studia i prace wydziału nauk ekonomicznych i zarządzania nr 41, t.

Waldemar Gajda*
Warsaw Management School – Graduate and Postgraduate School

The Role of Money in the Contemporary Economy

Abstract

Purpose – the aim of this article is to present chosen aspects of functioning and role of
money in the contemporary economy.
Research methodology – the method of analysis and idiographic method were used as
research methods. The idiographic method allows us to acquire information which reveals
extraordinary, distinct, unusual features of the phenomenon of functioning of money in
economy.
Result/findings – the historical background of influence and the role of money in the
development and operation of economy and society were presented in the article. Four most
important tendencies which influence negative assessment of the role of money in the mod-
ern economy were indicated. They include generation of economic crises; development of
instruments of financial engineering which are used for speculations; detachment of money
from the real economy as well as its drastic distribution. The final part of the article includes
an attempt of specification of necessary changes in functioning and role of modern money
for the elimination of indicated negative tendencies.
Originality/value – the indication and assessment of four most important negative
tendencies in functioning of modern money. The proposal of recommendation of making
some changes with the indication of new paradigms for functioning of money and financial
spheres.

Keywords: analysis; money; contemporary economy; paradigms

*
E-mail: [email protected].
44 Gospodarka regionalna i międzynarodowa

Introduction

Money as economic category is described by economists as value of effort

which is socially necessary and also as one of the phenomena of human activity.
In various periods of its development, people were convinced that they managed se-
crets of endless multiplying money. People who drew such conclusions tried to con-
vince others about it with the same certainty. However, the economic reality verifies
the view concerning the phenomenon of money and the possibility of its endless
multiplication, at the same time asking: Is the modern money reliable creation of
human activity which may be accepted without any objections? Only a few decades
ago, very few economists questioned its reliability. Nevertheless, nowadays critical
opinions referring to the modern role of money in the economy are more common.
Also this study may fall within this tendency. The main purpose of this article is to
present chosen (negative) aspects of functioning of money and its role in the modern
economy. In order to pursue the accepted objective, the method of analysis and idi-
ographic method were used as research methods. The history of the role of money
in the development and functioning of economy and society were presented in the
article. Four major tendencies which influence the negative assessment, i.e. genera-
tion of economic crises; the development of instruments of financial engineering
which are used for speculations; the detachment of money from the real economy as
well as drastic inequality of its distribution were indicated on the basis of the con-
ducted analysis. The attempt of presentation of modern money in the new role was
conducted in the final part of the article. The role, which will enable to eliminate
negative tendencies and to create a new financial order based on the redefinition of
paradigms which are binding in the sphere of finance.

1. The historical background of the positive and negative role of money

Money and its use have created positive and negative assessments since the
dawn of the world. In the positive aspect, money improves and determines processes
of market exchange through its functions, i.e. circular, financial/accounting, paying,
saving and international settlements. It is the basis of operation and development of
given states as well as of the whole global economy, including development of the
 Waldemar Gajda 45
The Role of Money in the Contemporary Economy

civilisation of humankind. It may be metaphorically stated that money is a heart of

the financial system of economy.1
Financial markets created by money are the places of work of millions of well-
educated and well-paid specialists who work in banks, pension and insurance funds,
investment funds, consulting and supervising companies, etc. However, despite its
positive role, it also creates negative associations. Money from its beginning, has
been used to pursue any possible objectives through centuries of evolution, to the
present day. An example from the history of Christianity. Almost 2000 years ago,
Jesus, due to money, for the first time and only once in his life, used force casting
away money traffickers from the temple in Jerusalem. Gaining control over buying
and selling market of a special coin called “temple half-shekel” was an economic
reason of throwing away the traffickers from the temple. It was the only one coin
which was made of half of ounce of pure silver and it did not have the image of
a pagan emperor and which could be used by the Jews to pay the tax temple, i.e. of-
fer to God. Using the huge demand for “half-shekels” the money traffickers bought
them monopolizing the market and afterwards they sold it with a huge profit. Ac-
cording to Jesus, it was a violation of sanctity of the house of God.2 Whereas in the
history of the biggest and most important states of the world, money was used to
achieve military (making wars), economic as well as political targets. The overthrow
of Stuarts dynasty in England, is a good example. The conflict between the English
money traffickers with the kings from the dynasty caused financing the invasion
of William III of Orange, who overthrew the Stuarts in 1688 and took the English
throne. Financing of great wars was another aim of the use of money. “I know of
absolute certainty, that the division of the United States into federations of equal
force was decided long before the Civil War by the high financial powers of Europe.
These bankers were afraid that the United States, if they remained in one block
and as one nation, would attain economic and financial independence, which would
upset their financial domination over Europe and the world,” Otto von Bismarck
said about the American Civil War.3 Also the First and the Second World War were

