LITMIR.BIZ

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the course of historical development first of all the system of metal circulation formed which was based on the metal coins usage.

      Initially (in particular in the XVI^th-XVIII^th centuries) the system of bimetallism existed.

      Bimetallism is the system where the role of the total equivalent is played by two metals – gold and silver. It means that these two metals circulated on equal basis and had a fixed correlation.

      The unlimited circulation, free issue and two prices determination on one good are supposed. This system existed in the XVI^th-XVIII^th centuries and in some countries of West Europe even in the XIX^th century. However such system didn’t provide the stability of money circulation.

      There are three systems of bimetallism:

      Of the parallel currency where the correlation between the gold and silver coins is spontaneous.

      Of the double currency where the government fixed the correlation between metals and the gold and silver coins issue and their popularity were made by this correlation.

      Of the limping currency where the gold and silver coins were the legal means of payment but with unequal terms. For example if the silver coins issue was made privately thus practically they played role of the gold symbols.

      In the result of silver production cheapening in the end of the XIX^th century and its devaluation the gold coins began to go out of circulation to treasures, i.e. «bad money drives out good».

      In the XIX^th century the system of bimetallism was replaced by monometallism which was based on only one metal, i.e. only one metal plays role of the total equivalent. The silver monometalism existed in Russia (1843-1852), in India (1852-1893) and in China (till 1935).

      The gold coin standard most closely met the requirements of capitalism of the free competition period, promoted the development of production, credit system, world trade and capital export. Sometimes the age of gold coin standard is associated with the fast industrialization and economic prosperity.

      Since the First World War little by little gold was drove out of circulation by paper money and credit notes; the process of gold demonetization began which subsequently captured the international circulation.

      First of all gold stopped performing the function of the instrument of circulation and payment in the domestic circulation and then in 1976 the function of the world money. For the detailed information look through the chapter «The international currency and credit rela- tions».

      As can be seen from the above the system of metal money circulation became a thing of the past. Nowadays the fractional coins are minted from different alloys and aluminum.

      1.2.2. Paper money and their circulation consistency

      Paper money is relatively new for the world of money. The paper monetary units are token money, only symbols. Usually they appeared in the periods of acute state needs during the wars and revolutions when the other sources of financing (taxes, lendings, etc.) ran out. One more reason of the paper money issue was a chronic deficit of an external state account, in order to avoid the gold drain abroad the government was forced to implement the inconvertible to gold money provided with a forced rate of exchange.

      For the first time it was issued in the VII^th century in China in the form of large denominations in order to replace the inconvenient fullbodied copper coins. And while the notes could be freely exchanged onto the full-bodied they were popular in circulation. Later in the XIII^th century paper money was issued in Persia and in the XIV^th century in Japan.

      However in other countries the substitutes of «real money», i.e. coins were widely spread. Their nominal was verified with the sovereign’s stamp or a sign and a personal stamp of a merchant or a banker. Initially in the form of complementary means of exchange the deposit receipts of stocked items, taxes payments, loans granting were used. Their circulation increased the trade opportunities but at the same time frequently complicated the exchange of these paper duplicates onto the metal coins.

      Among the west countries the first who began to issue paper money were the North American States. In 1690 such monetary units were issued in Massachusetts State.

      In Europe the first who decided to adopt the American practices was France: in 1716-1720 the famous economist and banker John Law (1671-1629) began to print the notes of the Royal Bank. Hereafter when the world economy followed the way paved by John Law and began to create the central banks he was granted with an exclusive right of the banknotes issue.

      On the territory of Kazakhstan the paper monetary units appeared in the end of the XVIII^th century and mainly these were the Russian monetary units.

      In Russia the emission of paper money – assignats for the first time began in 1769 r. It was supposed that like in other countries who risked implementing paper money they could be freely exchanged onto silver or gold on request. But all turned otherwise. To the end of the century already the excesses of assignats forced to freeze the exchange, in the nature of things the rate of assignated ruble began to fall and the prices of goods increase.

      Money separated on «bad» and «good». According to the law of Thomas Graham bad money drives out good: the money commercial value of which rises in respect to bad money and official exchange rate disappears from the circulation. It simply «put by» at homes and bank safes.

      In the XX^th century the performers of the «bad» money role were the banknotes which drove out of circulation gold. Since the First World War the tendency for the banknotes exchange on gold termination became a frequent practice. Whereupon the bank bills became almost undistinguishable from the treasury notes – the second type of paper money. The Central Bank faced the matter of the money circulation unfaltering watch. Actually paper money itself doesn’t have any useful value.

      Paper money is a sign, symbol of value. How come the refusal of gold happened which became so widespread and settled subsequently? The simplest explanation is that paper money is convenient in circulation and easy for transportation. It is useful to remember the words of the famous Englishman – Adam Smith who said that paper money should be considered in the quality of the cheaper instrument of circulation.

      Actually during the circulation the coins abrade and a part of precious metal disappears. Besides growths the demand of gold in industry, medicine and among supplies. And the main the goods circulation on a scale of trillions of US dollars, tenge, franks and other monetary units is impossible to cover by gold.

      A transfer to a fiduciary circulation sharply widened the commodity exchange limits. Paper money – banknotes and treasury notes – are obligatory for acceptance in the quality of a payment mean on the territory of the State. Its value is determined only by the quantity of goods and services which could be purchased on it.

      Thus the XX^th century is marked by a transfer to a paper money circulation and gold and silver conversion into the commodity which could be purchased at a market price.

      Paper money should be understood as a monetary unit which is issued directly or indirectly by the Treasury Department for the budget requirements and provided with a compulsory purchasing power. They include the treasure notes, different types of substitutes (government bills, government bonds, some kinds of consolidated stocks and token money).

      Paper money is a monetary unit inconvertible on metal supplied with a compulsory nominal and issued by government to cover its expenses.

      Modern money is a social phenomenon appointed by the governmental authorities. Its color, size and artistic features are not important for buyers and sellers. A trust to money is determined by a trust to a credibility of some or another governmental authority. The society represented by the government can easily appoint the other in form and images paper or plastic notes to perform the functions of money and the individuals will use them as money to cover their needs. That’s why nowadays money is called fiat money».

      The government keeps control of the circulation emission of currency. If the money issue was unlimited or could be done by everyone thus the prices would grow sharply, money would devaluate and wouldn’t be used.

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