Monetary system: concept, structure and types

Money plays an exceptional role in a market economy, the functioning of which is based on commodity-money relations. Money is often called the language of the market, since with their help the circulation of goods and resources is carried out. Therefore, the market is impossible without money, without money circulation.

Money circulation is a continuous movement of money, their functioning as a means of circulation or a means of payment. It serves the sale of goods, as well as the movement of loan (in the form of monetary capital) and fictitious (in the form of securities) capital. Consequently, money circulation consists of a set of non-cash cash turnover (non-cash payments make up to 75%) and cash circulation.

The organization of money circulation, historically formed in this country and enshrined in law, forms a monetary system.

With significant differences in the forms of construction of monetary systems in different countries, all systems are characterized by the following common features: at the heart of any monetary system is a certain monetary commodity, as a measure of value, treasure and world money; nominal substitutes of real money (gold) function in circulation, which ensures the elasticity of the sphere of circulation in the process of reproduction.

The legislation of each country determines the structure of the monetary system, which includes:

the national monetary unit (ruble, dollar, franc, yen, etc.), in which the prices of goods and services are expressed; a system of credit and paper money, change coins, which are legal tender in cash circulation; state-regulated forms and conditions of private credit money (bills of exchange, cheques); the system of money emission, i.e. the legally fixed procedure for issuing money into circulation; the procedure for exchanging the national currency for a foreign and state-fixed exchange rate; state bodies responsible for the regulation of money circulation.

Depending on the type of money circulated, there are two main types of monetary systems:

Metal money circulation system; The system of circulation of nominal banknotes.

The system of circulation of metal money assumes that in circulation there is full-fledged gold and (or) silver coins, which perform all the functions of money, and credit money can be freely exchanged for monetary metal (in coins or bars).

Within this type of system, two of its varieties were formed: bimetallism and monometallism.

Bimetallism (bis – twice and mettalon – metal) – when two metals are used as money – gold and silver (16-19 centuries). Two varieties of bimetallism are known: a) a system of parallel currency – when the value ratio between gold and silver coins was formed spontaneously in accordance with the market value of gold and silver; b) a system of double currency, in which a certain value ratio between two metals (parity) was established by the state, and the minting of gold and silver coins and their acceptance in acts of sale and other transactions were carried out according to the established ratio.

Bimetallism does not correspond to the needs of developed commodity-money relations, since it contradicts the very nature of money as the only commodity designed to fulfill the role of a universal equivalent. The inconsistency of bimetallism was especially noticeable in the system of double currency, when the legislative fixation of the value ratio between gold and silver faced a spontaneous fluctuation in the market values of these metals, which made this system fragile. Inevitably, there was a discrepancy between the market and fixed values of gold and silver, as a result of which one of the metals was valued by the law above its actual market value, and the other – lower. This led to the fact that coins minted from metal, the relative value of which had now increased, went out of circulation, only coins made of depreciated metal remained. Typical of bimetallism, the displacement of “good” money by “bad” money was called Gresham’s law.

The significant depreciation of silver in the late 19th century as a result of the cheapening of its production forced the USA, Germany, and other countries to stop the free minting of silver coins and predetermined the transition to monometallism, which became widespread in the late 19th and early 20th centuries.

Monometallism (mono – one and mettalon – metal) – when one metal is used as a monetary unit (monetary commodity). Depending on which metal  plays this role, monometallism can be copper (existed in Rome in the 3rd-2nd century BC), silver (in Russia (1843-1852), in Holland (1847-1875), in India (1852-1893), in China until 1935), gold (introduced at the end of the 18th century in Great Britain, in Germany (1871-1873), in France and Belgium (1873-1874), in Russia and Japan (1897), USA (1900), which gradually became dominant. Gold monometallism existed in the following forms:

gold coin standard (existed before 1 world currency and was characterized by the circulation of gold coins, for which banknotes were freely exchanged); the gold bullion standard, which was introduced in England, France during the 1st World War and provided for the possibility of exchanging credit notes for gold bars (usually weighing 12.5 kg); gold standard, which was introduced in the 20s of the twentieth century in most countries. Credit money and banknotes could be exchanged for foreign currency (mottos), exchanged for gold. The mottos represent means of payment in the currency of other countries, intended for international settlements.

The world economic crisis of 1924-1933 led to the collapse of these forms of gold monometallism. Since the 30s of the twentieth century, a new type of monetary system has been formed in Western countries.

The system of circulation of nominal banknotes, in which a monetary commodity does not function in coin form, but in the form of paper and money circulation and purely banknote circulation.

In the practice of regulating money circulation in the period from 1914 to 1945, the system of banking circulation was divided into the following varieties:

freely exchangeable banknotes for gold, the so-called gold bullion standard. This exchange may be made either at a rate firmly fixed by law, or at the current rate established by the government, or at its authority by the issuing bank; banknotes indirectly exchanged for gold through foreign currency convertible into gold. This system is called the gold standard; a type of system in which the national currency is exchanged for a foreign currency (including convertible into gold) with certain currency restrictions (for example, not for  all citizens, or only for foreigners, etc.). In all these cases, the reversibility to foreign currency also applies to the funds held in current accounts with the Central Bank; banknotes exchanged for gold and current account funds only for foreign Central Issuing Banks (in the USA until August 1971); non-exchangeable (“non-convertible”) banknotes. This is the so-called closed currency.

It should be noted that in the course of the development of paper money circulation, the following characteristic features of this monetary system have developed:

withdrawal of gold coins from circulation; refusal to exchange banknotes for gold and the abolition of their gold content; the dominant position in monetary circulation was occupied by credit money (bill of exchange, check, banknote, credit card); strengthening the issue of money (paper and credit) for the purpose of lending to private entrepreneurship and the state; significant expansion of non-cash turnover, when non-cash payments are carried out by transferring sums of money by the bank from the account of one enterprise to the account of another, or by set-off mutual claims; the exchange of all forms of payments in gold in the domestic market and the displacement of gold from international circulation by reserve currencies or international units of account; state regulation of money circulation.

Thus, in the second half of the twentieth century, the exchange of goods for gold, even in the places of its extraction, ceased. Gold has lost the function of an intermediary both in the domestic turnover of the country and in international trade. Even the currencies of the two countries have ceased to be compared in accordance with the gold content. The issue of both paper and credit money has been monopolized by the state in modern conditions. A state-owned central bank tends to try to compensate for the lack of money savings and the supply of money in the market by increasing the money supply and pursuing an active monetary policy, helping to establish equilibrium in the money market.