Money as an economic and value category

As you will remember, Article 128 of the CC RF categorises money as objects, although the world’s leading economists believe that the function of money may be fulfilled by both objects and obligations.

There follows a number of quotes.

Encyclopedia Americana:
"Money can be anything of which the use is accepted everywhere and universally for payment for goods, services and debts". ⁶⁴

Russian Legal Encyclopedia:
" MONEY — 1) in the economic sense — special goods or objects that serve as a general countervalue within the framework of commodity circulation of a specific national economy; 2) in the legal sense — items which are object of civil law and fulfil in civil turnover the function of a general instrument of countervalue to the extent that it is not prohibited by the State (M. proper), as well as items produced after models defined by law, by specialist government enterprises, and recognised by the State as the sole legal means of payment with a properly forced exchange rate in relation to M., which is expressed in a national monetary unit (national currency) (monetary symbols)" ⁶⁵

R. Barr:
"Money has had different forms over time and space. Its physical properties are not definitive: all kinds of money — silver and gold coins, banknotes, cheques, bank transfers — are means of payment; they do not have common physical characteristics, and some of them are not even of a material nature" ⁶⁶

Rist:
"Paper money acquires the capacity to retain value as a result of an act of volition." ⁶⁷

Money became money (nomisma) not through its internal character, but on the strength of the law (nomos), and it is within our power to change this situation and render it useless.".

C.R. McConnell, S.L. Brue:
"Metal and paper money are obligations of the State and agents of the State. Current accounts represent obligations of commercial banks and savings institutions." ⁶⁸

K. Marx:
"Exchange value, separated from the goods themselves and existing alongside them as an independent commodity, is money". ⁶⁹
"Money is a particular commodity which thus represents the adequate existence of the exchange value of all goods as a particular, allotted commodity"; ⁷⁰
"Credit money means money in the form of some kind of obligation".⁷¹

L.N. Krasavina, analysing Marx, elaborates: "Money in itself is not an object but a historically defined form of economic — that is, socio-productive — relations between people in the process of commodity exchange. Money is a historically developing economic category: at each stage of goods production, it is filled with new content of a specific type of production relations, expressed through a universal cost equivalent. This content is complicated by a change in reproduction conditions and objective criteria for the formation of labour input and commodity value that are necessary for society. In the precapitalist stages of development, money expressed the production relations between individual goods manufacturers; under conditions of pre-monopoly capitalism, it expressed the production relations between the goods manufacturer and society; and under monopoly capitalism, between the goods manufacturer and the world market"⁷²

A.G. Gryaznova:
"Money is an economic category in which public relations are manifest, and with whose assistance public relations are conducted"⁷³.

O.I. Lavrushin:
"Money is an economic category in which public relations are manifest, and with whose assistance these relations are built; money acts as an independent form of exchange value, and medium of exchange, payment and hoarding"⁷⁴.

P. Berger:
"Money is issued by three kinds of institutions: commercial banks, the State Treasury and an issuing bank"⁷⁵

L. Harris:
"Money is defined as any commodity which functions as a medium of exchange, a unit of payment and a means of retaining value"⁷⁶.

N.G. Mankiw:
"Money is the sum of assets regularly used by people to acquire goods and services from other individuals"⁷⁷.

C.J. Woelfel: "The admissibility of concrete forms of money for the payment of debts is established by a law which defines it as a LEGAL MEANS OF PAYMENT and, consequently, allows a debtor to present it to clear his debt."⁷⁸

Money is the greatest invention of civilisation and infiltrates all spheres of human activity. It is fundamentally more important than simply an instrument of the economic system. It is fair to say that an efficiently functional monetary system exerts a positive influence on the circulation of revenue and expenses, which is also the essence of economics. A monetary system that works well promotes more effective use of available production and human (labour) potential; it ensures full employment and prevents the growth of inflation and social tension at the same time. And on the other hand, a poorly functioning monetary system that is inadequate with regard to existing reality can cause sharp fluctuations in production levels, a recession in the economy, and various social crises.

The essence of money lies in the fact that it serves as a necessary active component and composite part of the economic activity of society, and of the relations between different participants in the reproduction and distribution process⁷⁹. Money is a constituent of commodity relations. The advent and development of goods brings with it the advent and development of money. This inseparable pair — goods and money — is a perpetual form of movement in economic life.

