Political Economy Money and International Trade PDF

Political Economy Money and International Trade: Part One: Economics of Money 1 2  Chapter One: The Importance, Nature and Definition of Money 3  Chapter one: The Importance, Nature and Definition of...

Political Economy Money and International Trade: Part One: Economics of Money 1 2  Chapter One: The Importance, Nature and Definition of Money 3  Chapter one: The Importance, Nature and Definition of Money  Money:  First definition:  Money is anything having a customary of conventional use as a medium of exchange or a measure of value.  comments on this definition:  It doesn’t tell anything about the origin of money.  It only hints at the social nature of money as an instrument.  It defines money by some and not all of its functions.  It does not express openly, that money is related, historically.  Second definition:  Money is a social instrument, invented historically in relation to exchange economy, generally accepted in the society, to effectuate different functions that facilitate the exchange of commodities and services.  Comments on this definition:  Money is a social development.  It is related to certain stage; that of commodity production.  It created through a certain historical process.  Third definition:  Money is anything that is legally, generally acceptable by all the members of the society, and be able to function as a general standard of value, Medium of exchange, as a store of value, and a mean for settling deferred payments. 4   The importance:  Money is the most important economic instrument in modern economy.  It’s so difficult to imagine the existence of any economic activities without money.  All modern economics have become completely monetary ones.  The nature of money:  Economic life revolves around the production of goods and services.  Goods and services in a modern economic system has exchanged because no individual or a country could be economically self-sufficient in everything.  If people are not self-sufficient, so far as their economic needs are concerned, exchange becomes a necessary process.  People must obtain the goods which they do not themselves produce by offering exchange the commodities in the production of which they have been specialized.  This process of exchange is necessary in order to exchange goods for goods.  In real life however, people do not often do this. A producer exchanges his output not for goods but for money and when he obtains goods from other people he does it by offering money for them, not goods he has produced.  In other words, an extra stage is introduces into the process.  Instead of exchanging into goods for goods, a process which is called “Barter’s System”, people exchange their goods for money and then exchange the money for goods they want. 5  Barter’s system:  Definition:  It refers to the direct exchange of goods and services for other goods and services without the use of money.  When an Individual has particular foods and demands other goods or some of it, he should find someone else who have the goods that match his requirements.  There should be a double coincidence of wants since a dealing process would be implemented in one process.  The difficulties of barter’s system:  The difficulties of a double coincidence of wants;  Where everyone wants to exchange a good should find someone who wants what he has, and has what he wants.  This is impossible in modern societies with its diversity of wants and desires on one side, and the existence of thousands of exchanged goods and services on the other side.  The absence of a general measure of value for all goods and services in the process of exchange.  The difficulties results from the existence of many goods which are not possible to divide; in other words, it is so difficult to exchange large commodities (goods) for small ones, especially in the dealings related to animals and agricultural crops.  The absence of an effective means to be used in differed and future payments settlements.  The non-existence of agreeable and suitable means to store the value and wealth or a publicly accepted purchasing power.  To overcome these difficulties and advantages  Find a suitable and agreeable means which we can use as a medium of exchange, a standard of value and store of wealth and value. These means have been known as “money”, which developed in the different periods and take many kinds. 6  The development of money and its kinds:  Money which we all use today has developed over countries in the different periodical times. It has evolved from certain animals, stones, copper, iron, silver, gold, paper money, the credit money, electronic money “cards”, so we can present the kinds of money as:  Commodity money  The metallic money  Paper money  The deposit money or credit money  Electronic money We will briefly discuss the kinds of money as follows:  Commodity money:  It refers to the material or physical commodities whose value comes from a certain commodity out of which it is made.  It had to be something in common use that was considered to be valuable for its own sake, and therefore were generally accepted.  At different periods of time and in different parts of the world, many different commodities have serves as money such as “cattle, sheep, lather, fish, corn, salt…etc. Hence, the term of exchange were fixed by reference to one standard commodity.  Therefore, the most important function of money was to make purchasing process be separated from selling process and hence overcoming the difficulty of double coincidence of wants.  Thus, individuals can sell the surplus of certain goods for general purchasing power and use it to buy the desired good from anyone he wants to sell it.  But the commodity has its own disadvantages:  Lack of its durability, portability and divisibility…etc.  Therefore the tendency had towards specific commodity money, which is called precious metals. 7  The metallic money:  The ancient civilization like “Egypt, Greek,..” had used certain metals as money. Aristotle tells us Men agreed to employ in their dealings with others something which was useful and easily applicable to the purposes of life such as “Iron, silver and gold”  At first its value was measured by size and weight, but in process of time and to mark the value “coins”.  Metals were selected for their durability convenient size, ornamental qualities, easy handling, certainty, relative scarcity and relative value stability.  The value of the metallic money as a good “in non-monetary purposes” is the same as its value as a medium of exchange.  When gold was used as a money, the money supply could grow in either two ways:  First, it could grow through the increase of gold supply itself as result of new discoveries or imports,  Second, it would grow when the value of existing gold itself.  Paper money:  Historically, the paper money known two phases and two kinds as follows:  The representative paper money:  It’s fully backed by a commodity such as gold; money of this type represents the full-bodied money in existence. It was not money in itself; it was created as a result of increase of dealings and exchanges. This kind of money was paper receipts, certificates that attest to ownership of a commodity “gold and silver” held in safe keeping by a merchant or group of merchants.  