1
T. Gruszewski, Teoria pieniądza i polityka pieniężna. Rys historyczny i praktyka gospodarcza,
Oficyna Ekonomiczna, Oddział Polskich Wydawnictw Profesjonalnych Sp. z o.o. Kraków 2014, p. 69.
2
M. Sickler, Władcy pieniądza, www.michaeljournal.org/WLADCYPIENIADZA.htm (ac-
cessed: 4.11.2014).
3
Ibidem.
46 Gospodarka regionalna i międzynarodowa

based on the phenomenon of the use of money. Hitler did not have any money for
war. “The characteristic feature of our economic programme is that we do not have
it at all,” he said.4 The economists, Hjalmar Schacht and John Dulles, created the
foundations of the military power of the Third Reich making financial fundaments
of the development of the newest and one of the biggest arms industry of that time
through the implementation of the Mefo bills of a little-known company Mettalur-
gische Forschungsgesellschaft guaranteed by the Reich’s bank and German com-
panies. The companies which had Mefo bills could exchange them into discounted
cash in each German bank. And in turn, each bank could sell it in the Reichsbank.
There had been DM 12 billion in the bills before the annex of Austria. Hitler could
only take over Austria, the Czech Republic and afterwards the remaining states of
Europe and Africa to cover the bills.

2. Money in the contemporary economy

Despite the systematic economic development after the Second World War
which has been due to the skilful use of money, more and more frequently its role is
perceived in negative tendencies. The sources of these tendencies include:
–– generation of economic crises by the financial systems, including the last
from the beginning of 2008, which has been the most serious since the Great
Depression,
–– a very quick development of new instruments of financial engineering which
is used for speculations, e.g. Subprime, CDS,
–– detachment of money from the real economy,
–– drastic inequality of the distribution of money.
The last economic crisis was a crisis of financial engineering. The usage of the
new instruments of financial engineering such as subprime in the real estate sector
in the US became a main reason of global economic crisis. The underlying cause
may be seen in the monetary policy of the US. Since 1971, when president Nixon
suspended convertibility of dollar into gold, each crisis which has appeared in the
US was combated with the increase of available monetary base and low interest

4
H.J. Braun, The German Economy in the Twentieth Century, Taylor & Francis, Hamburg 2010,
p. 67.
 Waldemar Gajda 47
The Role of Money in the Contemporary Economy

rates5. The increase of monetary base as well as seeking new instruments of finan-
cial engineering was a reason of deregulation made at the end of the 1990s of the
20th century. It enabled the creation, sale and marketing of derivatives which were
created on the basis of illiquid primary instruments, such as loans and credits. It en-
abled securitisation of mortgages, which means its selling as well as issuing new
securities secured with properties financed with mortgages. Banks sold mortgages
to intermediaries such as: Federal National Mortgage Association as well as Federal
Home Loan Mortgage Corporation, which in turn, issued on their basis liquid secu-
rities and sold them to other financial institutions, e.g.: investment banks, insurance
companies, pension or investment funds. The sale of mortgages by banks allowed
them to dispose them from their balance sheets and credit risk transfer to other fi-
nancial institutions. Banks could provide subsequent loans thus increasing lending
through numerous securitisation without the necessity of increasing its capital base.
Hence, securities secured with credit assets were created. The main advantage of
these securities was that one package of primary instruments could be used many
times as the base of issuing. It caused a huge increase of the value of these securities
on the financial markets. The free movement of capital enabled influx of foreign
investors who recognised liquid securities as good and secure investments.6 Never-
theless, they created “a finance bubble” which, sooner or later, had to have negative
influence on whole global economy introducing it into one of the biggest economic
crises in the history. In October 2008, there was the biggest fall on the London and
Tokio Stock Exchange for 20 years. 2.3 trillion dollars evaporated only during four
days in October 2008, whereas losses in 2008 were estimated for 8.3 trillion dol-
lars. At the same time, states of the EU spent over 1.8 trillion euros on rescuing
financial system (as guarantee and capital injection to the financial system).7

