing the dynamics of monetary income.
Since monetarism has much in common with the quantity theory of money, it is considered to be a modern version of the latter.
Monetarism is a combination of two basic principles:
Money matters, i.e. changes in the monetary sphere have a decisive influence on the general economic situation.
Central banks are able to control the amount of money in circulation.
In the 80s the attractiveness of monetarism began to decline sharply. Some fundamental methodological postulates of monetarism were revised, and several movements emerged from its composition.
Neoclassical monetarists(Friedman) stand for absolute flexibility of the price mechanism and the corresponding effectiveness of monetary policy (the most radical group).
Monetarist-gradualists(Leider) believe that the elasticity of the price structure is insufficient. This slows down the reaction of the market mechanism to changes in the supply of money, creating a time lag between the implementation of monetary policy and the reaction of the economy. Therefore, the task is set of a stepwise reduction in inflation rates (policy of monetary gradualism).
Monetarists-pragmatists They believe that in the fight against inflation, financial instruments should also be used to contain income. We are talking about an organic combination of tight monetary policy with income policy (a position close to Keynesian).
In the structure of modern economic thought, there are two more movements that belong to the new conservatism: supply-side economics and the new classical school of rational expectations . The positions of these trends in determining practical recommendations for monetary policy largely coincide with the views of neo-Keynesians.
TOPIC 4. MONEY MARKET
Essence and structure money market.
As defined by Brew and McConnell, a money market is a market in which the demand for money and the supply of money determine the interest rate (or level of interest rates).
Objects of the money market can be: money, capital, securities and currency. In accordance with this, the following segments can be distinguished in the structure of the money market:
directly the money market;
capital market;
stocks and bods market;
currency market.
Formation of the relative value and price of money.
Ensuring a balance between the demand and supply of money.
Maintenance of economic relations.
Demand for money and the factors that determine it.
McConnell highlights the following types demand for money:
Demand for money for transactions.
Demand for money from assets.
bid
percent, Dt
demand for money, c.u.
In this case, a simplification is made: the amount of money for transactions is not related to changes in the interest rate. In fact, the amount of money available for transactions is inversely proportional to the interest rate. As interest rates rise, entities reduce the amount of money intended for transactions in order to more money invest in assets that generate income (interest).
The presence or absence of a connection between the demand for money for transactions and the interest rate depends on the income received:
If the income received does not exceed the cost of the “consumption basket”, the interest rate does not affect the demand for transaction money (all income is spent on meeting current needs).
The relationship between the demand for money and the interest rate arises only in the case of the formation of cash balances. In this case, the interest rate acts as a factor in the division of money into transactional and speculative purposes. An inverse relationship is formed between the interest rate and transaction money.
bid
P 
percent, Da Dt Dm
demand for money, c.u.
The total demand for money is equal to the sum of the demand for money for transactions and the demand for money from assets.
Formation of money supply.
The money supply is closely related to the issue of money. The issue of money in its broad sense is carried out at two levels: 1 – central banks, 2 – commercial banks and financial and credit institutions equivalent to them.
In most countries, the exclusive right to issue banknotes belongs to central banks. Paper money is printed at state sign factories, coins are minted at mints.
In the economic literature, central bank notes are referred to as "high performance money". The banknote issue is of a credit nature. Each introduction of a certain amount of banknotes into circulation in the financial statement of the central bank must correspond to a corresponding credit position - a loan to the government, a commercial bank or foreign assets. The Central Bank, with the help of the economic instruments at its disposal, is able to influence the formation of these debt obligations and thus regulate the issue of banknotes.
The supply of money, formed at the state level, is not limited to banknote issue. In many countries, the means of payment of state treasuries are retained: coins and a certain amount of paper banknotes.
In countries with administrative economies, treasury emissions were directly related to financing budget deficit. In countries with a market economy, there is a different system for servicing the budget deficit, which is based on the placement of government debt obligations on the open financial market. The placement of government debt obligations on the open market affects the emission processes, and therefore the supply of money. The direct emission effect occurs only when government securities are placed in bank depository institutions, including the central bank. By purchasing government bonds, the central bank creates the basis for further deposit and check issue, which leads to an increase in the money supply in circulation.