This form of money “certificates” was circulated in many countries. They were used for settling many transactions and to be circulated from hand to hand. Gradually, paper receipts became banknotes and the deposits holders became bankers. 8   The legal paper money:  The government by virtue of law mandates the acceptance of paper money in transactions “medium of exchange, measure of value, unit of account and store of value” and to be used as a means of scaling debts and payment of taxes.  Therefore, legal paper money become acceptable by law, trusted from the government” not from the material, of which it is made”, and no one can refuse it “completely people’s confidence”.  The advantage of paper money:  It costs government less, use few resources comparison to metal money.  It is much lighter than metal money.  It is controllable to economy needs>  The deposit money or the credit money:  the paper money suffers from some difficulties such as:  They could be easily stolen or burn.  Sometimes it may be difficult to transfer especially in large amounts.  In addition, the economic, social, legal, technological and administrative developments have led to take another step forward towards the deposit “credit” money; this kind of money could be called checking accounts or current accounts.  Inventing and introducing checks was a major innovation, where it has many advantages:  Reduces the transportation costs of transferring paper money; it could be written for any amount “up to the balance in the account” and for different amounts suitable transactions.  But there are many defects for checking accounts “credit money” such as:  It takes time for a check to be sent from a place to another, and create problems for both parties. 9  Electronic Money:  Electronic money has become possible and essential with the economic, social development and with the development of information and communication technology on one side, and the emergence of electronic commerce or electronic transactions on the other.  Electronic payments has developed itself from using electronic means for settling transactions such as:  Credit cards  Debit cards  Stored value cards  Electronic checks  Digital money We will present the definition of each in brief:  Credit Cards:  It’s a plastic card issued by a bank up to certain balance agreed upon between the customer and his bank, on sum of money against some guarantees. So when the customer purchases an item, the vender can swipe the card through the card reader and the deal will be settled automatically by the bank by advancing a credit to its customer in his account to transfer to the seller.  Debit cards:  They look like credit cards, but they are issued against real deposits of customers; where transactions would be settled by withdrawing from their band accounts in the same way as in credit card. 10  Prepaid cards:  It’s similar to both credit and debit cards in size. It contains a real purchasing power which the customer has paid in advance, there cards are now multi-purpose that could be used for more than one purpose, or wide scale electronic “at bank counters via ATM or by telephones, or via personal computer. This previous means constitute what is so-called cads which typically allow consumers to use electronic means to access conventional payment; but they are not money in themselves.  Smart cards:  They refer to cards that contain their own computer chips. They could be loaded not only with money, but also with all the personal identity information related to the customer “owner”. They can be loaded from ATM machines, personal AI computers and by telephones.  Digital cards:  This type of money is called “digital cash-electronic, cyber cash, cyber currency”. It may require on-line third party payment to process transactions such as banks, or it may be designed do that value could be exchanged directly between venders “sellers” and purchasers “buyers”.  The requirements for electronic money to be entrusted and to attain widespread recognition and use are:  Transferability  Usability  System Monitoring  Security  Anonymity 11  Characteristics of money briefly:  General acceptability  Durability  Portability  Homogeneity  Disability and transferability  Scarcity and intrinsic value We can summarize the steps and kinds of money as follows:  Origin of money: is in exchange economy; in the circulation of commodities which is exchange real term “barter”.  From the difficulties of barter money emerges “The commodity money”  The tendency towards specific commodity money precious metals “silver, gold”.  To mint money we must regard:  The “purity, weigh, nominal and real value of coins.  State intervention to guarantee:  Weigh, purity, nominal and real value of coins.  Fiat metallic money should be accepted by the individual, with the coins. The currency takes a name and prices appear.  The paper money there is many reasons lead to paper money:  Capitalist production, rapid expansion of commodity exchange, the need for more money, and the scarcity of metals”.  The deposit money or the credit money the credit deposit current account. We have seen that the difficulties of paper money have led to the deposit money, which could be written by a bank.  Electronic money:  Because of the limits on the bank to bank create credit money, and the limits of check as the instrument of circulation. The transformation become towards the electronic money. 12  Chapter Two: Measures and Functions of Money 13  Functions of Money Before we introduce different functions of money, it is so important to know the assets that play the role of money and should be generally accepted for settling debts. They are called measures of money.  Measures of Money:  The change in the total supply of assets used as money affects important Economic variables such as money inflation, investment, employment, unemployment, interest rates and national income, etc.  Therefore, it is so important to measure the general accepted assets as money.  There are three measures of money which are well known:  M1, it consists of:  Currency, it includes banknotes “or notes” + coins.  Checking deposits accounts  Traveler’s checks This measure concentrates essentially on the function of money as a medium of exchange. It’s called the basic money supply. It parts are very highly liquid money  M2, it consists of:  M1  Time deposits  Saving deposits  Money markets deposit accounted and other deposits. The part of M2 is very liquid where it could be transferred into cash money quickly and at very little cost.  M3, It consists of:  M1  M2  Less liquid assets which includes long time deposits at all depository institutions and loan agreements presented by commercial banks and other financial organization, etc. 14 Finally, these measures are changeable from time to another and they may differ from one state to another. So, it is crucial “important” for the monetary authority to control all the generally accepted assets as money; in order to maintain the stability of economy, where money has a causal relationship with aggregate economic variables and activities.  