7. Home reading. Read and retell the text in English and Russian: regulation and token money

The Bank Charter Act of 1844 followed a long dispute about the control of the money supply and whether the value of the note issue should be allowed to exceed the stock of gold available to support it. The Act placed a statutory limit on the fiduciary issue (that part of the note issue which was not backed by gold) and restrictions were placed on the issue of notes by joint stock banks other than the Bank of England. In fact, these regulations were framed so that the passage of time would eventually leave the Bank of England as the sole note-issuing authority in England and Wales. The last private bank of issue in England surren­dered its rights in 1921.

Apart from relatively short periods of emergency when conversion was suspended, all bank-notes, until 1914, were convertible into gold. Convertibility on a restricted basis was restored in 1925, but finally abandoned in 1931. Since that time Bank of England notes have been wholly inconvertible and we have now reached the stage where our bank-notes, while still carrying a 'promise to pay' printed on their faces, are no more than token money. This is also true of the coinage; the commodity value of the coins is but a tiny frac­tion of their money value. Nevertheless the notes and coins are universally acceptable, the fact that they have no real commodity value, and are not backed by gold, in no way affects their ability to serve as money.

Unit 4 functions of money

A medium of exchange

As we have already explained, the use of money as a medium of exchange makes possible a great extenuation of the principle of specialization. In an advanced society the use of money allows us to exchange hours of labour for an amazing variety of goods and services. We can exchange, for example, two weeks' labour for a holiday abroad just as eas­ily as we can exchange it for a piece of furniture or a year's rent on a television set. Such exchanges are taken for grant­ed yet they would be inconvenient without the use of money.

A measure of value

The first step in the use of money was probably the adoption of some commodity as a unit of account or mea­sure of value. Money, most likely, came into use within the barter system as a means whereby the values of different goods could be compared. The direct exchange of goods for goods would raise all sorts of problems regarding valuation. For example 'How many bushels of corn are equal in value to one sheep, if twenty sheep exchange for three cows and one cow exchanges for ten bushels of corn?' The problem of exchange rates is easily solved when all other commodities are valued in terms of a single commodity which then acts as a standard of value. Money now serves as such a standard and when all economic goods are given money values (i.e. prices), we know, immediately, the value of one commodity in terms of any other commodity.

A store of value

Once a commodity becomes universally acceptable in exchange for goods and services, it is possible to store wealth by holding a stock of this commodity. It is a great conve­nience to hold wealth in the form of money. Consider the problems of holding wealth in the form of some other com­modity, say wheat. It may deteriorate, it is costly to store, may be insured, and there will be significant handling costs in accumulating and distributing it. In addition, its money value may fall when it is being stored. The great disadvan­tage of holding wealth in the form of money has become very apparent in recent years — during periods of inflation its exchange value falls.

A means of making deferred payments

An important function of money in the modern world, where so much business is conducted on the basis of credit, is to serve as a means of deferred payment. When goods are supplied on credit, the buyer has immediate use of them but does not have to make an immediate payment. The goods can be paid for three, or perhaps six, months after delivery. In the case of hire purchase contracts, the buyer takes immediate delivery but pays by means of installments spread over one, two, or three years.

A complex trading organization based upon a system of credit can only operate in a monetary economy. Sellers would be most unlikely to accept promises to pay in the future which were expressed in terms of commodities other than money. They would have no idea how much of the commodities they would need in the future, and if they do not want them, they face the trouble and risks involved in selling them. Sellers will accept promises to pay expressed in terms of money because, whatever the pattern of their future wants, they can be satisfied by using money.