"Money ‘underwent’ a protracted evolutionary process and under the influence of the progress of civilisation radically changed its form, character, content and essence.

The most important factors in the transformation of money were the development and growing complexity:

• firstly, of productive forces;
• secondly, of production relations, including trade-money relations, and credit relations as a part of the latter. Money, as is widely known, is a part of trade-money relations;
• thirdly, of the superstructure: the State and the laws which are created by the State.

So, that which gave rise to this phenomenon of human society, by developing and becoming more and more complex, led money to a similar result"⁸⁰

 

The commodity origin of money

Many schools of theory link the question of the origin of money with the development process of the exchange of goods.

For any product to become a commodity, it had to:

• be produced not for personal use, but for sale;
• satisfy certain requirements, i.e. have utility value. Moreover, the commodity must be useful to the purchaser, a fact that is confirmed by the sale and purchase of the commodity;
• have value. The value of a commodity consists of any costs associated with it, and moreover, not the individual costs of the manufacturer (cost price), but costs recognised by the public. This must also be acknowledged by purchase and sale.

Only the sum of these three conditions makes a product a commodity. The absence of any of these means that the product is not a commodity. For example, if a certain product is produced for personal use or it is impossible to buy or sell it, then this product is not a commodity.

The exchange of individual products of social labour between primitive communities had an incidental character. The development of commodity exchange was linked with the first large-scale social division of labour — between cattle-breeding and agricultural tribes. The second large-scale division of labour — the separation of crafts from agriculture — led to commodity production and regular exchange between private owners.

A. Smith wrote: "… Any rational person, at any level of the development of society after the division of labour, had to organise his business so that he permanently had a certain amount of the type of commodity which he was sure that nobody would refuse to accept in exchange for products of his trade". ⁸¹

As a result of the development of commodity exchange, a particular commodity stood out, which had the greatest sale capacity — money, having divided the process of the mutual exchange of commodities (C — C) into two simultaneously functioning processes: sale (C — M) and acquisition (M — C). This made it possible to overcome individual, quantitative, time and space constraints that are characteristic of trade, and thus to significantly reduce transaction expenses of exchange.

 

Functions

Every phenomenon, in order to display its existence and characteristics, must show its worth in practice. «The economic essence of money manifests itself in its functions»⁸²,and modern economic literature draws the concept of money from the functions it fulfils. «Anything that fulfils the functions of money is money»⁸³. Thus, anything which people accept as money and which fulfils the functions of money can be used as money.

According to Marx, money fulfils five functions:

1.     a measure of value;

2.     a medium of exchange;

3.     a means of payment (all spheres of commodity circulation);

4.     a store of value;

5.     universal money⁸⁴.

Many Western academics recognise just three functions of money:

1.     a medium of exchange (payment);

2.     a measure of value;

3.     a means of hoarding and saving (retaining value)⁸⁵.

However, they all agree that anything which people recognise as money and which fulfils the functions of money can be used as money.

Generally speaking, in economic theory there is no single opinion on the functions of money. The point of view of Professor Yu. I. Kashin is worthy of attention; he suggests that universal money is not an independent function, but just a spatially limited area of its use. Equally interesting is his evaluation of the transformation of such function as «a means of hoarding and saving» into the function of «reposing money », guaranteeing credit-issuing circulation through its presence in any depository⁸⁶. From time to time, money is given a secondary function — an ideological-proclamatory function. This played a significant role after the Battle of Kulikovo (when Russia won a decisive victory over the Mongol opressors), and also when Russia was liberated from the Poles (uprising of Minin and Pozharsky), as well as from 1917 to 1924.

The functions of money are regarded as a manifestation of its essence. Furthermore, these functions are fulfilled only with the participation of people who can separate the value of goods from their user and exchange value, who accept money in the process of commodity exchange and other payments, and also use it as a means of hoarding. This means that money is an instrument of economic relations in society, but the functions of money can only be fulfilled with people’s participation.

Within the framework of this study, we are primarily interested in the economic function of circulation and payment, and the legal rules of monetary circulation.