Functions of Money:  It’s clear that many of the essential characteristics of a highly developed economic system which are:  Divisions of labor  Large scale production  In advance of demand with high levels of life  Wide spread of exchange “internal and external”  High degree of accumulation of capital “internal and external”  Advancement of technology All of these elements are completely linked with use of money. Indeed without money to Facilitate exchange, production, saving and investment, etc. it would be impossible for an economy to develop. Therefore, we have to repeat what we said before; it is so difficult to imagine the existence of economic activities without money. Thus, all modern economies become completely monetary ones. In general, we can summarize the main basic functions of money in the three following function:  Money as a measure of value.  Money as a medium of exchange.  Money as a store “stock” of value or wealth. From the basic functions of money, we could be derived two functions:  Money as a unit of account.  Money as means of payment, and means of credit. 15 Firstly, the basic function of money: money performs the following basic functions:  Money as a measure of value:  It’s the first basic function; it renders commodities and services comparable on the market; with the money as a measure of value; commodities and services starts to have prices. Money becomes as a standard of prices; as well as prices are always measured by monetary units.  Money serves as a unit in terms of which the relative values of different commodities can be expressed. It would be difficult to determine how many kilograms of orange were worth “equal” one kilogram of meat; or how many pens or books would be exchanged for a ton of cotton.  The process of establishing relative values would have to be undertaken for every act of exchange, according to whatever commodities were being offered against one another.  In other words, money is used to measure the value of goods and services in terms of monetary units. Thus, using money allows us to define the relative and comparable values of various goods and services. This mechanism applies also to international exchanges in monetary in monetary economics, though the foreign exchange rate.  Money as a medium of exchange:  The most important function, and vital role played by money in economic life, is that of a medium of exchange. It permits the separation of exchange into the two distinct acts of buying and selling, without requiring that the seller should purchase goods from person who buys his product, or vice versa. 16   Hence, producers are enabling to concentrate on finding the most suitable outlet for their foods and services. While buyers can concentrate on finding the cheapest market for the things they wish to purchase.  Specialization is encouraged because people whose output is not a commodity, but an intangible contribution manufacture of one in which many others are involves can be paid an amount of money equivalent to their share of product. Hence, they can use this money income to purchase whatever they wish.  This function leads to an improvement in quality since all products would be provided on markets, so the best in quality and the lowest in price would be highly demanded than others. It raises the standards of living and economic and social welfare.  Money as a store “stock” of value or wealth:  A third and related basic function of money is that of acting as a store of values or wealth. It is difficult to envisage saving occurring under a barter system. Clearly persons could not set aside some of their output to meet possible emergencies in the future. Nor could anyone stage in the production of a commodity save of his output, since he would be producing nothing tangible. Even when a person actually produced a complete commodity, he would be find many and great difficulties. Most commodities deteriorate rapidly either physically or in value, as a result of long storage. Even if storage were possible, the practice of storing commodities for years would involve obvious disadvantages. 17   Yet, if wealth cannot be set aside, or can be accumulated only with great difficulty, how can future contingencies be provided for, or capital formulation undertakes, so as to raise productivity?  The use of money disposes of these difficulties, instead of having to store physical commodities. A producer can set as aside sum of money which can be used in the future whatever purposes he chose.  Without money, debts could be incurred only in terms of specific commodities; also, without money the modern system of financing capital accumulation from funds derived from a large number of different people and institutions would be impossible.  In other words, money value represents “offer” the purchasing power which provides for a holder over all real goods and services. So holding and keeping money means in the meantime holding and keeping purchasing power that could be used at any period of time. Hence, money is a store purchasing power or a store of value and wealth.  There are many assets that could be served as a store of values and wealth such as:  The different kinds of deposits, bonds, foreign currencies, precious metals “gold”, stocks, lands, buildings, etc.  The liquidity of the assets is defined by these characteristics:  The degree of acceptance in society.  The possibility of forecasting its future value.  The cost of conversion to another asset. 18   In spite of some these assets offer against in the form of rent, profits, or dividends, they suffer from many defects “as we have seen before”. There assets at these above three levels: it is the most liquid of all assets.  Thus money is better than other assets in the terms of liquidity and convenience provided that money has a stable value. People especially those who have a good wealth tend to allocate it between money and the other kinds of assets depending on the nature of their work, profession, objectives, and attitudes in life. The main determinants in this regard would be the liquidity and profitability. Beside the basic functions, money performs other functions which are derived from the first. They are the following:  Money as a unit of account:  From the function of money a standard of value, money becomes a standard of piece. It could be also used as a unit of account in cases, where no exchange needs to be involved. For instance, recording accounts, dealings, liabilities, etc. in monetary terms without actual use of money.  Money as unit of account has achieved many advantages which are:  It makes dealings much easier, and hence it facilitates and maximizes trade, production, productivity and economies scale.  It allows different prices for different qualities for the same or similar goods and services.  It enables to evaluate the performance of projects over time.  It enables to future projects to be compared and thus enables better allocation resources. 19   It enables to recording and measuring the major economic variables such as:  General level prices, inflation, national income, aggregate investment, total consumption, etc.  It enables to measure the performance of the economy on the internal and external scale.  It reduces information and transaction costs of exchange.  Money as means of payment:  Transactions and contracts could be done and realized in terms of money, but liabilities and debts must be settled in the future-dealing in the exchange market.  