Theories of Money Economic Essay Example

The Evolution of Money

Thomas Aquinas’s Theory of Money Following Aristotle, Thomas Aquinas developed the idea of the naturalness of subsistent economy and, consequently, proposed the division of wealth to be transferred into natural (products of the subsistent economy) and artificial (gold and silver). According to the Aristotle’s dogmas and the tradition of the Catholic Church, Thomas Aquinas condemned usury. However, in regard to the trade he believed that it was a legitimate activity. These provisions were the basis for Aquinas’s arguments concerning the fair price.

The discussion about a fair price includes two points of view:

•  the price is valid if it provides the equivalence of exchange;
• the price is valid if it provides benefits to people according to their social status.

In his theory of fair value, Thomas Aquinas incorporated both of these provisions, distinguishing two types of justice in exchange. One kind of justice guarantees the price “according to the goods,” that is according to labor and costs. In this case, the equivalence is interpreted in terms of costs. The second kind of justice provides more benefits to those who “mean more to public life.” The equivalence is interpreted as the appropriation of the share of goods, which corresponds to the dignity of the exchange participant. This means that the process of pricing used to depend on the social status of the exchange participants.

Ibn Khaldoun’s Theory of Money In his works, Ibn Khaldun tried to strengthen the faith in the immutability of differentiation of society by the social class, i.e., in the fact that Allah has given one group of people an advantage over the other group. In addition, he focused on the godly character of barter trade at all stages of the social development from “primitive” to “civilization”. For this purpose, Ibn Khaldun put promoted the concept of “social physics”. The essence of this concept is that the transition to civilization and, accordingly, the excess production of material wealth will allow increasing the national wealth, and eventually everyone will be able to gain greater prosperity and even luxury. However, at the same time the universal social and property equity will never be put in practice and the social division by “layers” (classes) through ownership characteristics and the principle of leadership will not disappear as well.

Developing the thesis about the problem of lack of income in terms of the material wealth, the thinker indicates its relevance to size of the city, or rather, the number of its population, and makes the following findings:

• With the growth of cities, abundance of “necessary” and “devoid of necessity” is growing. It leads to a lower price for the first and a higher price for the second and at the same time testifies the prosperity of the city.
• A small size of the population of the city is the cause of the deficit and the high cost indicates the required material wealth for the population. – The heyday of the city (as well as society as a whole) is real in terms of reducing the amount of taxes, including taxes and levies for rulers in urban markets.

Mercantilism Mercantilism is a transition period in the evolution of money and the emergence of economics as an independent science. Mercantilism is a doctrine that is based on the idea that wealth means possession of money and its accumulation. At this stage of development, money used to be gold and silver, thus, the mercantilists believed that the more gold “came into” the country and the less money “came out” of it, the richer it was.

According to such understanding, the trade was a “war” for gold and silver. It was believed that trade was beneficial only when the country was the seller but not the buyer. Mercantilism as a stage of money evolution stated concepts that were used to this day and became the impetus for the allocation of the economy into a separate science.

Classical Quantity Theory of Money The quantity theory of money emerged in the 16-18th centuries as a reaction to the concept of the mercantilists, who claimed that the more gold there is in the country, the richer it is. The quantity theory is a theory of demand for money. It is neither the theory of production, nor cash income and the price level. Any provision concerning these variables requires combining the quantity theory with special conditions imposed on the money and other variables supply.

The founder of the quantity theory of money was a French economist Jean Bodin (1530-1596 years), who was trying to uncover the causes of the price revolution, linking their growth with the influx of precious metals in Europe.

This theory was further developed in the writings of David Hume. According to Hume, the value of money and the prices of goods are determined by the ratio between the quantity of money in circulation and the goods, i.e., the prices of goods are always proportional to the amount of money. In fact, new discoveries of gold and silver have reduced its cost since they embodied less social labor. This explains the increase in the prices for goods and the expansion of a need for money circulation. The quantity theory of money establishes a direct relationship between the growth of money supply in circulation and the growth of commodity prices.

David Hume made an important contribution to the development of scientific understanding of the money value by his study of the quantity theory. He put forward and substantiated the idea of the representative nature of the money value, according to which:

• money comes into circulation without its own value and receives it in circulation as a result of the exchange of a certain mass of money for a certain weight of the goods;
• the cost of money formed in circulation and determined by the value of goods that are traded is purely notional. Its value depends on the amount of money in circulation.

