Introduction
Currency is a fundamental part of modern economic functioning. It facilitates transactions, measures the value of goods, and enables saving.
However, despite its everyday presence, its real role and the way it influences the economy often remain unknown to the general public.
I- Advantages of currency
Currency is a universally accepted instrument for paying for, saving, and measuring the value of goods and services. It forms the basis of trade in any modern economy for the following reasons:
1- Compulsory tool
The creditor or seller cannot refuse money in exchange for the debt or in the valuation of the goods offered, and at the same time, he cannot demand any other instrument in its place.
Furthermore, the law specifies the value of this mandatory instrument for payment and transaction.
2- A comprehensive and non-specific tool
Currency allows its holder to obtain any type of available goods and services, and its role extends to include all sectors of the national economy, while, for example, a purchase voucher only grants its holder the right to obtain a specific and defined type of goods and services.
3- A tool related to a specific location
Currency is considered a comprehensive and generally accepted instrument, but only within the borders of the state that issues it, in other words, the comprehensiveness and universality of currency ends at the borders of the state.
That is, the binding force of currency and its general and comprehensive nature are related to the locality of transactions and payments, where it differs the situation regarding free currencies within the global monetary system like the dollar, for example,and which is enjoying widespread popularity globally.
4- A tool for direct and immediate business
Cash allows for immediate settlement for commitments the debtor towards his creditor immediately after paying the debt in cash, without waiting for anything else.
Accordingly currency guarantees this immediate balance the moment it is used, on the other hand, we find that the check which is also considered a means of performance.
If the debtor uses it to settle his outstanding debts to his creditor, he is not absolved of his obligation until the creditor is able to collect its value, and grants the debtor must provide a receipt indicating that he has discharged his obligation.
II- Functions of currency
The importance of currency and its pivotal role in the modern economy is highlighted by the functions it achieves, which are in the following:
1- A means of exchange
It is considered the direct function that distinguishes currency from other assets, meaning that currency is not sought for its own sake, but for what it performs, from a service to facilitate exchange operations.
And this function has been given several names, including intermediary for exchange or mediator for payments, the function of currency is fulfilled by anything that is generally accepted in exchange for goods and services.
This could be a piece of gold, copper coins, or pieces of paper, the important thing is that this thing that can be used as currency is acceptable to individuals.
Currency has enabled this function from overcoming many problems the difficulties faced by the barter system in the regarding the impossibility of exchanging goods between members of society.
The following some of these obstacles:
- Incompatibility of desires;
- Reducing exchange costs;
- Encouraging further specialization in production based on freedom of choice.
It should be noted that the use of currency as a medium of exchange enabled breaking down the barter process into two stages:
- First stage: Single sale this is done by exchanging the commodity for money;
- Second stage: Single purchase this is done by using money to buy another item.
2- Measure of value
One of the most important functions of currency is that it is considered the basis of value or a unit of account, meaning that it measures the actual value of goods and services.
On this basis, every country determines the price of a good or service in terms of the number of monetary units used within that country.
For reference, under the barter system, a single commodity had several prices, but with the use of currency, each commodity came to have a single price denominated in money, enabled currency overcoming the problem multiple exchange rates and economic calculations,
and it became the value of one unit of each good or service is expressed in monetary units, that is to say, the monetary price, it is what was granted each good or service has one monetary value instead of thousands of values.
It also enabled currency in helping concluding contracts and maintaining accounts in cash, and knowledge what profits or losses the company had made at the end of each.
3- Store of value
This function is linked to the characteristic of permanence and stability, and it is considered the most important function of currency in modern economies, since the holder of currency is in fact the holder of general purchasing power that he can spend over time to obtain the goods he wants to buy at the right time, knowing that it will be acceptable at any time in exchange for any good or service he wants.
It is worth noting, that currency is characterized by its ease of storage and use anywhere and at any time, and at a lower cost compared to bartering, which made it difficult for an individual to retain his goods in order to exchange them for other goods.
And considering therefore, currency is a means of saving for future spending, and in order to perform this function perfectly, it must maintain its strength purchasing power, especially since inflation weakens the function currency as a good store of value.