When we use money to meet and settle the future transactions, besides using it to fulfill the contractual dealings and to settle the different kinds of debts. Hence, money acts or performs as a mean of deferred payment, where some of dealings cannot be settled at once. New dealings have emerged such as transactions in stock exchange and future dealings. Thus money serves in this way, to motivate aggregate demand and hence production.  We can add to these derived functions of money; money as means of saving, when money serves as a medium of exchange, it is called quays-money “near money”. 20  Chapter three: Monetary System And Monetary Rules 21  Chapter three: The Monetary System and the Monetary Rules  the definition of the monetary System:  The monetary system in a country is all types of money in circulation, the monetary unit “the prevailing currency”, as well as, the monetary institutions and authorities that work in the monetary fields with the dominant monetary rules. Furthermore, the relationships between institutions, individuals and national income units through the monetary policy set by the state in its relations with the economic policy.  It is needless to say that the monetary system in each country is based on objective rules, which is called the monetary rules; and of course in the existing money system.  In general, the monetary rule determines the basis in which money in circulation for a country relies on. In the previous chapters, we have discussed the types and function of money, and we will discuss in the following chapters the money value, the monetary policy, and the monetary institutions. So in this chapter we will briefly focus on the study and analysis of monetary rules as follows:  The definition of the monetary rule.  The importance of the monetary rule.  The types of the monetary rules. 22  The definition of monetary rules:  The monetary rules is the basic foundations that money in circulation in the economy depends on; and the monetary rule is the basis and the value that equals the monetary unit through money issuing, and the relations between its kinds and the connection between such currency and the external various types of currencies.  Thus, it is regarded as the last measure that is taken by the individuals of society as means of account for the economic values in order to compare them with each other.  The importance of the monetary rule:  the monetary rules can be shown as the following:  It’s the fundamental of performing the money for its functions efficiently, as it determines the amount of the money in circulation. In the presence of a money rule, the kinds, the functions and the amount of money issued, as well as the institutions, the rules and regulations are specified. So, on the contrary, in the absence of appropriate control over the monetary rules or the monetary system as a whole, there will be deterioration in the money function as a standard of value, as an instrument for future payment and as a store of value, as well as, the impact on its function as an intermediary for the swap.  The effective control on the amount of money in circulation can be achieved through a set of particular monetary rules to create money, the function of the monetary system, the framework of the monetary institutions and the monetary policy pursed.  The monetary rule unifies and consolidates the money units in a country and achieves coherence among the types of money in circulation. 23   The monetary rule is considered as a measure to administrate the changes in the value of the money unit when it becomes high or low and then it controls the purchasing the power of money.  The monetary rule is regarded as the base of making external exchanges, transferring currencies among countries, payment settlements and the continuation of the international trade movements through the stability of exchange rate “that achieved by the gold standard”.  The monetary rule plays a vital role through its controlling the monetary supply achieving economic rule performance is considered to be the standard that judges the validity of the monetary system. Types of the monetary rules: There are two types of the monetary rules which include metal rule and paper rules. The metal rules also are divided into two types. A single-metal rule and a bimetallism rule.  A single metal rule:  In a single metal rule, the legal money in a country is joined with a single metal “gold, silver”, and this could happen either by making money into it easily. Thus, the value of the money according to this rule depends on the value of the metal that may be gold or silver.  According to the gold metal rule, it consisted of four types which prevailed historically and actually, they are:  Gold-coin rule.  Gold-bullion rule.  Gold-foreign remittance rule.  Gold-equivalence-rule. 24  According to this rule, the legislator creates a consistent relationship between the value of the currency and the value of a certain weigh of metal which is taken as a metal rule in the state. Thus, if the economic value of money is linked with the economic value of gold and it becomes a base of the money in circulation or the monetary unit is from gold, we are here in the area of the gold rule. But if this metal is silver, we become in the area of silver rule as a rule or a base for the money.  Forms of gold standard:  Gold standard has four images:  Coins  Bullions  Foreign-gold remittance  Gold exchange  The advantages and disadvantages of gold standard:  Following the gold standard rule has achieved some goals at local and international level:  At the local level, the gold standard rule controls the volume of the currency inside the state, though the currency laws which required a coverage of any currency issuing by using gold reserved which leads to limiting the central bank’s ability to issue the currency and thus, controlling the money supply. However, this offer will be eventually increased through importing gold and decreased as a result of exporting gold.  At the international level, the country that follows the gold standard rule undertakes to buy and sell gold to settle its international payments in unlimited quantities but at fixed prices. This is necessary to maintain the stability of the external value of the currency. This means the essence of the international fold standard rule is the changing of the currency into gold freely.  As a result of using the international or local gold standard, some advantages have achieved. But at the same time, the actual practice has led to the existence of multiple defects. 25  First the advantages of the gold standard rule:  The availability of confidence in the monetary system because gold is high value commodity and desirable; also, the other money can be converted into gold.  The automation of the monetary system and this is due to the fact that the money supply tends to expand and contract depending on the available quantities of gold reserved; so the government or the central bank is in no need to have a tight control on the monetary system as it works automatically.  The stability of the price level which means the maintaining on a reasonable degree of stability in price level during long period in comparing with any other rule.  