When the mechanism of money creation is considered not only in its function as a medium of circulation, but also in the function of accumulation, and as a means of not only cash, but also non-cash payments, then, along with the central bank, commercial banks become the direct subject of the emission process. They create bank money by providing credit loans to their customers. When banks provide a loan, the money supply increases; when the loan is returned to the bank, it decreases.
The specific nature of the value of money.
The relative value of modern money is related to its economic utility. The usefulness of a good is characterized by its ability to satisfy relevant human needs. The utility of money is determined indirectly - through the utility of other goods and services that can be obtained with this money.
The nature of the value of money depends on its functions:
If money is used as a medium of exchange, then the value of money is its purchasing power.
If money is used as a store of value (money as financial assets), then its value is determined through the amount of remuneration in the form of interest. The interest rate is an indicator of the cost of bank money.
Equilibrium in the money market.
Destructive for the economy as a whole, including for the monetary system, is not only the excessive emission of money, but also its lack, the dissatisfaction of money demand. Thus, the deepening of crisis processes in the United States during the Great Depression of 1929-1933. was stimulated by the erroneous actions of the Federal reserve system aimed at artificially reducing the money supply.
Restoring equilibrium in the money market occurs as follows. A decrease in the money supply creates a temporary shortage of money in the money market. People and institutions try to get more money by selling bonds. The supply of bonds increases, which lowers the price of bonds and raises interest rates. With a higher interest rate, the amount of money people want to hold decreases. Therefore, the quantity of money supplied and demanded are again equal at the higher interest rate. Likewise, an increase in the supply of money creates a temporary surplus of money, causing demand for bonds to increase and their prices to rise. The interest rate falls and equilibrium is restored in the money market.
In a developed market economy, there is an automatic mechanism for self-regulation of the demand and supply of money. We are talking about protective stabilizers that direct the development of the monetary system to establish equilibrium:
Price stabilizer: an excess supply of money generates, through the price multiplier, an inflationary depreciation of money, a decrease in its relative value and a corresponding adaptation of the overvalued money supply to existing demand. Thus. Ensuring equilibrium in the money market occurs due to changes in the rate of inflation, which is balanced with the growth rate of the nominal supply of money.
Credit multiplier: since credit emission is based on debt obligations determined by the real demand for money, this accordingly regulates the quantitative parameters of the money market.
Substitution mechanism: with an increase in the money supply, participants in the economic process come to the conclusion that part of the assets that they held in cash is excessive. From this we can predict that they will give preference to replacing money with other assets (securities, durable goods, jewelry).
Velocity of circulation of money: in the event of a decrease in the quantity of money, the velocity of circulation of each monetary unit increases.
TOPIC 8. CREDIT IN A MARKET ECONOMY
Loan capital and loan interest.
The essence and functions of credit. Principles of lending. Forms of credit.
Credit relations and the credit system.
1. Loan capital and loan interest.
Loan capital is a form of monetary capital, which is provided by its owner for the purpose of generating profit in the form of loan interest for temporary use by an entrepreneur. Loan capital is not directly invested by its owner in production or trade. This is carried out by another person - an entrepreneur, to whom the capital is transferred for temporary use. As a result, capital is bifurcated into capital-property and capital-function: ownership of capital remains with the lender even after it has passed from his hands to the borrower.
Sources of accumulation of loan capital:
Money capital, which is temporarily released in the process of circulation of industrial and commercial capital. This release is carried out:
accumulation in the form of depreciation charges;
temporarily free funds are created due to the fact that the sale finished products and the purchase of new raw materials, fuel and materials do not coincide in time;
accumulation is carried out as a result of the accumulation of a wage fund over a certain period of time, as well as part of the income that is distributed among the owners of the means of production.
Rentier capital is the monetary capital of persons who are not themselves engaged in entrepreneurial activity, but live by receiving interest from the use of capital as property - issuing accumulated funds in the form of a loan.