5
H. Simons, 33 sposoby na kryzys gospodarczy. Natychmiastowe rozwiązania dla twojej firmy,
Difin, Warszawa 2009, p. 18.
6
M. Adamczyk, Współczesny kryzys finansowy – przyczyny i konsekwencje dla gospodarki
światowej, Prace i Materiały IHZ Uniwersytetu Gdańskiego, Gdańsk 2012.
7
W. Gajda, Współczesny kryzys gospodarczy. Geneza, przebieg i jego wpływ na podstawowe
wskaźniki makroekonomiczne oraz koniunkturę polskiej gospodarki, w: Ekonomia w ujęciu global-
nym, regionalnym i lokalnym, eds. A. Krzysztofek, A. Przybyłka, AT Wydawnictwo, Kraków 2014,
p. 182.
48 Gospodarka regionalna i międzynarodowa

That crisis was neither the first nor the last, whose cause was not overproduc-
tion, like the classics of economic cycles, but functioning financial system and de-
velopment of derivative elements which created new, utopian money.
Detachment of money from the real economy is one of the biggest, nega-
tive results of the impact of money on the economy. The classical role of money
in the economy is characterised with the use of the following functions: circular
(exchange), financial/accounting (value measure), paying, saving and international
settlements. Due to these functions, money improves and determines processes of
market exchange but should also influence keeping the economic balance on the
market. A rule which says that the value of the issued cash and the cash which is
in circulation equals annual value of supply of products and services divided by
the multiple of circulation of this cash in a year is an essential condition of the bal-
ance. According to this cardinal principle, annual increase of the value of supply
of products and services should be balanced with the increased supply of money
which is equal approximately to the value of economic growth. Hence, in balanced
economy, overall value of financial transactions should be equal to annual overall
of exchange of products and services as well as social benefits and taxes. According
to Bojarski, maintaining the above-mentioned conditions of money and economy
stability and having at the same time development stimulation is one of the most
important principles of preserving balance between the supply of money and the
real economy. Therefore, it should be sought to restore a close relation of issuance
and circulation of financial settlement means with the real economy and creation of
liquidity and solvency conditions with its increase.8 Modern realties are completely
different than the requested balance model. The data of 1970 indicated that 90% of
cash flow corresponded to economic transactions connected with the real economy
and only 10% to the speculative transactions. Nowadays only 3% corresponds to the
real economy, whereas 97% to the speculative transactions. According to the Bank
for International Settlements in Basel, which renders its services to over 140 central
banks and national financial institutions, in 1989, daily financial transactions in the
world constituted in total USD 740 billion, in 2007 it was USD 1.7 trillion. Whereas
in 2013, the value of transactions was USD 5.3 trillion per day.