The gold performance as a medium of exchange and as a standard of value in the international level leads to the availability of a kind of money that exceeds the international levels, enables to make an accurate comparison between the values of goods owned by different countries and expands the international trade and the settlement of payment.  Exchange rate stability which is regarded as one of the most important advantages of the international gold standard as the currency of each state and the expression of it, is measured by gold and it includes the same time stabilizing the exchange rate of the gold.  The equivalent of the price level could happen between the stated that are subjected to the gold standard. Thus, this enables the contribution of all countries in the international trade and at the same time, the amendments can be made between the prices level different countries through the so called “the theory of the gold movements”. 26  Second: The disadvantages of the gold standard:  The fast loss of confidence of the monetary system especially in the unusual and unrest circumstances while such confidence increased in the normal conditions.  Non spontaneous operating: as the idea of spontaneous is non-accepted in the performance of any economic or monetary system and the administrative interference must be done through a specific policy that has a goal and ways. However, the negative implications of the spontaneous are more than the positive ones.  Instability in prices: as the balance of gold in a state is in a permanent change and also, the supply and demand factors lead to change in gold prices. As a result, all these reflect in the domestic prices which become unstable.  The stability in the exchange rate can be achieved on the expense of the stability of domestic piece level that is subjected to wide fluctuation.  Inappropriate effects of the gold international movements lead to the transfer of economic crises than can achieve in a particular country to other countries. Of course, the last ones cannot protect themselves from these crises. The previous defects, the inflexibility of the gold standard rule as well as the most political and economic events led to the evolution of gold standard rule and its collapse. Before the First World War, the gold standard has worked efficiently. However with the beginning of this war, many countries have come out of such rule to avoid the continuing of the shortfall in the balance of payment and then getting out of the gold standard rule. 27 Later, there have been attempts done by many countries to return to the gold standard after the war, precisely after 1928, but the great depression that happened in 1929-1932, destroyed these attempts. In 1937, there was no country to follow the gold rule, and the reason of this collapse was due to the following:  Putting obstacles in front of the foreign trade and adopting protection policy after the World War1 then, the gold began to lose its importance as a medium of exchange and as a standard of value on the international level.  Poor distribution of the gold: as many countries lost a part of their gold reserves as well as the irregular movements of the gold supply and demand contributed in the collapse.  Price rigidity: Achieving the exchange rate stability was on the expanse of domestic prices as there weren’t any flexibility in domestic prices which contributed in the collapse of the gold standard rule.  Increasing the international dept. during the war that forced the debtor countries to export gold and this led to the disruption of the gold rule.  Using the remittance of foreign gold, holding a share of gold reserves by many countries that follow the gold standard as well as, the withdrawal of large parts as result of unusual circumstances led to the collapse of the gold rule.  Political instability in many countries and its effect on the stability of the monetary system, the money movements, and then the gold movements led also the collapse of the gold rule. 28  The bimetallism rule:  It is the rule in which two kinds of metals are used. That means the legal money in circulation for a country is joined either two types of metal “gold and silver”. According to this system, the monetary unit is selected in both of gold and silver units and the monetary value of both metals.  The double metal rule means the existence of a double money base as the money value is joined in a fixed relation with the value of both silver coins have an unlimited absolute discharge and bend power. This could happen by achieving the following conditions:  Determining the metal weight that equals the currency unit in both metals which lead to a fixed percentage between them as well as the ensuring the freedom of the metal convertibility of metals according to this ratio.  Recognizing of coins that are made from both metals by unlimited discharge power of debits.  Launching the individuals’ freedom to convert any of the alloy metals to coins and vice versa, provided that this conversion must be identical to the legal proportion considered by the law to balance between them. In 1834, Egypt adopted the bimetallism rule when Mohammed Ali made the monetary unit that consists of a riyal of gold and a riyal of silver and he selected the legal weigh percentage: 1:15/52 between them, with the recognition of the unlimited discharge power in fulfillment to both of them. 29  The advantages of the bimetallism:  Not decreasing the material that money is made of, and thus overcoming the problems resulting from the gold.  Strengthening the stability of price level as a result of depending on two metals and not a single one in the case of the money supply provision.  The appropriating of the currencies: as the silver coins can be used in the settlement of small transactions, while gold coins can be used in the settlements of the big ones.  The stability of the exchange rate; the use of the bimetals helps to recover the lack of gold problems, and thus it helps to stabilize the exchange rate.  The disadvantages and the collapse of the bimetallism:  Throughout the monetary history, the practical application has shown that the bimetallism rule has been applied only in very specific periods when the legal ratio, imposed by the legislator for gold and silver value was equal to the commercial value in the global market as a commodity.  This led to the collapse of the mentioned system and the monetary system and the monetary system was based on only a single metal in most periods. Thus, the metal evaluated by law in the global market with less than its value, has disappeared.  The increasing in silver production at a faster rate than the increasing in gold production, has led to change silver into a bad currency, while gold has become a good currency and then, it began to disappear in circulation according to “Gresham’s law, bad currency expels good currency” 30   Consequently, bad currency is evaluated as a monetary unit, by the legislator, more than its value as a commodity in the global market. However, the good currency is evaluated legally as money, with less than its commercial value as a commodity in the global market.  It’s important to mention that Gresham’s law is a general law in its application. So, it is not applied on gold and silver, but it is also applied on metal and paper money if the paper money loses its value as a result of an excessive release.  Concerning the monetary paper-rule:  The paper money is the basic one without a link to any metal and it is made of paper.  