John Locke believed that the decisive factor, which regulates and determines the value of money (gold and silver), is its amount. This is opposed to the fact that the accumulation of gold and silver cannot make the nation richer since a result of the accumulation will be impairment of precious metals and the rise in commodity prices. From this perspective, the real wealth of nations is not due to dead stocks of gold and silver, but is determined by the establishment of factories, and the use of manpower.

A quantitative theory considers money only as a medium of exchange, claiming that prices are established and the value of money is determined in the course of circulation in a collision of money and commodities. The mistake of the quantity theory is the idea that the entire money supply is in circulation. In fact, there is an objective economic law that determines the required amount of money in circulation according to the law of value.

Adam Smith’s theory of money justified the emergence of money as a result of the exchange-based division of labor. Analyzing the problem of the gold monetary circulation, Smith focused on the inadmissibility of the credit money in excess of the metal stock since it would lead to the decrease of their value, which would be lower than the value of gold and silver. Only gold was recognized as real money meanwhile the credit money was considered only as a sign of cost or substitute of the real money.

Thus, the main provisions of quantity theory of money are as follows:

• The purchasing power of money as well as the price of the goods is established on the market;
• All the issued money is in circulation;
• The purchasing power of money is inversely proportional to the amount of money and the price level is directly proportional to the amount of money.

Comparing the Greek’s and the Classical Economists’ Perception of Money If to compare the Greek’s perception of money, its functions and the point of view on this issue expressed by the classical economists, Adam Smith, John Locke and David Hume according to the classical quantity theory of money, one can conclude that these two theories have much in common. The main provisions of the classical quantitative theory correspond to Aristotle’s concepts of money. The first common point is the claim that all forms of money, including metal money, are devoid of intrinsic value. Besides, the main function of money was seen in the same way. Both theories consider the medium of exchange as a main function of money.

In Greece, the state regulated the trade in general and established the right of sale and the prices for essential commodities. It means that the prices were determined by the state in its sole discretion. However, the classical economists considered that money should play only an intermediary role in the economy. This is due to the fact that the increase in the quantity of money in circulation results in a proportional increase in the absolute level of prices and does not affect the relative prices, i.e. exchange proportions in the exchanged goods. Thus, pricing takes a more meaningful and reasonable form according to the classical quantitative theory of money.

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Karl Marx’s Theory of Money Karl Marx’s theory of money was based on the labor theory of value. According to his conception, money was the result of the development of exchange forms. One of the two exchanged goods always played an active role and presented the relative form of value. The second product was opposed to the first as equivalent and presented the equivalent form of value. The development of exchange led to the fact that the equivalent form of value was exclusively assigned to one commodity which was gold or silver. Thus, there was a form of monetary value that in reality was money.

According to Marx:

• money is commodity, spontaneously released from the world of products for the purpose of a universal equivalent;
• full money is gold or silver;
• paper money is only a substitute for real money;
• Reduction in the value of money leads to an increase in commodity prices for goods meanwhile an increase leads to the rise.

Thus, according to Marx’s economic theory, money was considered as a special commodity. Marx believed that gold performed the functions of money because that it maintained its commodity nature. Gold as a commodity had a use value and its own value. The use value of gold lied in the fact that it provided the raw material for jewelry and could be used in industry. According to Marx, the cost of gold consists in the fact that its production takes a large amount of socially necessary labor.

Special use value of money is expressed in property of being a universal equivalent. It means that:

• the use value of money becomes the universal form of manifestation of the immediate value of all other commodities;
• a concrete labor enclosed in money acquires the property of being a universal form of expression of abstract human labor;
• private labor extended to the production of money appears as labor directly in a social form.

Thus, the result of the XVIII century was the development of the fundamental trends of the doctrine of money. Various monetary theories have a lot of common grounds. The development of the dominant quantitative monetary theory was influenced to some extent by other monetary theories.

Conclusion Money is metal and/or paper valuables, which are a measure of the sales value. It acts as universal equivalent, i.e., expresses the value of all goods and can be exchanged for any of them. Money is a necessary active element and an integral part of the economic activity of society indicating the relations between various participants of the trading process. Money has passed a long way of evolution. The history of money is a part of the history of the market economy. Expressing the value of the world of commodities, in economic history money has taken the forms that were dictated by the current level of trading relations. Every historical period has its own predominant form of money. The essence of money is demonstrated in its functions that reflect the characteristics and capabilities of their use. During its evolution attitudes towards money and its functions varied in different times and societies.