The part of the population's cash income and savings that temporarily exceeds their current consumption fund. These funds are concentrated in the deposit accounts of banking and credit institutions and converted into loan capital.
Available funds of government and local budgets, insurance companies, pension funds, and other institutions.
1) the price of capital borrowed (classical direction of monetary theory);
2) payment for the sacrifice or refusal of the owner of the money to immediately use it to acquire certain values (neoclassical school);
3) payment for parting with liquidity (Keynesian school).
The source of loan interest is the profit that an entrepreneur receives in the process of productive use of loan capital.
The loan capital market includes 4 main segments: money market (short-term credit operations servicing traffic working capital); capital market (medium- and long-term credit operations servicing the movement of fixed assets); stock market; mortgage market (credit operations serving the real estate market).
2. The essence and functions of credit. Principles of lending. Forms of credit.
The functional form of movement of loan capital is credit.
Credit functions:
Redistribution of monetary and financial resources available in the economy and their concentration in priority areas of economic activity.
Creating additional purchasing power to the existing one in the economy.
Capitalization of free cash income (accumulation of loan capital through real savings of individuals and legal entities. Through the mechanism of credit, these monetary resources are withdrawn from a state of temporary inactivity and transformed into the form of loan capital).
Monetary service for the circulation of capital in the process of its reproduction.
Accelerating the concentration and centralization of capital through the use of shares and bonds of corporate ownership.
Maintenance of the innovation process.
Ensuring growth in the efficiency of money circulation (mutualization of payments, acceleration of money circulation, creation of various forms of bank money).
The use of credit as a tool for macroeconomic regulation of economic processes.
Returnability.
Urgency (violation of this condition is a sufficient basis for the lender to apply economic sanctions to the borrower in the form of an increase in interest or presentation of financial claims in court).
Payment.
Security.
Targeted nature of the loan.
Differentiated nature of the loan (differentiated approach to different categories of borrowers, for example, preferential lending conditions for individual entities or areas of activity).
Commercial, commodity or trade (its traditional instrument is a bill of exchange).
Bank:
short-term, medium-term, long-term and on-call transactions;
targeted and general purpose;
secured, blank and under financial guarantees of third parties.
Consumer.
State.
International.
3. Credit relations and credit system.
Credit relations arise between the lender and the borrower regarding the mobilization of temporarily free funds and their use on the terms of repayment and payment.
The credit system is a set of credit relations, the institutions that regulate them, the credit mechanism and credit policy.
A credit mechanism is a certain set of principles, organizational forms, methods and rules that are regulated by current legislation and provide the necessary conditions for the implementation of credit relations.
Credit policy covers a system of financial and credit measures of the state aimed at achieving certain economic goals. Credit policy is based on appropriate institutional institutions and the existing credit mechanism.
An integral part of the credit system is the banking system - a set of different types of banks existing in a particular country in a certain historical period.
At various stages of development of society, the composition of credit institutions changed in accordance with the evolution of historical development conditions national economies. At the same time, there are some general principles for building credit systems at the present stage:
distribution of functions of the central and other banks;
control and regulation of the activities of second-tier banks by the central bank;
The central bank does not take part in competition in money markets within the state.
The rapid development of capitalism after the industrial revolution was accompanied by an expansion of the functions and operations of commercial banks and the emergence of specialized credit institutions. In many countries, central issuing institutions were created, savings banks and savings and credit associations appeared.
Intensive development of joint stock companies from the second half of the 19th century. led to the emergence of new functions for existing banks and specialized lending institutions such as investment banks and companies. At the beginning of the 20th century. appears whole line new credit institutions: foreign trade banks, institutions consumer loan and so on.
The development of the credit system is also accompanied by the universalization of commercial banks, which currently perform almost all functions, with the exception of issuing banknotes. Therefore, commercial banks are universal banks.
By the nature of the functions they perform, all credit institutions can be divided into emission institutions, which are central in the credit system, commercial banks - universal banks, specialized financial and credit institutions that perform separate functions or serve certain sectors of the economy.