8
W. Bojarski, Autonomiczne i prospołeczne systemy finansowe w warunkach kryzysu, Konferen-
cja Naukowa WSZ-SW i KRS (in print).
 Waldemar Gajda 49
The Role of Money in the Contemporary Economy

Progressive detachment of the processes and financial systems from the real
economy and development of independent and uncontrolled, speculative capital in-
volving international markets, sooner or later, will lead to tragic economic conse-
quences and necessity of seeking a new financial order.
Drastic inequality of distribution of money is another negative result of the
influence of money on the economy. The operation of modern financial systems
reverses natural economic order connected with a fair division of effects of man-
agement. It leads to such negative consequences as a very big social stratification,
serious impoverishment and even destitution of a part of society as well as hoarding
huge wealth by small groups of people. According to data of 2014 given by Oxfam,
organisation which is engaged into charity, and published by Forbes, 85 the rich-
est people in the world have wealth which equals 3.5 billion of the poorest who
constitute half of the population of the world. The wealth of 85 multibillionaires is
estimated at 1.7 trillion dollars. Forbes also informs that 1645 billionaires accumu-
lated, in 2014, property worth USD 6.5 trillion, i.e. almost one third of the biggest
economy of the world, the US. In the last year, increase in value of the property of
this group was USD 1 trillion. 1% of the population of the world accumulated the
wealth which equals to USD 110 trillion (almost twice bigger as annual GDP of all
economies of the world).9
Such a huge concentration of modern economic resources by a small number of
people constitutes a risk for balanced growth of the global economy and coherence
and stability of societies.

3. Necessity of changes on financial markets

A concept of changes referring to changes in functioning of money in its wider
sense in the modern economy proposed in this study refers to two aspects. The for-
mer is related to the elimination of political dysfunction connected with the breach
of financial and economic order by a state. Cicero in 55 BC indicated cardinal
principles of functioning of finances of a state, i.e. budget of a state has to be bal-
anced, payment deficit reduced and the public debt decreased; the authorities must

9
Forbes, 85-najbogatszych ma tyle pieniędzy co połowa świata, www.forbes.pl/85-najbogatszych-
ma-tyle-pieniedzy-co-polowa-swiata,artykuly,169784,1,1.html (accessed: 3.02.2015).
50 Gospodarka regionalna i międzynarodowa

be controlled and their arrogance must be eliminated.10 In spite of the lapse of time,
these principles have been up-to-date. Almost in all states of the world cardinal
rules of functioning of finances of a state mentioned by Cicero are not followed. The
world debt constitutes over USD 61 trillion. According to the official data of the U.S.
Treasury Department, the public debt of U.S exceeded, in 2014, USD 18 trillion and
in the last year it was almost one trillion dollars bigger. In 2012, the relation of public
debt to GDP in the US exceeded 100%. The public debt of Japan is USD 14 trillion.
Taking into account its relation to GDP which is 237%, this debt is one of the biggest
in the world. The debt of Italy reached a value of USD 2.7 trillion and the relation to
GDP which is over 132.6%. France and Great Britain have debt which is 90% in rela-
tion to GDP with nominal value constituting USD 2.5 trillion and USD 2.3 trillion,
respectively. Germany USD 2.8 trillion, China over USD 2 trillion, Canada USD 1.6
trillion, Brazil USD 1.5 trillion. The debt of Poland is USD 296 billion which equals
to 57.48% of our GDP.
Existing lack of balanced budget as well as increasing public debt of most states
of the world may result in: stopping the pace of growth of particular countries and,
at the same time, the increase of GDP of the whole global economy, increase of costs
of servicing the debts (absorbing money which could be spent on the development of
economies through innovativeness and absorption of Union or world funds), exist-
ing of inflation processes, fall of credibility on the international financial markets
(further increase of costs of servicing the debt) as well as potential increase of social
tensions in particular states caused by the lack of pay rises in public sector, limited
increase in pensions, social expenses as well as necessity to increase taxes by the
governments of these states.
The latter aspect concerns only necessity of changes on the financial markets
in order to eliminate described negative influence of money on the economy. In this
matter, one may find various concepts in the literature on subject, even the ones
which are radically connected with absolute and rapid liquidation of the financial
markets as necessary condition to create new social system. The necessity of im-
plementation of new solutions for functioning of money is indispensable. Never-
theless, it seems that the reasonable and possible to implement changes should be
based on renewed science and common education rather than on the radical concepts

