Wednesday, 24 August 2011



Money makes the world go round

John Kander, Fred Ebb

Money is the greatest economic invention to date. 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 during inflation and deflation. However, all historical cost accounting world–wide is done assuming it is stable in real value when the stable measuring unit assumption is implemented for the valuation of most – not all – constant items during low inflation and deflation. It is assumed, in principle, that money is perfectly stable when balance sheet constant items and all income statement items (excluding constant items like salaries, wages, rentals, transport fees, etc. which are measured in units of constant purchasing power on an annual basis) are valued in nominal monetary units when financial capital maintenance in nominal monetary units is implemented during low inflation and deflation as authorized in IFRs in the original 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 zero annual inflation which has never been achieved on a sustainable basis in the past and is not likely soon to be achieved in the future.

Bank notes and coins are physical tokens 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, variable and constant items – are valued in terms of money within an economy.

An earlier form of money was commodity money; e.g. gold, silver and copper coins. Today money is 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 on a sustainable basis. All other units of measure are fundamentally stable units of measure, e.g. inch, centimetre, ounce, gram, kilogram, pound, etc.

Nicolaas Smith

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

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