And what is given to money characteristic being the medium that stores values the most compared to other media, in terms of its ease of use, low cost, and superior suitability, because it possesses the following characteristics:
- Currency costs nothing in the form of storage expenses;
- It is not subject to significant physical damage as a result of its storage, and it is a fully liquid financial asset;
- It gives its owner the freedom to spend it as they wish when using it in the future.
Generally, the extent to which currency is efficient in performing this function depends on the following:
- The extent to which currency enjoys general acceptance not only in the present but also in the future;
- The fact that this currency has a stable value in the present and in the future.
4- A means of deferred payment
This function is related to the first, although here it pertains to settling deferred payments, it facilitates the process of concluding contracts for marketing goods based on forward contracts, with the understanding that the goods will be sold at specific prices at present.
Furthermore, this function enables the lending and borrowing of purchasing power through the process of establishing loans.
What makes this function extremely important is that the modern economic system requires a large number of contracts in which payment is future, and most of them are contracts for the payment of installments and debts in which future payment is specified in a number of monetary units.
Furthermore, currency is considered a good means of deferred payment as long as it retains its own purchasing power, provided there is no inflation.
III- Demand for currency
Generally, there is a demand for money, meaning the need to obtain cash liquidity, for the following reasons:
1- Making exchanges
In general, the need for individuals to make purchases of goods and services is one of the reasons that drives them to keep part of their income in the form of liquid cash, which is known as the demand for cash to conduct current transactions.
2- Precaution
People keep cash on hand to cope with unexpected or unplanned expenses, as well as to cope with emergencies such as illness or job loss, etc.
3- Speculation
In their pursuit of financial gains from speculative operations, individuals resort to asking for currency and keep it in its liquid form so that they can Benefit from changes in bond and stocks prices, for example, they might buy it when prices are low, and they sell when prices rise, to generate some financial returns.
VI- Money supply and measuring the quantity of currency
The monetary system includes all the currency in circulation within a given country, as well as the institutions, laws, and procedures governing the issuance of currency by the monetary authority (Central Bank), as well as commercial banks that hold deposits individuals and institutions play their part in providing loans within certain controls.
The Central Bank focuses on managing the money supply in a way that ensures a reduction in the unemployment rate and an increase in economic growth rates, addition to control price levels by keeping them stable at acceptable levels.
It is worth noting, that the difference in defining currency, whether in the narrow or broad sense, leads to different viewpoints regarding the demand for currency, meaning the origin of the demand for currency, it is either a direct demand, meaning a demand for currency for its own sake, or a derived demand, meaning a demand for currency as a medium of exchange.
In this context, the money supply represents all the money in circulation in an economy, including immediately available money and savings that are more or less liquid.
1- Narrow scale
The narrow scale includes which is known as M1, the amount of currency in circulation, which includes paper and metal currency, as well as demand deposits, this concerns current account deposits.
For reference, this scale can be expressed through the following equation:
M1 = C + D
where:
C: Currency circulating outside the banking system.
D: Current deposits.
2- Expanded scale
Extended scale is that is known as M2, in addition to the elements mentioned above, it includes M1, Saving Deposits, and may be added also, for the expanded scale, quasi-money such as the Long-Term Deposits.
It can be expressed regarding the money supply in its broadest sense using the following equation:
M2 = M1 + Term Deposits +Saving Deposits
Where Term Deposits include:
- Investment Deposits for less than a year in the national currency.
- Foreign currency Deposits denominated in national currency.
As previously mentioned, both Saving Deposits and Term Deposits are considered quasi-money.
3- The Broadest scale
The broadest scale is usually used in developed countries, which is known as M3, which enjoy a high degree of economic progress and financial and monetary depth, resulting from significant advancements in financial and monetary markets.
This scale is determined by adding Long-Term Investor Deposits (for more than a year) to Extended scale M2.
Accordingly, money supply in its broadest sense can be expressed by the following equation:
M3 = M2 + Long Term Deposit
4- Total liquidity measure
The total liquidity measure, known as M4, includes, in addition to the components of M3, highly liquid assets.
The Total liquidity measure can be expressed by the following equation:
M4 = M3 + High Liquid Securities
It should be noted that government treasury bills are a form of highly liquid assets.
Conclusion
Currency is much more than just a means of payment: it organizes the economy, facilitates trade, and gives confidence to economic actors.
Therefore, understanding its functions, advantages, and the mechanisms for measuring the money supply is essential for better economic decision-making.