CHANGE
LexInter | April 24, 2019 | 0 Comments

CHANGE

Change

Money serves as a medium of exchange or cash, a unit of account, and a store of value. In non-legal terms we also speak of money .

The primary role of money is to facilitate trade. Before money, it was the gift, which was the first form of exchange . Then came the regime of barter, of exchange. Barter required that both parties had to have exactly the good that suited the other. Otherwise, the exchange could not take place.

Currency made it possible to separate the transaction into two independent parts that could be done at different times, buying and selling. The circulation of money makes it possible to multiply the possibilities of exchange. The currency makes it possible to pass from bilateral barter to multilateral barter before passing to the market .

At the same time as the currency is developing, accounting is developing .

Money first developed on the basis of the intrinsic value of money. Money was suitable for everyone. Money has been since time immemorial an object of creation by any person holding a good which lends itself to use as an instrument of exchange.

This was for example, in prehistoric times, flints or shells. It was later pieces in bronze, silver or gold.

These are things that have value in themselves, that can also be used in trade because they can be standardized. It takes the currency.

From currencies being the object of a generalized acceptance by a community, which are private currencies, we will evolve towards public currencies. The state will tax its currency, for different reasons. Money is the symbol of political power. Moreover, money is a source of income for the State insofar as the cost of producing money is less than its nominal value (this is called seigniorage). It will become a tool of public policy for stabilizing the level of employment and prices à la Keynes, and a means for the country to give itself a certain political independence by having its own currency ”.

In this context, the first step is standardization. Money, like weights and measures, will come under the power of overlords, kings and later under the power of the state, to avoid fraud and maintain confidence. Beating money becomes a sovereign power, like defining and controlling weights and measures.

The importance of money will grow with the industrial revolution, the development of specialization and the ever increasing importance of trade in industrial capitalism.

Foreign currencies are called currencies , as opposed to the national currency.

Fiduciary money  

The currency initially has a value equal to the nominal value carried on the support of the currency. It is a standard currency, made of precious metals, gold and silver in particular.

As public cassettes are often squandered, especially in wars, princes, kings and states will often abuse their power to mint money by manipulating coins. The currency will move, the precious metal content will drop and eventually common metals will be used.

The face value of the coins will become greater than the intrinsic value. The exchange value is conventional, it will come from the value which is attributed to the currency and therefore from the trust, it is fiat money.

To issue this fiat currency, governments will call on banks. The princes, kings and states had appealed to those who had developed payment mechanisms adapted to the development of the economy, to the circulation of goods, namely the bankers. They are the ones who developed letters of credit, which allow a merchant to have liquidity without having to carry change and without the risk in particular of having his money and gold stolen. The letter of credit is the origin of scriptural money. The letter of credit is issued on the basis of a deposit, the banker asks his correspondent to make available to the bearer of the letter of credit an amount based on this deposit. Loans and deposits are structurally linked.

Governments in the 17th century discovered that a bank can lend more than it received a deposit, because these deposits are usually left for a very long time by the depositor, even if the latter has a right to immediate restitution. of these deposits, outside of the blocking agreements. Private banks are created to act as government banks. Banknotes are issued by private banks acting as issuing institutions for fiat money.

This is the case in 1694, with the creation of the Bank of England. Scotsman William Peterson is offering a £ 1.2million loan to the government. In exchange, the subscribers become shareholders of T he Governor and Company of the Bank of England with a Royal Charter which gives the bank long-term banking privileges, including the ability to issue debt securities. The Bank of Englandhas also become the bank of banks. She had the obligation to keep enough gold to pay off her debt securities, until in 1797, taking into account the decrease in gold reserves, she was on the contrary forbidden to pay in gold. This ban lasted until 1821. The bank, which from 1920 to 1944 had evolved into a central bank, was nationalized in 1946.

The Banque de France was created on January 18, 1800 by the First Consul Napoleon Bonaparte. The Banque de France was incorporated as a public limited company with a capital of 30 million francs, divided into 30,000 registered shares of 1,000 francs. Its primary role was to issue notes payable to bearer and at sight in return for the discount on commercial paper. It shared, with five other establishments, the role of issuing banknotes. The Banque de France obtained on 24 Germinal Year XI (April 14, 1803) the exclusive issuance privilege for Paris, for a period of 15 years. The capital was increased by 15 million francs, which enabled the Banque de France to absorb the other issuing establishments. The note issues were offset by deposits of customer gold and commercial paper discounts. The banknote was not however a very widespread instrument of payment since the smallest denomination was 500 francs, which corresponds roughly to a current value of 900 €. In the early years of the XIXe century, it was therefore only used for important settlements, gold minted ensuring current payments. The first years of the Banque de France were difficult, following the crisis in public finances. The decrease in the Bank’s cash position resulted in restrictions on the repayment of the notes.

Napoleon to bring about a reform intended to give the government greater authority over the management of the establishment. By the law of April 22, 1806, Napoleon reformed the Banque de France. The management of the Bank’s affairs, until then entrusted to the central committee, was henceforth ensured by a governor and two deputy governors appointed by the State. The privilege was extended for twenty-five years beyond the first fifteen years and the capital increased from 45 to 90 million francs.The Bank, said the explanatory memorandum of the reform, is a public establishment, it must use its privilege in the common interest of the Government, the citizens and the shareholders: “The property of the Bank is with the State and the Government as much as with the shareholders”.

Two years later, the imperial decree of January 16, 1808 promulgated the “fundamental statutes” which were to govern the operations of the Bank until 1936. This text also decided the establishment of branches called “discount counters” in certain provincial towns where the development of trade made it necessary to do so.