As a means of payment, money is used for payments outside the sphere of commodity exchange. A particular characteristic of this function of money is a time interval between the movement of money and the movement of goods and services: for example, taxes, welfare payments, interest on credit. Money is easily accepted as a means of payment. This is a convenient social invention, which makes it possible to pay owners of resources and producers of «goods» (with money), and which may be used to purchase any of a wide selection of goods and services available on the market.

As currency, money functions within the sphere of commodity exchange. Today, money is a medium of exchange first and foremost, and can be used to buy and sell goods and services.

As a medium of exchange, money enables society to avoid the inconveniences of barter exchange. Representing a convenient way of exchanging goods, money allows society to make use of the products of geographical specialisation and the division of labour between people.

It is important to note that business entities choose the form of money that most precisely corresponds to the requirements before them: if they need to buy a newspaper, they will get small change ready; if a legal person is expecting to have to pay taxes, then he will have ready in advance the required amount of non-cash money in his bank account. If payments are maintained over time, or if there is no specific deadline for a potential payment, the business entity will try to choose the form of conserving value which would, firstly, have the necessary liquidity, and secondly, yield a certain revenue over time. Conservation of value in the form of money can lead to «lost profit expenses». In order to avoid this, every business environment nowadays has the optimum balance between liquidity, profitability and risk capital. However, as a rule, other resources, such as bank deposits and revenue securities of companies, banks and the State are also used.

 

Properties

Money must have the following properties:

• liquidity;
• portability;
• durability;
• divisibility;
• standardisability;
• recognisability.

The most important of these properties in money is liquidity. Absolute liquidity means that an owner of money, using this money, can at any time fulfil any financial obligation, because money can always be used a legal tender. The most important requirement for conforming to this characteristic is for money to receive general (and, ideally, governmental) recognition, both from purchasers and vendors, as a medium of exchange.

 

Settlement of commodity conflicts using money

Based on the study of factual material, Karl Marx scientifically proved that money is a historical category that is inherent in goods production. But in order to understand the origin and commercial nature of money, and to explain how and why money made its mark in the world of trade, let us look first of all at commodity conflicts and ways of resolving it. Modern economic theory identifies the following basic commodity conflicts that have arisen through exchange and have been resolved with money as a universal cost equivalent between:

• consumer and exchange value;
• concrete and abstract labour (between subjective and objective utility);
• the private and public nature of labour.

Money according to its own underlying essence is exchange value separated from a commodity, used in everyday economic practice.

Commodity — unity of consumer and exchange value; and value is the unity of the utility of a commodity and the cost of producing it. Value is the material form of the cost of abstract public labour, expressing the relationship between the vendor and the purchaser, or between cost and profitability.

Consumer value — the ability of a commodity to meet this or that requirement of a person; its usefulness.

Exchange value — the ability of a commodity to be exchanged in specified quantitative proportions for another commodity.

"Objects which have a very high consumer value often have an extremely low exchange value or even none at all; in contrast, objects which have a very high exchange value often have a very low consumer value or none at all. There is nothing more useful than water, yet one can buy nothing with it. On the other hand, a diamond has almost no consumer value, but in exchange for it one can receive a very large quantity of goods" ⁸⁷

Money as a measure of value and as a medium of exchange forms a union of opposites. One function presupposes the other, as the use of money ensures the movement of value and consumer value. On this basis, Karl Marx developed the methodological principle: "… a commodity turns into money primarily as the unity of a measure of value and a medium of exchange…" ⁸⁸

In the union of the functions of a measure of value and a medium of exchange, their contrast and contradiction become apparent. Firstly, as a measure of value, money acts as ideal money, and in the function of a medium of exchange, it acts as real money. Secondly, the function of a measure of value is fulfilled by full-bodied money, while in the function of a medium of exchange, it is replaced by tokens of value.

To quote Karl Marx: "As a result of the first process of turnover, sale, emerges the initial point of the second process, money. Goods in their initial form were replaced by their equivalent in gold. This result may, first of all, suspend the process, as a commodity in this second form has a natural existence capable of waiting. A commodity in the hands of its owner has no consumer value, when it is available in a form that is always fit for use, as it is always in a position to be exchanged, and it only depends on the obligations when and at what point on the surface of the world of trade it enters into circulation again. The presence of a commodity in the form of a gold chrysalis forms an independent period in its life, in which it can remain more or less for an extended period of time"⁸⁸.

