Saturday, 2 April 2011

Money makes the world go round

Money makes the world go round

Money is the greatest economic invention of all time. Money did not exist and was not discovered. Money was invented over a long period of time.

Money is not perfectly stable in real value even though all historical cost accountants assume that when they implement the stable measuring unit assumption during low inflation and deflation. They assume, in principle, that money is perfectly stable all the time when they measure all balance sheet constant real value non-monetary items, e.g. issued share capital, retained earnings, capital reserves, all other items in shareholders´ equity, provisions, trade debtors , trade creditors, all non-monetary payables, all non-monetary receivables, all income statement items (excluding constant real value non-monetary items like salaries, wages, rentals, transport fees, etc. which they correctly inflation-adjust annually) at their historical costs when they implement financial capital maintenance in nominal monetary units (the Historical Cost Accounting model) during low inflation and deflation as authorized in IFRs in the Framework (1989), Par 104 (a).

Money is not the same as constant real value during inflation and deflation. Money only has a constant real value over time during sustainable zero annual inflation which has never been achieved in the past and is not likely soon to be achieved in the future.

Bank notes and coins are physical token instances of money. Money is a monetary item which is used as a monetary medium of exchange and serves at the same time as a monetary store of value and as the monetary unit of account for the accounting of economic activity in a country or a monetary union. All three basic economic items - monetary items, variable real value non-monetary items and constant real value non-monetary items - are valued in terms of money. The European Monetary Union uses the Euro as its monetary unit. The US Dollar is the monetary unit most widely traded internationally. The Rand Common Monetary Area which includes South Africa, Namibia, Swaziland and Lesotho employs the Rand as the common monetary unit or monetary unit.

An earlier form of money was commodity money; e.g. gold, silver and copper coins. Today money is generally fiat money created by government fiat or decree.

Money is a medium of exchange which is its main function. Without that function it can never be money. The historical development of money led it also to be used as a store of value and as the unit of measure to account the values of economic items.

Money is the only unit of measure that is not a stable value under all circumstances. Money is only perfectly stable in real value at zero per cent annual inflation. This has never been achieved over a sustainable period of time. All other units of measure are fundamentally stable units of measure, e.g. inch, centimetre, ounce, gram, kilogram, pound, etc.

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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