Furthermore, the monetary authorities determine its appropriate value and the quantities that are issued. Such money has unlimited discharge and it represents the legal, Prevailing and now, all countries lf the world walk on the paper money rule. 31  Chapter four: The Historical Development of the Monetary System in the Capitalist Economy 32  Chapter four: The Historical Development of the Monetary System in the Capitalist Economy We will limit ourselves to the capitalist economy from the beginning of the 19th century up till now. The monetary standard changes its form with the qualitative transformation of the capitalist economy.  The stages of development of the monetary system:  We can distinct between four stages of development of the world monetary system “capitalist”, which are the following:  From the beginning of the 19th century till the First World War.  From the First World War and until the Second World War, or the period between the two wars “1918-1944”.  The period from the post after the Second World War until 1972 “the ancient system of international monetary fund”.  The main characteristics of the two stages “1944-1975,1979-2009” are:  At the level of taking in consideration the following:  Condition of production of the surplus.  Condition of realization of the surplus “commercialization”.  Conditions of monetary circulation.   The historical forms of gold standard are:  Gold coin standard.  Gold bullion standard.  Gold exchange standard. 33  The transition from the gold standard to the paper standard which contains the following changes:  The Dollar-Gold exchange standard which began after the end of the Second World War 1944 through the Breton woods agreements and establishments of the international monetary fund.  The free exchange or the market exchange and the different systems of exchange from 1976 up till now.  The international liquidity through the financial, monetary, and economic World Crisis.  The type of capitalist enterprise and form of the market:  The competitive or monopolist struggle.  The rhythm of technical innovation and the increase of the productivity of labor.  The tendency of value to decline, with the still domination of competition, the long-run tendency of declining prices.  The possibilities of commercialization: the extension of the internal national market and the possibility of controlling further external market through the process of colonialisation in a world which was not yet wholly dominated by the western capitalist countries.  The degree and type of organization of the working class, with its effect on the possible.  The monetary situation: especially the possibility of the expansion in the production of gold and silver with the rapid expansion commodity production.  In the international economy, the strength of each economy and hence the strength of its currency:  It is measured by the relative level of level of labor productivity in the national economy “relative in the sense of its level in relation it the levels of labor productivity in other national economies”. 34   It depends on the availability of an industrial basis for the whole national economic activity, and level of scientific and technological development.  The relative of labor productivity determines:  The role of the national economy in the international trade, and hence the degree of benefiting from the world market.  The role of national capital in international investment  The relative level of development “in relation to the other national economies” and hence, the type of participation in the international division of labor and consequently, the mode of distribution of the gains from the international trade and the international investment We can present the monetary capitalist system overtime, or the historical development of the monetary capitalist system through a schematic presentation in the following stages:  First the period from 1800 to the first World War:  From 1818 to 1821:  Britain officially depends on the gold standard which is clear from:  Purchasing power of the currency unit equals the value of the gold weight in it.  Free international trade in gold.  The state is ready to buy and sell gold at a certain price.  Beside gold coins there is circulation of paper money.  There are 59 states depending on gold standard.  Internal and international transactions in the metropolitan economy ate settled by gold coins “gold standard takes the form of gold coins standard”.  In the dependent economies “colonies” which depend on the gold standard “local currency; gold coins +paper money” to settle the international transactions. But the external transactions were settled in the basis of the sterling pound “the gold exchange standard”. 35  1914-Sterling hegemony “domination of British Candid”:  The rush to the banks to withdraw gold  The imposition of compulsory course for paper  The getting out of gold standard  Second the period from the First World War “1914-1918’ to the Second World War “1039-1945”:  The great events in this period were:  International economic monetary disorder  The great depression “1929-1933”  The rise of Dollar $  The reconsideration of the pattern of control over the world market at the end of the Second World War.  The monetary developments in this period were:  The ware changes the relative economic position of the advanced capitalist countries, and hence the relation importance of their currencies “a real economy factor”.  Qualitative changes the pattern of indebtness:  USA and Japan became creditors while Britain, France and Germany became debtors.  Hence, the pattern of demand for their currencies propensity to get rid of the feeble money to obtain the strong money “a monetary factor”, and these make disturbance of the financial market with strong tendency towards speculation.  Inefficiency of the stock of gold available in the international economy “a real economy transactions and the rapid expansion in the volume of economic transactions and the need for additional quantities of money “a monetary factors”.  Disequilibrium in the real distribution of gold among the strongest countries, the USA holding the biggest part “a monetary factor”. 36  The evolutions in this period were the following:  1912, Britain backs to the standard.  1922, Geneva international agreement returns to the gold standard “re-back to the gold standard in another form which was bullion gold standard.  Internal transactions were settled by paper money with a compulsory course.  International transaction was settled with gold in the form of bars.  Defense of exporting gold below a certain value.  The undertaking of US government to buy and sell gold at a fixed price “35 Dollar for the ounce”.  A special status within the bullion gold standard paving the road for the hegemony of the USA dollar.  1935, Britain got out the gold standard to the paper standard.  Second World War “1939-1944”, reconsidering the pattern of control over the world market.  Third the period from “1944 to 1999”:  The world monetary system “capitalist had known very important changes in the period which were:  1944-1968/1972:  The Briton wood’s system agreement 1944, this agreement had established the international monetary fund to control the world monetary system through the following rules:  The international monetary system by the IMF adopted the Dollar exchange standard through one American Dollar equals 35 dollars.  