When a commodity enters the market, that is, into the sphere of exchange, this contradiction appears as a conflict between the consumer value and the exchange value, or between the private and the public profitability of a commodity. This conflict is solved by dividing the commodity into two: the commodity and money.

The solution of this contradiction in a commodity is the exchange operation of a commodity for money, during which the user value of the commodity is definitively separated from its value. Thus the market solves the problem of providing for the public in the person of purchasers with goods that it needs, while the producers of these goods are rewarded with corresponding income.

Thus, the necessity of money is caused by the conflict between exchange value and consumer value within a commodity. The contrast between these two categories of values, which are linked with each other, occurs in the debates of all classical economists on the subject of the theory of prices. For A. Smith, this contrast is between consumer value and exchange value, while for the founders of the marginal utility theory it is the contrast between subjective and objective utility.

These two sides of value represent the union of opposites. The union of consumer value and exchange value is defined by the fact that these are comparable values. Exchange value is a certain quantity of consumer value, measured on a universal scale accepted for this purpose by society.

In our opinion, Russian economist M. A. Portnoy described very well the reason for the origin of money under the conditions of commodity production:

"And so, every commodity, i.e. product, that is created to be sold, bears within itself a contradiction as the object of public economic relations, acting as the unity and conflict of opposites, and is expressed as a range of interlinked and mutually conditional contradictions between:

• the individual and society;
• consumer value (utility) and value (social utility);
• presence and essence;
• private and general (public).

These conflicts cannot be solved by themselves. To solve them, the commodity in question must be confronted with its opposite, whose role was fulfilled, at the more primitive stage of trade, by another commodity, and at more developed stage, by money. The commodity conflict is solved by exchange — a buy-sell transaction — in which the vendor — the owner of the commodity — participates on the one hand, and the purchaser — the owner of equivalent value — on the other. At the same time the vendor acts as a separate individual, personifying the private principle, and the purchaser represents the public, embodying public interest. The exchange is an act of public recognition of the useful quality of the productive activity of a particular individual (or enterprise), and at the same time solves the conflict between the individual and the public, and all subsequent conflicts.

Since the purchaser represents the public in this act, the purchase of the commodity means that the public as a body has approved the productive activity of the individual who is the owner and seller of this commodity.

As a result of the exchange, the consumer value (utility) of the commodity is separated from its value (public utility).

With the development of trade and the appearance of money, the world of trade split into two poles: at one pole are all the goods that embody the current consumer value (utility); and at the other is the money which embodies value (public utility).

All goods are now becoming varieties of one or the other phenomenon. They all represent utilities designed to meet various needs, when their universal essence is expressed henceforth in money. Goods are now products with a corresponding purpose, while money is the embodiment and measure of their value.

Goods, having been traded, are transformed from their potential value into real value. Before they had been sold, they were products of private economic activity, the expediency of which remained under question. After the buy-sell transaction, the commodity becomes a component of public wealth, expressed in money. Private energies expended on creating it are recognised as an adequate proportion of public energies, the scale of which is represented in monetary form.

Thus, money is:

• the embodiment of value, the personification of public utility;;
• the essence of goods as values, their universal characteristic as components of public wealth" .⁸⁹

It would be hard to exaggerate the significance of money as a medium of exchange, as it allows one to avoid the barter form of trade. The replacement of barter exchange by monetary exchange separates the act of sale from the act of purchase. If money exists, the vendor of a commodity only has to find someone who wants to buy his commodity, and having received the money, he can buy anything he wants. The replacement of the bartering method of transactions with a system that uses money as a medium of exchange leads to a reduction in turnover expenses. Far less time and energy is needed for monetary exchange than for barter. By lowering turnover expenses, money stimulated the development of specialisation and trade.

Let us sum up the significance of money’s function as a medium of exchange. As such, money:

• mediates the movement of goods and services, facilitating their circulation process;
• overcomes constraints of quantity, time and space characteristic of barter exchange;
• reduces turnover expenses.

Money, which arose naturally from the need to resolve commodity conflicts, nevertheless became more than simply a subject of heightened interest for the administrative systems of governments. Governments began to impose means of payment that were controlled by the State (currency) on controlled economies, and through legislation to limit the circulation of other methods of payment; and, as a result, the only legal monetary resource left was the currency of that particular government.