CREDIT SYSTEM
Central Bank of Issue
Rice. Structure of the credit system.
The banking systems of individual countries differ significantly in their structure. At the same time, there are a number of features inherent in all banking systems operating in a market economy. This is, first of all, a two-level structure. At the first level there is one bank (or several banks, as in the USA), which performs the functions of a central bank of issue. At the second level of the banking system all other banks are located: universal and specialized.
The banking system requires constant monitoring by special authorities. Each country has a system of legal acts that regulate different aspects banking. The activities of non-banking financial and credit institutions make it possible to fill certain niches in the market banking services, which for some reason remained unoccupied. Such institutions do not have the status of a bank because they do not carry out a set of basic money market operations; their activities, unlike banks, do not change the money supply in circulation.
Evolution of credit systems.
Credit institutions are not a modern invention. Over a long historical period, they developed in all countries, forming one or another national credit system, the main link of which is the banking system. The stability of the entire economy largely depends on its functioning.
The evolution of the development of credit systems has proven the need for effective supervision over the activities of banks. The tasks of the supervisor are to guarantee the safety and sound functioning of banks. To do this, they must have at their disposal adequate capital and reserves necessary to cover the risks arising in the process of execution banking operations.
Internationalization of banking and the objective process of strengthening relationships between banks different countries world led to the intensification of the activities of the Basel Committee on the regulation of banking activities. The committee includes the UK, Germany, France, the Netherlands, Sweden and Luxembourg.
Each country has a system of legal acts regulating various aspects of banking activities. Features of historical development and the action of various political and economic factors determined the specific forms and methods of monitoring the work of banks. In many countries, not only central banks, but also government bodies specially created for this purpose take part in the supervision and control of the activities of banks.
The past few decades have seen profound changes in credit systems around the world. These changes are primarily associated with the following processes:
deregulation of financial markets is a process of legislative reforms that have been carried out since the late 60s. and covered most countries with market economies. They were aimed at easing or completely abolishing restrictions and prohibitions in financial activities;
strengthening the role of non-banking financial and credit institutions – characteristic feature 70-90s;
increased competition in banking;
technological revolution - in banking, primarily associated with the process of computerization;
financial innovations - imply the emergence of operations that were not previously used (new types of deposits, loans, new money market instruments, securitization);
financial globalization - the expansion of the scope of activities of large banks beyond national borders, accompanied by the creation of a network of foreign branches and an increase in specific gravity foreign transactions in banking business.
TOPIC 9. FINANCIAL INTERMEDIARIES OF THE MONEY MARKET.
Functions of financial intermediaries.
Types of intermediaries in the money market.
1. Functions of financial intermediaries.
Representatives of both the demand and supply of money can enter the market independently or using the services of financial intermediaries. Their main function is to assist in the transfer of funds from potential accumulation subjects to potential investors and vice versa. Financial intermediaries create their funds by borrowing funds from those who have savings, for which the latter are paid interest income. By accumulating funds in this way, they provide them for more high percent investors. The difference between the interest income received and paid goes to cover the expenses of financial intermediaries and their profits. The activities of financial intermediaries are beneficial to all participants in the money market:
There is no need to search for each other.
The risk of loan default or ineffective investment is reduced.
Increase in interest income for depositors.
The total costs of the borrower for obtaining a loan are reduced by reducing the moral, physical costs and time spent searching for several people with savings to obtain the required loan amount.
Persons with minor savings have the opportunity to take part in a business that gives higher profits (compared to lending small amount), but which was inaccessible to them due to the need for significant investment.
Often, for people with savings, the opportunity to receive a guaranteed income on their capital (in the form of bank interest, income on bonds, receiving pension rights) is more attractive than the risk of participating in projects that are not always reliable (purchase of shares).
Financial intermediaries reduce the cost of financial transactions, which is achieved through unification and specialization (in this case, economies of scale operate).
The risk from incomplete information is reduced.
For most savers and borrowers, it is more profitable to deal with financial intermediaries who are professionals in their field than with small, little-known partners.
