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Chapter 1Money and Monetary System Structure of Chapter 1 Learning Objectives 1. To learn the origin and definition of money. 2. To understand how the existence of money facilitates the development of an economy. 3. To understand the functions of money. 4. To grasp the evolution of the payment system. 5. To learn about monetary system, including present China¬ðs monetary system. Warmingª²up Listening ɨÃè¶þάÂë¼´¿É¿ªÊ¼ÌýÁ¦Á·Ï°¡£ Directions: Listen to the dialogue carefully and choose the best answer to each question you hear after the dialogue. ¡¡¡¡1. A. U.S. dollar, pound sterling and Hong Kong dollar. ¡¡¡¡¡¡B. U.S. dollar, pound sterling and Japanese yen. ¡¡¡¡¡¡C. Hong Kong dollar, pound sterling and Japanese yen. ¡¡¡¡¡¡D. U.S. dollar, pound sterling and Deutsche Mark. ¡¡¡¡2. A. It stands for the European Currency Unit. ¡¡¡¡ B. It stands for the European Currency Union. ¡¡¡¡ C. It stands for English Currency Union. ¡¡¡¡ D. It stands for England Currency Unit. ¡¡¡¡3. A. 11 B. 13 C. 15 D. 17 ¡¡¡¡4. A. January 1, 1999 B. July 1, 1999 C. January 1, 2002 D. July 1, 2002 ¡¡¡¡5. A. 11 B. 13 C. 14 D. 15 Preª²reading Discussion 1. Do you want as much money as you can get? 2. Compare money with wealth and income. 3. Imagine what would happen if 10£¬000 commodities can be produced in a society without money. Text 1.1The Origin and Definition of Money 1.1.1Market Economy and Exchange Activities The emergence of money is closely linked to the development of exchange system, and market economy is in fact an economy of exchange. So the study of money should be based on the analysis of market economy. Historically, the division of labor is prerequisite for the emergence of the market economy. It is because of the natural differences in each person¬ðs talent, character and hobby that division of labor occurred. These differences formed each person¬ðs feature and determined what one could do, produce or what kind of services one could provide. In the course of social development, people were always not content with the present conditions and often hoped to gain most at the lowest cost, which promoted the social development. So people found in the long time production that they could become most satisfied and the social efficiency could be the largest if people with their own specialty engaged in what fitted them most and exchanged with others the products and services they produced. So specialization of labor first emerged, the foundation of social exchange was laid and the exchange system occurred. 1.1.2The Origin of Money Money appeared after the exchange system. That¬ðs to say there would be no money without the exchange system. There is no money because of the lack of exchange both in the economy of selfª²sufficiency and in the communist economy. There are two types of exchange in the history: one is barter, in which goods or services are exchanged for other goods or services. It¬ðs a kind of exchange without money and may be also called direct exchange. In a simple and small society, exchange was a kind of occasional activities and did not occur very often, so the exchange then didn¬ðt need money. As the economy developed, however, greater specialization in the division of labor increased the difficulty of finding goods that each trader wanted to exchange. Barter depends on a double coincidence of wants, which occurred only when a trader who had goods or services wanted to find someone else who had goods or services he wanted and who also wanted goods or services he had to offer. What¬ðs more, as the number of goods produced in the economy increased, barter became more cumbersome, timeª²consuming and it also increased the cost and lowered the efficiency. The greater the degree of specialization in the economy, the more difficult it became to discover a double coincidence of wants. So emerged indirect exchange, that is exchange of goods and services with money. Through repeated exchange, traders might have found that there were certain goods for which there was always a ready market and which people would like to accept in exchange. If a trader could not find a desired match or did not need goods for immediate consumption, some goods with a ready market could be accepted instead. So traders began to accept certain goods not for immediate consumption, but because these goods would be acceptable to others and therefore could be traded later. For example, salt might become accepted because traders knew salt was always in demand. As one commodity became generally acceptable in return for all other goods, that commodity began to function as money. So money appeared. The process of the origin of money is described in Figure 1ª²1. Figure 1ª²1The Origin of Money 1.1.3The Definition of Money Marx defines money as a special commodity that permanently serves as general equivalent. There are prerequisites for Marx¬ðs definition of money in three aspects: first, money is a commodity with value and value in use. Only in this case can money play various functions; second, money has the ability to display value of goods with its own value in use, i.e., money can serve as a general equivalent; third, money itself is a commodity with value and value in use representing general purchasing power, so money becomes generally accepted. Obviously, Marx¬ðs theory is based on the system of metallic money. When discussing paper money circulation, Marx explains that paper money is the representative of metallic money and is a symbol of value and functions as money indirectly. But in modern society, money in circulation in most countries has no relation with precious metal, such as gold and silver, so Marx¬ðs theory cannot explain this phenomenon wholly. Western economists define money (or, equivalently, the money supply)as anything that is generally accepted in payment for goods or services or in the repayment of debts. Currency, which is bank notes and coins, clearly fits this definition and is one type of money. However, to define money merely as currency is much too narrow today because besides currency, payments can also be made by the transfer of deposit balance via checks or electronic transfer system. CHECKPOINT Do we still need money if there is no exchange activity in the economy? Why or why not? There are two types of exchange in the history: direct exchange(barter) and indirect exchange(through money). Money appeared after the exchange system. That¬ðs to say there would be no money without the exchange system. 1.2The Function of Money 1.2.1Medium of Exchange or Means of Payments Money serves as a medium of exchange, circulating medium, or means of payment when it is passed from hand to hand in exchange for goods and services or in payment of debts. Money as a medium of exchange effectively eliminates the requirement of double coincidence of wants and overcomes the difficulty of barter. The characteristic mode of trade in our economy is the sale of goods for money. The money is accepted not for its own sale but because it can be used to acquire other goods and services. Since money is generally acceptable, it represents ¡°generalized purchasing power¡±, thereby affording its possessor wide freedom of choice. Money is therefore essential in an economy: it is a lubricant that allows the economy to run more smoothly by lowering transaction costs, thereby encouraging specialization and the division of labor. 1.2.2Unit of Account or Standard of Value Just as we measure weight in terms of ponds or distance in terms of miles, we measure the value of goods and services in terms of money. Money is the unit of account that we use to quote prices and record debts. We could also refer to it as a standard of value. Using money as a yardstick and quoting all prices in terms of unit of money certainly make it more convenient for trading transaction. 1.2.3Store of Value A store of value is used to save purchasing power from the time when income is received until the time it is spent. That means money is used to defer the time of exchange of goods and services. The effectiveness of money as a store of value depends on two factors: one is the easiness that people can get goods with money when in need of them; the other is the price level because the value of money is fixed in terms of the price level. Money can function as store of value only when its value is stable as an asset. CHECKPOINT Among the functions of money, which one is the most fundamental? Why? Money is anything that functions as a means of payment(medium of exchange),a unit of account, and a store of value. The unique and primary function of money is that it serves as a generally acceptable means of payment. By necessity, money will also function as a store of value, and its unit of measurement will naturally become the unit of account and measure of value.