The rates of exchange of other currencies in the whole world are fixed in dollar according to the previous relation “the system of fixed rates of exchange”  It allowed a period of stability of exchange rates of currencies and that led to:  Encouraging international trade.  The reconstruction of the Western European countries.  Prompting growth in advanced capitalist countries. 37   Establishment of international economic organizations which were dealing with the states:  The international monetary fund “IMF” presented short-run credits.  The international Bank for Reconstruction and development “IBRD or WB World Bank” presented long- turn credits.  1968, the beginning of crisis of the capitalist economy:  The USA economy became Dollar became the strongest “the most hegemony”.  1971/1972-1999:  This period had known vital and structural changes in the monetary system which was in the following:  This Crisis of the Breton Woods’ system “the international monetary disorder”  The structural crisis of the capitalist economy which its monetary manifestation were  The stage inflation and the crisis of the state’s economic policy.  The US dollar crisis and the rush for having the gold/  The US government nullifies “stopped” its undertaking to sell gold for dollars at a fixed price “ounce of gold= 35$”.  The result was the collapse of Breton Wood’s system, and its monetary manifestations were:  Floating of all currencies  Instability of foreign exchange rates  Speculation becomes the dominate rule  The struggle for the reconsideration of the pattern of hegemony “of capital and currency”  The paper standard becomes the dominant rule.  The formation of new economic blocs “regional integration” and new monetary systems within the blocs. 38   Within the crisis, the emergence of the new system of the International Monetary Fund floating system of all currencies, complete free determination of foreign exchange rate, existence of European currency “Euro beside USA dollar and other hard currencies.  Within the crisis, the emergence of the world trade organization “WTO”  From 1999 up till now:  This period reflects the present daily life and which actually knows many kinds of changes:  The complete domination globalization.  The militarization “especially by American capital” of the international relations.  The economic relations included the transitional corporations as major international agents backed by their states.  The imposition of the free market on the stated “especially in the underdeveloped economics” and hence the imposition of a free market and their currencies “floated currencies” despite the feebleness of their economies.  The emergence of the Euro to replace the European national currencies “13 currencies in the beginning and 24 currencies later on”  The economic power relations between the US dollar, the European Union Euro, the Japanese Yen and China through the monetary and through their struggle.  At last, the most important events in out nowadays “from the med of 2008” are the emergence of the international financial economic crisis and its great effects over the whole world, and hence, it defects on the international monetary system. 39  Chapter Five: The Historical Development of the Monetary and Banking System in Egypt 40  Chapter five The Historical Development of the Monetary and Banking System in Egypt. The historical development of the monetary system and banking in Egypt is regarded as a reflection of development in the Egyptian economy either at the period of dependency and colonialism or at the period of the Egyptianization and nationalization or at the period of the openness or at the period of the economic reform. We will shade the light upon these periods briefly: First: Dealing with the monetary system:  Mohammed Ali tried to establish an independent economy in Egypt, and then he worked on reforming the monetary system in 1834. After that, he tried to strengthen the Egyptian currencies “the Riyal and the Golden Pound”, but these attempts didn't achieve any sufficient success.  The National Bank of Egypt was established on 25 of June, 1898 with English capital in a form of a joint- stock company with a million pound capital, stated in Cairo. The bank was granted the monopolization and privilege of issuing of banknotes. Thus, we are here in front of the first issuing of paper money in Egypt, but at a fair price with the pound Sterling “GBP-97.5 Egyptian pound” without the need to move gold from England to Egypt, and then installing the exchange rate between the two currencies, and so, the dependency between them had been strengthened. Such dependency deepened when Egypt entered into the sterling area in 1916.  As for the banking system which is regarded as the most important financial institutions, it has been developed, associated and expanded with the evolution of money especially paper and credit ones. 41  Monetary system from 1916 till 1947 “the Sterling exchange rate”:  During this period, the Egyptian monetary system had seen a complete link between the Egyptian pound and the Sterling pound, and then the sterling, exchange dominated. In other precise words, Egypt entered the sterling area. Thus, the relations of dependency and controlling had been deepened and using the monetary system to achieve such goal.  Using the English treasury bills in the National Bank for issuing securities and automatic transferring to the Sterling pound, also as a result of the surplus achieved for Egypt in its relationship with England as the total volume of credits to Egypt as a debt on England was about 450 million Sterling pound which represented 25% of the Egyptian national income in 1946. Also, as a result of assets' accumulation for the Bank of England, all these previous facts led to inflation, rising prices and transferring the surplus fund to England while the structural imbalances have increased and the Egyptian economy was suffering from retardation with all its social, economic and political dimensions.  Getting out of the Sterling area:  As a result of the frozen Sterling assets' problems at the bank of England, Egypt signed an agreement with England in 30/6/1947 which included a permanent getting out of the sterling area for Egypt from 15/7/1947. Also, Egypt held many conventions frozen assets and the last one held in 1959.  Egypt joined the International Monetary Fund “Breton Woods Agreement” where fixed value has been determined to its currency “the Egyptian pound” with gold and the American dollar. At the same time, the Egyptian pound was equal 4.133$ as its weight of pure gold which was equal 3.6728 grams. 42  As for 1957, the Egyptian government has imposed a controlling policy on foreign exchange, Egyptianizing and nationalizing all banks. Then, the Law No. 20 of 1976 has been issued specially for the Central Bank, by which such bank has the full authority in managing the banking and monetary policy.  The Law No.97 of 1976 was issued to organize handling the foreign exchange and the banking system was granted flexibility to work in internal and financial markets.  