10
E. Mączyńska, Ład gospodarczy. Pochwała ordo, www.pte.pl/pliki/2/12/16_maczynska.pdf
(accessed: 3.11.2014).
 Waldemar Gajda 51
The Role of Money in the Contemporary Economy

which evoke to liquidation of the global financial markets (which are not possible
to introduce due to present conditions). The present and future role of economic
sciences concerns the creation of new financial structure (but not only financial),
which may be created concurrently to the present by way of evolution. The new
structure should be based on new paradigms. The process of devaluation of bind-
ing paradigms in economic sciences is perceived. However, most academic cen-
tres still create analyses of claimed benefits of the present economic and financial
order. Technical progress has introduced societies into the epoch of abundance of
products and services and it frees them from hard work very quickly. It causes that
the paradigms accepted for the epoch of shortage are not binding any more. Also
generation of more common worldwide crises which negatively influence economy
and society by financial systems enforces changes of their principles. This new situ-
ation requires from science re-evaluation of bases and creation of a new financial
system based on new paradigms. Hence, the determination of a new role of money
is the basis. Taking into account scientific perspective, one should consider if a new
redefinition of the role of money should not be based on the new paradigm negating
money as goods. Money is abstraction, agreement of a person accepting it in its role,
a symbol, information, it has a very low value therefore it should not be treated as
goods. Thus, the role of intermediary of value and value measure should be restored.
Eliminating the opportunity to create debt money, new means of payment as deriva-
tives of real money, currency speculations, etc.11 It will enable to limit or eliminate
its negative role in causing crises or using instruments of financial engineering in its
broad sense. It will undoubtedly influence the stability of particular economies and,
at the same time, global economy. Another considered new paradigm should be to
cover the value of money in goods, thus balancing the economy through maintaining
balance between supply of money and its real economy and it was described above.
A proposed change of the financial system basing on renewed science and re-
definition of its assumptions with newly adopted paradigms of its functioning must
be supported by universal economic education. The education which will allow so-
cieties to make rational choices in compliance with their business not the business of
markets and financial elites. Economically-educated societies will have opportunity
to choose between the old and the appearing new economic and financial system.

11
I. Litwin, Autonomiczne i prospołeczne systemy finansowe w warunkach kryzysu, Konferencja
Naukowa WSZ-SW i KRS (in print).
52 Gospodarka regionalna i międzynarodowa

Paying special attention to notions connected with social and economic problems,
focus on fairness and balance of financial systems, i.e. basic assumptions of properly
working global economic system should be one of priorities in the system of univer-
sal economic education.

Final remarks

The development of economics caused that the theory of money belongs to its
best developed fields and it is one of the fastest growing fields of knowledge. New
derivative instruments of money give more and more sophisticated and complicated
opportunities of its creation. It causes that there are two spheres, real and finan-
cial, in the current economic reality. The real one is connected with real material
products and services related to them, whereas the financial sphere refers mainly to
transactions with money or its derivatives constituting subject matters. In practice,
it causes detachment of money from the real economy and more common negative
consequences for economy which are described in this article. Therefore, it seems
necessary to indicate those unbeneficial tendencies and take measures which are to
increase their effects and, in a longer term, target at their elimination. The recom-
mendations of the changes of the role of money which result from this study are an
attempt of such actions.
The proposed changes refer to three aspects:
1. Eliminating political dysfunctionality connected with the breach of the fi-
nancial and economic order by a state.
2. Changes on financial markets through new paradigms for functioning of
money worked out by science:
–– Paradigm 1 – negation of money as goods and a new redefinition of the
role of money,
–– Paradigm 2 – money covered in goods, as a result balance of economy
through maintaining balance between the supply of money and the real
economy.
3. Universal economic education of societies.
 Waldemar Gajda 53
The Role of Money in the Contemporary Economy

The recommendations presented above (conclusions) concerning the necessity

of making changes in functioning of money in its broad sense in the modern econ-
omy are neither a remedy nor ready-to-use solution, but the collection of desiderata
for economics as proposal and attempt to rise discussion.

