Does The State Have A Right To Control The Supply Of Money?

The objective necessity of the economic relations’ development between the state and business entities is money. The essence of money is the economic category. In economic literature, money is defined as a special commodity that is spontaneously released from the world of commodities. Money serves as a universal equivalent and is, figuratively speaking, a crystallization of the exchange value.

Money is a conventional means of payment, which can be exchanged for goods and services and is used to pay debts. Money represents one of the two major categories of any commodity economy. Money is known to be a special commodity that presents the universal equivalent form of value of all other commodities.

The numerous studies have shown that money is a special commodity, which is the only universal equivalent within a particular country. By definition, money is the absolutely liquid asset. It should be noted that money came as a result of economic relations in the economic life of people. Thus, the appearance of money is absolutely objective. The essence of money can be viewed from two sides: material, as an expression of the values, ​​and immaterial, as a requirement to change forms according to the level of trade relations for the effective functioning of the economy. Thus, the question of what the role of the state is in issues that regard to money and its supply determines the necessity in investigation of the question of whether the state has a right to control the supply of money. As a consequence, the purpose of this paper is to investigate this question and apply a theory, which is illustrated by a particular example in order to prove the answer. In order to analyze the question and consider it from the theoretical point of view, it is necessary to apply the Karl Polani’s theory.

Theory

All the K. Polani’s works can be divided into three main research units. The first one encompasses the analysis of capitalist society of the 19^th century: the genesis of the self-regulating market system; mechanisms of functioning of the system; socio-economic consequences of the establishment of this system; possible forms of its transformation. This issue is devoted to the main job of K. Polani, The Great Transformation (1944).

The second block is represented by the economic and anthropological studies by Karl Polani. This is an analysis of the socio-economic structure of the pre-industrial societies such as the Ancient Greece, Mesopotamia, Dahomey  till the 18^th century), and existing in the world today. K. Polani explores the primitive forms of exchange, forms of pre-industrial markets, and the money that is used in these societies.

The third direction in the artistic heritage can be identified as the K. Polani’s study of the classics of economic science from Aristotle to the late 19^th century economists. In all his works, regardless of the subject matter and scope, the American economist develops his main thesis that the market is uncontrolled; the self-regulating system is not the result of the natural development of human society. In addition, it is based on a broad historical and anthropological material, which shows that the self-regulating market system was a deviation in human development. By this, the author proves the thesis of unnatural and even dangerous aspects of such an economy for humanity, and the impossibility of the long existence of a society where the economic base is a self-regulating market system.

The relevance of the Karl Polani’s work’s research is determined by, first, the significance of his contribution to economic science and, second, by the possibility of the use discovered by him in the findings of modern reality. According to the research areas of K. Polani, they demonstrate the contribution that the American scientist has made to economic science. First of all, this is the so-called ‘double movement theorem.’ Analyzing the capitalist society of the 19^th century, K. Polani shows that the result of natural market development was the destruction of important organic bonds, which are the basis of pre-industrial societies where the economy has been dissolved in the social sphere. This led both physically and morally to mass degradation of people thus creating enormous insecurity of material and emotional nature.

However, following the instinct of self-preservation, the society tries to protect itself; it begins to resist this offensive movement of the market system: there are public organizations and movements that require limiting the power of the market. The same can be said about the role of the state in money supply control. This process is called by K. Polani as an advent of “counter-movement” (as opposed to an offensive movement of the market, during which the economy stands out from the social sphere), the results of which included the emergence of a regulated market. This concept was called by an American economist as “Karl Polani’s theorem of double movement.” That is particularly important because it represents the society as a force that is able to make the state take measures to limit the ravages of market mechanisms and establish control over the money flows.

Another important achievement is related to research in the field of economic anthropology. Analyzing the socio-economic system of pre-industrial societies, K. Polani comes to the conclusion that the economy of these societies is fundamentally different from modern industrial economies. Above all, this is due to the fact that in pre-industrial economies, the scope of economic activity is subordinated to the social sphere, i.e. social motivation activity is more important than economic incentives (material benefit). The author concludes that the traditional economic science (economics) is not applicable to the study of economic data. This is determined by the fact that the use of the categorical apparatus used in economics (rational choices to maximize the effective allocation of resources, etc.) is completely ineffective in this assay. In addition, the problem of the relationship of economic and social organization in general is not addressed and, accordingly, is not analyzed in traditional economic theory.