At last, act No.88 of 2003 has been issued and it was called the Law of the Central Bank, the Banking Sector and Money, in June, 2003. The law has led to a lot of changes in both banking and monetary policy. The most important changes were the wide- ranging of the central bank's authorities, the entire control of all the matters related to the banking and monetary policies, and their implications for economic and financial aspects in the Egyptian economy as a whole. Second regarding to the banking System: The banking system witnessed many developments in various stages; we will refer to the most important ones briefly as follows:  The first phase was from 1850 to 1956:  This phase witnessed the spread of foreign banks and its control Then, in 1898 the national bank of Egypt was established as commercial bank with a privilege it issue banknotes and to deal with banking operations for the government. As we have seen, has been established as a branch of the bank of England as an instrument to increase the dependency to the English economy. 43   This phase has also seen the establishment of the first Egyptian bank “Bank Misr” by the leading economist "Mohammed Talat Harb" in May, 1920. He created a range of industrial, commercial, financial and even technical companies “Studio Misr”. Such companies were needed to develop the economic activity.  The Second Phase:  The Egyptianization, the nationalization, the integration and the specialization, This stage includes:  Egyptianizing Banks and organizing credits, in 1957, by Law No.22 of 1957.  Nationalizing banks “1960-1961” by Law No.39-40 of 1960, and Law No.117 of 1961; then the entire banking system under the control of the state in terms of ownership, management and supervision.  The merging between banks:  After the banks were counted by 32 in December 1958, they became only commercial banks in October 1963, these banks are: The National Bank, Bank Misr, Bank of Alexandria, Bank of Cairo and Bank of Port Said. Also, the specialized banks were incorporated.  From the first of July 1973, there was a new specialty of banks on the basis of the sectors of the main economic activities. 44  The third Phase:  Stage of economic openness 1974-1987:  This stage was characterized by a fundamental shift in the Egyptian economic policy. It represents the adopting of the economic openness policy which means opening the door to foreign capital and following gradual steps to reduce the state role and giving the private sector a bigger role. This stage is characterized by the following:  The issuing of law 43 of 1974 which concerns the investment of the Arab and foreign capital and the free zones which was the beginning a new era of the national economy and hence, the Egyptian banking system. Then this law passed investing Arabic and foreign money in investment banks and business banks. Also, this law allowed Arabic and foreign investments according to the banks that their activities are restricted to the operations using free currencies if they are branches for institutions that have main centers abroad. It also authorized investing Arab and foreign capital in establishing banks which conduct operations in local currency if this investment was in a form of joint ventures with a capital owned by the Egyptian in a rate of no less than 51%.  The Law No.120 of 1975 was issued especially for the central bank. Through this law the central bank has the full authority to administrate and lead the monetary and banking policy, and considering the central bank as a legal, public and independent personality.  The Law No. 97 of 1976 was issued to arrange the trading with foreign currency, and offering the baking system, the ability to deal in foreign and local functional markets.  The Law No.50 of 1984 was issued to modify some of banking law provisions and credits. This law granted the Ministry of Economy more specialties in dealing with commercial banks. 45  The fourth phase:  The last developments in the banking system in light of the Economic Reform  It includes the developments that happened in the banking system from 1987 and up till now. During this period, Egypt has followed a group of economic policies that is called The Economic Reform Program. Such policies have been agreed upon with the International Economic Fund and the International Bank for Reconstruction and development.  The Economic Reform axes contain:  Liberalizing prices' system and cancelling gradually the support, and making free prices and in parallel with the world prices.  Reforming the monetary system and determining the exchange rate of the Egyptian pound according the force of the market and its unification.  Reforming the financial and taxation system by limiting the budget deficit and increasing the public revenues.  Privatization and selling the public sectors according to the Law No. 203 of 1991.  Liberalizing the foreign trade and joining to the World Trade Organization from the date of the first of January, 1995.  According to the banking sector: liberalizing interest rate and giving each bank the free to determine its interest rate with the guidance of the Central Bank discounting rate. 46   Taking a lot of procedures that aim at supporting the banking system. The most important procedures are:  Forcing the organized banks for the Central Bank to reach the standard of the capital efficiency and which means that the main and supported capital must not be less than 8% of its assets in accordance with the decisions of Basil.  Issuing the law No.105 of 1991, concerning with the secret of the bank's accounts.  Issuing the Law No. 37 of 1992, concerning the amendment of the banks, credit and the Central Bank law. The characteristics of such law are so clear in the tight control of the central bank, performing banks' merge operation, the authorized capital for the bank must be not less than a hundred million pounds, and the authorized capital for the branches of the foreign bank must not be less than $15 million.  The law approved establishing an insurance fund for the deposits of the banks which work in Egypt and recognized by the Central Bank. This law applies for the Egyptian pound and foreign currency deposits. Its main aim is to prevent the insolvency of any bank in Egypt and ensure the individuals deposits and increasing the trustfulness of the banking system.  The entire liberalization of the Egyptian pound exchange rated from the beginning of March 2003, by the Prime Minister's administrative decision. As a result, the Egyptian pound fell twice and the dollar rose from 3.4 pounds in March 200 to 6.4 pounds in the middle and at the end of the same year and now it is about 5.5 pounds for the dollar. 47   Issuing the Law No. 88 of 2003, it is the law of the Central Bank, the Banking Sector and Money which was issued on 15 June, 2003. In fact, this law has a great role in increasing the effectiveness of the Banking System and greater role for the central bank in controlling both the credit and monetary policies. This law was amended by law No. 162 of the year 2004 and law No. 93 of the year 2005.  Last, the direction to enlarging the circle of privatization to include all public sector banks. Eventually, the Bank of Alexandria was sold in 2007. Also, it was decided the sale of the Bank of Cairo but the Global Financial Crisis which began in the middle of 2008 as well as the increasing opposition prevented such trend. 48