In 1847 the amount of the cuts was reduced. Banknotes of 200 francs (around € 335 today) were put into circulation By decree of March 15, 1848, legal tender was imposed. Both individuals and public funds were obliged to receive the banknotes as legal tender. The law of August 3, 1875 definitively established the legal tender of banknotes, the banknote became a real currency, with the Banque de France at the heart of the distribution of credit to commerce and industry.

The Bank had the privilege of issuance. Until 1848 and from 1850 to 1870 the issue was completely free. With the law of 1875, a quantitative control was imposed. The Monetary Law of 1928 made fiduciary circulation subject to the minimum percentage coverage regime (gold cash of at least 35% of the cumulative amount of promissory notes in circulation and accounts payable balances). Since 1939 currency circulation is no longer subject to any legal limitation.

The volume of currency in circulation has only a relative meaning, given the development of cash flow

Scriptural money

Scriptural money is the currency that corresponds to the entries of accounts payable in banks. It circulates from one account to another by means of payment: checks, transfers, payment cards. It does not materialize by a support. The holder of a credit account in a bank if he wants to obtain cash will have to give a payment order to the bank to convert the cashless money into fiat money.

Scriptural money now represents about 90% of the money supply.

If the central bank produces fiat money, commercial banks create scriptural money by granting credits under the aegis of central banks. “Credits make deposits,” the saying goes. Monetary economics and interest are linked.

When a bank grants a loan, it does so either in return for a so-called real security or guarantee, that is to say based on an asset, or on the basis of the credit it grants in the repayment option of the creditor. When it finances the acquisition of property, it will hold the title materializing the security (seller’s privilege, mortgage for example), or a personal claim on the creditor who gives it a right to its heritage in the event of non-repayment. The bank’s claim on its debtor becomes an asset of the bank.

The credit financing the acquisition of a good by the debtor or his activity, it will result in expenses which will generate deposits. It is in this sense that the credits make the deposits.

The loans give rise to deposits which will generate new loans but of a lesser amount, however, since the commercial bank will keep part of the deposit in the form of central bank money to meet the needs of its customers and settle its debts. from other banks. The ratio between the scriptural money created and the fiat money needed to cover leaks is called the credit multiplier.

Scriptural money takes account of movements that are not going to take place materially, in cash. These are movements in the creditor bank relationship, where the first movement is a debit which is made in return for credit movements (interest payments and principal amortizations) which will take place subsequently. These are movements in the relationship between the bank’s debtor and its creditors.

The creation of scriptural money depends on the demand for credit, and on the acceptance of this demand by the banks. Economic agents (individuals and companies) incur debt for purchases or investments, taking into account the real interest rate and their desire for consumption, investment or growth.

The creation of money by commercial banks was controlled in a dirigiste manner by the Central Bank credit was supervised from 1963. An annual standard of progression of the credits granted was fixed to the banks. Credit supervision was often coupled with an industrial policy consisting in varying the possibilities of loans according to the sectors of activity requiring financing.

Nationalizations in the banking sector have enabled the State, which has become the owner of almost the entire banking sector, to de facto control all the companies in the country by means of the monetary weapon.

The credit policy of public banks has been marked by massive failures. The opening of international capital markets, privatizations, the independence of the Banque de France, then the creation of the ECB, led to the abandonment of the credit framework .

The Central Bank imposes mandatory reserves on second-tier banks (commercial banks), i.e. unpaid central money accounts at the central bank. Every bank must respect a ratio between its reserve of central money and its monetary creation in order to avoid any risk of illiquidity and therefore to assume, as far as possible, a phenomenon of ”  mistrust  ” or ”  run  “. This solvency test is a minimum standard of capital or equity capital – 8% of risk-weighted assets. This corresponds to the risk of non-repayment which affects the value of the asset resulting from loans (credit risk)

The Central Bank influences monetary creation through its rediscount policy. The discount rate is the interest rate that the central bank charges commercial banks when granting credit to them.

It influences the interbank market through its policy . The interbank market is a compartment of the money market, that is to say a market where short-term capital is exchanged (while the financial market is the one on which long-term capital is exchanged). On the interbank market, the central bank’s fiat money offers will be confronted on the one hand, but also from commercial banks which have cash surpluses; on the other hand, requests for fiat money from banks seeking to refinance themselves.

The central bank increases the monetary creation of commercial banks by purchasing securities using central bank money, which improves bank liquidity. It limits this creation by selling securities to banks in order to take a drain on their central money reserves and thereby reduce banks’ liquidity.

Electronic money

Electronic money is monetary value of an electronic nature and stored on a medium (chip card, stripe card, mobile phone, etc.) or an account on the Internet.

It is supposed to be the equivalent of coins and notes of fiat money, in electronic form. Therefore, it must be usable directly, without needing to give instructions to his banker and without having to withdraw the sums from a bank account: the electronic money units are transferred directly from the customer’s electronic wallet to the cashier of the customer. trader if he is equipped with the necessary equipment. .

Electronic money is therefore closer, in its use, to fiat money “than to cashless money. The loss of the medium of electronic money leads to loss of funds, (the sums held in bank accounts, which require donation). instructions to his banker to be able to transfer them).

As for fiat money, does the loss of support lead to the loss of funds.

 

Bills of exchange and currency

The role of money

Monetary theories are opposed on the role of money in the economy. Classics and neoclassics consider money to be neutral, Keynesians claim that money is active and can be used to improve economic performance, and monetarists believe that money is active, but above all harmful in the economy.

Money and inflation

Depreciation of currency is inflation

MONEY MARKET

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