The supporters of the theory by Polani stated that there is a need to create a new economic theory that is applicable to the analysis of non-market systems (systems where market mechanisms are built into the social environment, which means that the company is fully controlled by pre-industrial societies or they are deliberately restricted by social institutions such as, for example, socialist, post-industrial societies, etc.). They argued about the need to create a new economic theory that would be based on substantive approach taking into account the impact of social and cultural institutions in the economic behavior of people and the functioning of the economy as a whole.

The substantivists who were headed by K. Polani believed that only such a theory can adequately describe the operation of the non-market economy system where market mechanisms are built into the social environment, i.e. either in their infancy and thus fully controlled by society as in pre-industrial societies, or consciously limited social institutions as socialist, post-industrial societies. Furthermore, a particular attention was paid to the question of the state control of money supply.

The result of implementing this idea that was developed by K.Polani was the concept of integration of a society where he distinguishes between three forms of integration: reciprocity, redistribution and exchange. It should be noted that despite the brevity and schematic presentation of the concept, it is not sunk into oblivion and developed by foreign scientists. The American economist was one of the first who not only clearly demonstrated to historians and anthropologists that economy is frequently inapplicable to the study of non-market societies but also proved the need to analyze the economic institutions of these societies in the context of the entire social system. Developing this thesis, K. Polani introduces the reciprocity, redistribution and sharing, which are the three forms of integration of the society, in which the author suggests further analysis. K. Polani called this approach to the study as “substantivist.”

Application

The context of the economic system functioning as the state control of the money supply is characterized by the mandatory public financial management component. Answering the question of whether there is a need in the money supply state control or not, it is necessary to state that it is obligatory. This is determined by the numerous reasons, which are to be presented in the current chapter.

The necessity of the state control of money supply is important due to the fact that the state budget regulates the income and expenses of the state treasury. In countries that are not experiencing the crisis in the financial processes, legislative approval of the budgets and reports on their performance are presented in a general way. In other words, this process takes place in accordance with the established procedure. However, certainly, every year, surprises in budget execution, i.e. deviations from it can happen. For this reason, there is a constant need in the strict control over the implementation of the budget and, as consequence, of the money supply. This opinion has also been presented in Polani’s theory on the finance distribution.

Exclusive savings! Save 25% on your ORDER
Get 15% OFF your FIRST ORDER with the code my15off +
10% OFF every order by receiving 300 words/page instead of 275 words/page

HelpOrder

The evaluation of the state budget execution from the standpoint of control services is available from annual reports of the supreme state control of the authorities in different countries. Thus, the control is necessary in order to structure the country’s income. The budget revenues are classified by sections, chapters and paragraphs. Section shows the type of income; head creates the source of income (subordinate institutions); paragraph presupposes the category of the taxpayer, taxes and non-tax revenues. A detailed accounting of government expenditures is only implemented for financing the national economy. It opens separate accounts for each administrator of loans title, chapter and article.

When performing the control, the inspector shall be familiar with the budget classification. In terms of pre-monopoly capitalism, the cash execution of the budget is committed by the Treasury Department. With the development of the credit system, the various banking institutions and cash execution of the budget in many countries were entrusted to the banks, and in some countries, such as Japan – by the Central Bank (Bank of Japan); in the US, this function was put on the banks of the Federal Reserve System.

However, France continues to be operated by the treasury system, in which the collected funds are transferred to the government account at the Bank of France. In part of budget revenues, the auditor – by the means of the control tools of income – should pay special attention to compliance with the quota transfer in the federal budget revenues and incomes governing entirely payable to the budget. As part of the expenditure budget execution, an auditor shall identify irregularities in the expenditure of funds on the ground, without changing the decision of the legislative body of articles and chapters of expenditure. It is necessary to assess the effectiveness of budget expenditures.

The state financial control is a comprehensive organically related study of the legality, reliability, appropriateness and economic efficiency of business operations and processes through the use of the accounting, reporting, regulatory and other information in conjunction with the study of the actual state of the business entity. Financial control is a way of providing feedback to managers operating entities engaged in economic and financial transactions and processes.

The state control of the money supply is necessary due to the fact that the main task of the state financial control is to oversee the implementation of its principles of legality and advisability. The tasks of the state financial control define its functions, which include assisting the highest organ of power in the legislative activity; monitoring the activities of the government in formation and use of the state budget; evaluation of the effectiveness of use of budgetary funds and monitoring the implementation of government funding programs; coordination with other oversight bodies and providing them with methodological assistance.