References

Adamczyk M., Współczesny kryzys finansowy – przyczyny i konsekwencje dla gospodarki

światowej, Prace i Materiały IHZ Uniwersytetu Gdańskiego, Gdańsk 2012.
Bojarski W., Autonomiczne i prospołeczne systemy finansowe w warunkach kryzysu, Konfe-
rencja Naukowa WSZ-SW i KRS (in print).
Braun H.J., The German Economy in the Twentieth Century, Taylor & Francis, Hamburg
2010.
http://finanse.wp.pl/gid,16748992,kat,36874,page,12,title,Najbardziej-zadluzone-kraje-na
-swiecie,galeria.html.
Forbes, 85 najbogatszych ma tyle pieniędzy co połowa świata, www.forbes.pl/85-najbo-
gatszych-ma-tyle-pieniedzy-co-polowa-swiata,artykuly,169784,1,1.html.
Gajda W., Współczesny kryzys gospodarczy. Geneza, przebieg i jego wpływ na podstawo-
we wskaźniki makroekonomiczne oraz koniunkturę polskiej gospodarki, in: Ekonomia
w ujęciu globalnym, regionalnym i lokalnym, eds. A. Krzysztofek, A. Przybyłka, AT
Wydawnictwo, Kraków 2014.
Gruszewski T., Teoria pieniądza i polityka pieniężna. Rys historyczny i praktyka gospodar-
cza, Oficyna Ekonomiczna, Oddział Polskich Wydawnictw Profesjonalnych Sp. z o.o.
Kraków 2014.
Kołodko G., Świat na wyciągnięcie myśli, Prószyński i S-ka, Warszawa 2010.
Litwin I., Autonomiczne i prospołeczne systemy finansowe w warunkach kryzysu, Konferen-
cja Naukowa WSZ-SW i KRS (in print).
Mączyńska E., Ład gospodarczy. Pochwała ordo, www.pte.pl/pliki/2/12/16_maczynska.pdf.
Simons H., 33 sposoby na kryzys gospodarczy. Natychmiastowe rozwiązania dla twojej firmy,
Difin, Warszawa 2009.
Sickler M., Władcy pieniądza, www.michaeljournal.org/WLADCYPIENIADZA.htm.
54 Gospodarka regionalna i międzynarodowa

ROLA PIENIĄDZA WE WSPÓŁCZESNEJ GOSPODARCE

Streszczenie

Cel – celem artykułu jest ukazanie wybranych aspektów funkcjonowania i roli pienią-
dza we współczesnej gospodarce.
Metodologia badania – wykorzystano metodę analizy i metodę idiograficzną pozwa-
lającą na uzyskanie informacji ujawniających wyjątkowe, odrębne, niepowtarzalne, wyróż-
niające spośród innych cechy zjawiska, jakim jest funkcjonowanie pieniądza w gospodarce.
Wynik – przedstawiono rys historyczny wpływu i roli pieniądza w rozwoju i funkcjo-
nowaniu gospodarki i społeczeństwa. Na podstawie analizy wskazano cztery najważniej-
sze tendencje wpływające na negatywną ocenę roli pieniądza we współczesnej gospodarce:
generowanie kryzysów gospodarczych; rozwój instrumentów inżynierii finansowej służą-
cych spekulacjom; oderwanie pieniądza od realnej gospodarki oraz drastyczną nierówność
jego podziału. W końcowej części artykułu podjęto próbę określenia koniecznych zmian
w funkcjonowaniu i roli współczesnego pieniądza dla wyeliminowania tych negatywnych
tendencji.
Oryginalność/wartość – wyodrębnienie i ocena czterech najważniejszych negatyw-
nych tendencji w funkcjonowaniu współczesnego pieniądza. Propozycja rekomendacji
przeprowadzenia zmian ze wskazaniem na nowe paradygmaty funkcjonowania pieniądza
i sfer finansowych.
Tłumaczenie Agnieszka Skorupa-Domagała

Słowa kluczowe: analiza; pieniądz; współczesna gospodarka; paradygmaty

JEL codes: E42, E44, G01, G18, F38