International Financial System: Origin of Money, Form and Value of Money and Bretton Woods System

Topics: Money, Currency, Bretton Woods system Pages: 5 (1842 words) Published: January 4, 2013
Q1) Contrast and evaluate the chartalist and commodity view of how barter economies transformed into monetary ones? Early civilise trading relations were established by barter exchange. Barter economy is a system of exchange by which goods or services are directly exchanged for other goods or services. This was an inefficient method of exchange due to double coincidence of wants: two people both would need to have the other want, the time and effort spent searching for trading partners increases transaction costs: the costs in time or other resources that parties incur in the process of agreeing and carrying out an exchange of goods and services. Other limitations of a barter economy are, it is difficult to create credit relationships and the absence of common measure of value; money plays a role of measure of value of all goods in a monetary economy, so product value can be measured against each other however this will be absent in a barter economy. People exchanged goods and services that enabled division of labour and specialisation that was a key aspect of economic progress leading to a growth in economic output therefore exchanged became necessarily. Therefore money was invented as a solution for exchange and has gradually replaced barter: there is still a debate amongst monetary theorists as to whether money was crated endogenously by the market participants themselves: commodity view or whether the origin was issued by the state/authorities in an exogenous sense: chartalist view. A person’s view of the debate can impact their attitude towards monetary and financial policies today. Chartalist will intend to favour a centralised, highly regulated system whereas commodity money view person will advocate monetary diversity and market solutions.

Q2) How are the form and value of currencies determined?
Currency is a system of ‘money’ in general use in a particular country. Money is first and foremost a means of exchange – if an entity fails to fulfil this function it is not money. In order for money to be acceptable it must therefore function as a store value, it must hold its value for a period of time: durable. To be acceptable, in UK, ‘legal tender’ is used to describe the notes and coins that are produced by Royal Mint. This is the legitimisation role of the state in UK monetary system that the vendor involved in a transaction is legally bound to accept the currency for payment. (e.g. 10p – for any amount not exceeding £5). This helps to increase social confidence in a given currency. Money should be portable and must have a function of divisibility, functioning as a unit of account. Also money must have a function to create credit relation. Credit essentially enables the redistribution of financial resources from surplus to deficit agents. Credit allows surplus to be recycled improving the real economy. Money can appear in the form of common commodity such as gold, silver and bronze, paper notes also can be used to represent commodity, and are convertible in to them, this type of money is called symbolic money. Government can create and circulate a form of money that has no intrinsic value itself: this type of money is called fiat money. In modern era most money is held in the form of bank deposits and transaction takes place through the electronic transfer of funds from one deposit to another. And this type of money is called credit money. Credit money is built upon some form of base money. Only 3% of UK money supply is not credit money that exists in the form of electronic bank deposits. By the 19th Century, reliable convertibility of sterling to gold was well established in The British Empire (gold to paper money), Gold standard:-exchange rate of gold and paper money: countries that uses the gold standard sets a fixed price for gold which then the fixed price is used to determine the value of the currency, however all modern monetary systems are based on principles of fiat currency, which means that...
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