As a rule, in all countries, there are special institutions of parliamentary control over the expenditure of public funds. In the United States, the main control management is presented by the Congress headed by the Comptroller General; in the UK, this function is implemented by the National Audit Board headed by the Chief Auditor; in Canada, the Comptroller General is responsible for the money supply control; in Japan – Audit Bureau, in India – parliamentary committees of public accountability; the budgetary assumptions for affairs of state enterprises functions in Finland, etc.

Try our VIP services or become our VIP client, benefit from the incredible opportunity at a very reasonable price. Limited time offer – order our VIP package with a 20% discount.

In addition to the parliamentary oversight institutions in most countries, there are also government controlled systems. In the United States, this is the administrative and budgetary management at the president level, the system inspection services of the federal agencies, the Presidential Council for the fight against financial abuse in government offices (which is also called as the “Board of honesty and efficiency”); in India, this function is performed by the Service Inspector General and Auditor (Department of audit and accounting India), in Finland, the Audit Bureau of the state economy is responsible for the money supply control.

In order to show all significance of the money supply state control, it is necessary to consider an example of the particular country. One of the most interesting controlling systems is found in the UK. In the UK, there is no single coherent legislation regulating the work of the auditing mechanism. Traditionally, the general control over the administration at all levels is implemented by the legislature (parliament, local elected authorities), the judiciary, and non-governmental organizations. According to British experts,  guarantees of efficiency of such a system are unconditional subordination to the executive branch to the legislature, independence court and traditional understanding of the rule of law.

Parliament reserves the right to address the fundamental issues of a financial nature. In particular, the adoption of the annual budget is preceded by a rather heated debate, as a result of which the government is forced to make some changes in the draft (Reich 2015). A special role in the implementation of financial control plays sub-parliamentary national audit board, which controls the financial side of government and reports directly to Parliament.

According to the legislation, the sub-parliamentary national audit board is not a part of the state apparatus and reports directly to Parliament. The head of the sub-parliamentary national audit board is Auditor General who is appointed by the Prime Minister on the recommendation of the parliamentary committee of public expenditure and may be removed from office only by the Queen on the presentation of both houses of parliament. In contrast to other ministries whose staff are recruited from among civil servants, Auditor General personally picks up his staff – about 900 people who are accountable only to him.

The member of the National Board of Audit is defined so as to exclude the possibility of pressure of any kind on him from the outside. The activities of the sub-parliamentary national audit board are built on two main areas – preparation of opinions on the balance sheets of various government agencies and analysis of the effectiveness and efficiency of expenses incurred, and their compliance with ‘the direction and spirit’ of the parliamentary decisions on the allocation of funds for a particular program. At the end of each audit, the sub-parliamentary national audit board posts concrete proposals in parliamentary Committee in order to improve the situation, which, as a rule, is subject to objective debate in Parliament.

The state’s management system of money flow and supply control can be optimally effective if it is provided a reliable mechanism of control over its operations. In commercial organizations, the specified control is carried out in the interests of the private owner. In budgetary institutions and organizations, the control is built on the basis of national interests, the most important of which is the use of budget resources for the implementation of public tasks with the utmost efficiency and money supply in general.

The essence of control – as a budget management organization mechanism – is to identify possible deviations from the established tasks, to learn the reasons for these deviations and to build mechanisms to prevent them. The reliability of the organization of accounting information can be recognized mainly satisfactory after checking the external controller. Among the existing instruments of state, the phenomenon of the state audit control occupies an important place.

In areas that are financed from the budget, the state audit is expanding its scope – from the process of checking the legality of the decision of problems and target spending of budget funds to the results of the assessment process for their use. With the help of auditing tools that display the ability to ‘diagnose’ the possible financial irregularities, deviations from the government regulations, significant errors and problems in the development of allocated budget financing or in the direction of income derive from business activities.

One of the main directions of budgetary policy is the efficiency of public spending. In the context of the implementation of anti-crisis measures, organizations need to make optimal use both within the allocated funding and within the revenue from paid services and other income-generating activities.

This performance of the state money supply audit becomes an essential element of budget organizations in budget management. Its main purpose is to confirm the reliability of budget accounting and reporting on implementation of budget revenue, expenditure of the means of income-generating activities and budgetary funds, as well as evaluation of the resource efficiency. The content of the criteria depends on the subject of verification and specific issues of efficiency of use of public resources. All these facts imply that there is a constant necessity in state control of money supply.