2. Types of intermediaries in the money market.
Differences in the financial systems of different countries also determine a somewhat different division of financial intermediaries into groups. The most extensive classification of financial intermediaries is in the United States, where financial intermediaries are divided into three main categories: depository institutions, contract savings institutions,
Depository institutions.
A depository institution is a financial institution that has the right to accept deposits. Their main functions are to attract funds from individuals and legal entities in the form of deposits and provide loans to the population and enterprises. From the point of view of money circulation and control over it, this category of financial intermediaries is the most important, since it is they who, by opening and closing deposits, influence the supply of money in the economy. Types:
Commercial banks.
Savings institutions.
Savings and credit associations - financial institutions, the sources of income of which are savings, time and check deposits; the accumulated funds are mainly used to provide loans secured by real estate. Since secured loans are provided for a fairly long period, changes in interest rates during this time significantly affect financial position associations.
Mutual savings banks - similar to savings and loan associations in operation, but different organizational structure: Mutual savings banks are always organized on a cooperative basis, and the depositors of the bank are its co-owners.
Credit unions are cooperatives organized for the purpose of accumulating the savings of their members and their mutual lending(mainly for consumer purposes) in a certain social group. They unite people who work at the same enterprise, are members of the same trade union organization, or live in the same area. Their cash consists of entrance fees members and loans from commercial banks.
Attract long-term savings on a contract basis. They form their funds through periodic contributions in accordance with contracts. A significant number of concluded contracts makes it possible, using the theory of probability and economic risk, to fairly accurately determine the total volumes of future payments under contracts. This, in turn, enables contract-type institutions to control possible losses. Types:
Insurance companies raise funds by selling insurance policies and compete with others when placing funds credit institutions.
Pension funds are specialized institutions that accumulate funds intended for pension provision citizens after they reach a certain age. Pension fund assets are invested in corporate securities and government securities.
An investment bank raises long-term loan capital and transfers it to borrowers through the issuance and placement of bonds or other debt obligations. Acts as an organizational intermediary (finds out the needs of borrowers, agrees on the terms of the loan, selects the type of securities, their placement, organizes banking syndicates if necessary) and a guarantor between borrowers and investors.
Investment companies (funds) are companies that reduce the degree of risk for their clients. They act as an intermediary between investors and joint stock companies. Investment companies issue their shares and place them on stock market, and the funds received are placed in shares and bonds of many different companies, thereby reducing the risk of bankruptcy. They differ from investment banks in that they represent the interests of individual investors. There are open-end investment companies, which undertake to repurchase their shares on demand, and closed-end investment companies, which do not undertake such an obligation.
Mortgage bank is a bank specializing in mortgage operations: issues long-term mortgage loans; accumulates resources through the issue and placement of mortgage bonds; performs functions related to the packaging of mortgage loans.
A housing bank is a bank that specializes in lending and financing housing construction.
A financial company builds its funds by selling commercial paper and issuing stocks and bonds. The funds received are provided to consumers in the form of loans or credits for the purchase of expensive goods, home renovations and small business needs. Financial companies appeared in connection with mass production expensive durable items. They typically provide credit to consumers indirectly, that is, by purchasing consumer debt from trading firms. Distributed in the USA, Germany, Great Britain, Japan.
A mutual fund sells its shares to many small investors and uses the funds raised to build a diversified portfolio of securities (mainly stocks and bonds). This makes it possible for the fund’s investors, by pooling their funds, to receive benefits, primarily by reducing the specific costs of purchasing shares or bonds in large blocks, as well as by diversifying the securities portfolio, which would be impossible for each individual investor.
A money market mutual fund is a more recent type of mutual fund that has the features of mutual funds and at the same time somewhat expanded functions inherent in depository institutions (fund shareholders have the right to write checks with certain restrictions on their amount). Raised funds from investors are invested in short-term (up to 60 days) high-quality securities. The interest received is paid to the fund's shareholders. The ability to write checks allows fund shares to function in the financial market like checkable deposits that earn interest.