The law of money circulation

In a primitive society, before market relations became established, economic relations were priced on the principle of exchange, when some goods were directly exchanged for others. Over time, the first intermediaries appeared between the products (the prototype of money), and the exchange began to take place not simply between them, but by the formula of Goods-Money-Goods. But their turnover was spontaneous, the law of money circulation was not known at this stage.

With the advent of modern paper money, new trends have emerged in the exchange of goods and directly money. The number of banknotes grew, leading to an increase in prices and depreciation of bank notes. There was a need for constant control over the amount of money, which, in fact, were only symbols, not of useful value. There was a need to explain the ongoing processes, which led to the discovery of a new economic law.

The law of money circulation can be explained as follows. Money in the performance of its function of means of circulation and payment are constantly in motion. At any given time, a certain amount of money is in circulation in the country, depending on the volume of goods on the market, the level of prices on them, the degree of development of non-cash settlements and credit relations, as well as the speed of circulation of the money itself. The more this speed, the less the notes are in circulation at a time. The speed of money circulation is the average number of turns that make money when performing its two main functions - the means of payment and circulation.

Thus, the law of money circulation is an objective law of economic relations, according to which the amount of money that is necessary for circulation under certain conditions and in a specific period of time is determined. It was formulated by Marx.

The amount of money should be equal to the sum of the prices of goods that were sold on credit minus the sums of mutually extinguishing payments, taking into account the amounts of those that are already due for payment. The result of these calculations is divided by the average number of revolutions that the corresponding monetary units make. Under such a scheme, you can calculate the amount of money that at a certain moment is necessary for circulation.

The formula to which the law of monetary circulation is subject can be expressed in a simplified way as follows: D = MX / C, while M is the total mass of goods; C is their average price; The average speed of turnover is average (their number per year).

Under the gold standard, monetary circulation was regulated by the withdrawal of coins from circulation, when the demand was reduced in them, and their emission in the reverse picture. Today, in terms of paper money circulation, often the channels of funds flow are crowded, which leads to inflation (devaluation of banknotes).

The law of monetary circulation explains inflation by the fall in the price of money due to their excessiveness, which were issued in circulation. This amount is more than necessary for normal turnover. As a result, prices start rising, which leads to a redistribution of the gross product in favor of monopolists (state enterprises) and the shadow economy. This is made possible by keeping wages and other incomes of the population at the same level.

The law of monetary circulation determines the interdependence of the quantity of money supply and inflation. The release of surplus money necessarily leads to a drop in output and disproportions in the development of various branches of the economy, a backlog of production from the demand-driven payment capacity, and a budget deficit. With the wrong policy of the state, banks and enterprises, these disproportions can be further intensified.