Both the monetarist and the Keynesian theories directly advocate the regulation of forms of money, money supply and interest rates in order to influence the economy.

Thus, the money which arose in an evolutionary way from economic relations was gradually ousted by the State and replaced with money that arose through law and legislation. It is only in times of economic crises, when the State proves unable to properly support the function of the national currency as money, that the economy falls back on the use of full-bodied, commodity money or barter.

In this way, the ambivalence of the basis and superstructure, of the economy and legislation, is revealed in the change in the nature and essence of money.

The role of money is characterised by the results of its use and its influence on various aspects of the activity and development of society.

The role of money is most evident in the results of its part in the establishment of commodity prices. The role of money changes as conditions of economic development change. Its role increases with a shift to a market economy.

The concept of «money» is interpreted differently in Russian legal practice, than in the country’s economic practice. Article 140 of the CC RF is entitled «Money (currency)» and states: «The rouble is the legal means of payment and is to be accepted by nominal cost throughout the territory of the Russian Federation». Thereby, the legal definition of the word «money» is the same as the economic meaning of «currency» and is considered to be "the monetary unit of a particular government, established by law".⁹⁰

However, it will be demonstrated in this study that the concept of «currency» does not include commodity or financial money, and is only a subset of the concept of «credit money»; and, of course, is essentially a subset of the concept of «money».

So as to avoid confusion, we shall use the economic meaning of the word «money».

 

Money supply

Neither among economists, nor among government officials, is there a consensus of opinion on the question of which separate elements make up monetary supply in the economy. It is extremely difficult to draw a line between money proper and other liquid assets which partially fulfil the functions of money. Only local currency has absolute liquidity as a method of payment that has to be accepted — which is provided for by public law. Other liquid assets are a means of payment only in the event that the beneficiary agrees to accept them, i.e. a transaction exists on the basis of civil law. However, one should remember that a certain proportion of payment transactions and commodity turnover is served by liquid assets, which are gladly accepted by beneficiaries, but whose circulation is prohibited in a country on the basis of public law — for example, the US dollar in Russia⁹¹. In Russia it is also forbidden to circulate bars of precious metals and materials which contain them, as well as precious stones and rare-earth metals⁹².

In a narrow sense, the supply of money, known as M0, consists of cash, that is, metal and paper money which is in circulation. M1, according to C. R. McConnell and S. L. Brue⁹³, comprises M0 and checkable deposits, i.e. deposits in commercial banks, different savings banks or savings establishments, for which cheques can be written.⁹⁴.

In Russia, checkable deposits are not as widespread as in other western countries.

Western economists also distinguish «quasi-money» — aggregates M2 and M3. «Quasi-money» are certain highly-liquid financial assets such as chequeless savings accounts, deposit accounts and short-term government securities, which do not function directly as a method of payment, but may easily and without risk of financial losses be changed into cash or cheque accounts. In contrast, for example, with the USA, in Russia deposit accounts may be closed by the depositor and, before the expiry of the deadline, without payment of a fine.

M2 includes elements of the medium of exchange (cash and checkable deposits), in accordance with M1, and other elements, which may be converted quickly and without loss into cash and checkable deposits.

The third, «official» definition of M3in the USA is based on the fact that large (100,000 dollars or more) deposit accounts, which enterprises usually own in the form of certificates of deposit, are also easily converted into checkable deposits. An active market for such certificates does, in fact, exist, and so it is possible to sell (liquidate) them at any time, albeit with a possible risk of loss (in Russia an example of this is presented by the loan bonds of different tranches, which are sold with a significant reduction from their nominal value, if the deadline for redeeming them expires in 5–6 years or more).

To calculate the total money supply in the Russian Federation, provision is made for the following aggregates:

• M0 — cash money;
• M1 = M0 plus operating accounts and demand accounts;
• M2 = M1 plus deposit accounts;
• M3 = M2 plus certificates of deposit and State loan bonds.

There is a whole range of assets (they differ from country to country, but a certain similarity is apparent), which differ only slightly from each other by degree of liquidity or availability of monetary funds.

Which of the definitions of money listed above is preferable? Most western and Russian economists choose M1. Why? This simple definition includes everything that is directly used as a medium of exchange.