Before we can begin to analyze the financial system, we must first identify its overall role in society. The financial system decides who has the right to hold and control the wealth created by the economy, as well as when and under what conditions. In other words, it is a collection of rules that govern how people organize to generate goods and services and then share them. Social institutions are the norms that regulate people’s lives.
The economy’s two core institutions are ownership and money. The economy is an element of social life that operates on the terms “mine” and “someone else’s” and allows people to purchase and sell, trading the places of these categories. Money is a mechanism for redistribution of wealth. That is, it is a vehicle for the transmission of economic power in a society. Money-related economic power allows one to obtain material assets as well as manage people by paying for their services. Knowledge how the financial system works requires an understanding of money as a social institution rather than one of the real economy’s assets. Money is a social phenomena by nature; even when things (gold, kettles, furs, etc.) fulfill the role of money, it is through society’s acknowledgment of it as a method of payment, not by their consumer features.
The key factor that makes these items valuable is people’s willingness to regard them as such. This is not a legally binding agreement. Without a sure, regulations limiting currency circulation will be enacted, but first and foremost, money must establish itself as a social consensus in everyday life. Only norms that already exist and have been accepted by society can be codified by the government. As previously stated, this system of rules is a social institution. We take these standards for granted from a young age, seeing them as a normal part of our life and never considering that things could be different; this is known as socialization. Each person goes about his or her daily routine without pausing to consider his or her place in the greater social structure. When looking at a society as a whole, however, one gets the feeling that it is designed by someone, that individual people are components of a huge machine that moves like clockwork in predictable patterns. For most people, the order established by their original environment is as real as trees on the ground or the sky above.
However, we have a tendency to view social institutions adopted by foreign social systems with greater skepticism, particularly when they differ from procedures in our own home context. One of the benefits of economics is that it allows us to look at our own culture from a different perspective, dispelling many clichés. So, let’s take a look at one of the institutions stated above: ownership rights. What does the term “own” mean in the context of property, such as a car? Although it is obviously not the same as someone’s own hand, leg, or kidney, we all understand what it means when we hear that a car belongs to someone. The car belongs to someone since both the owner and others around him believe he has sole ownership, disposal, and usage of it. We will label everyone who enters his automobile and then leaves as a thief.
These are the guidelines to follow. Because society recognizes the importance of these principles, thieves will be prosecuted in any way feasible to defend the genuine owner’s fundamental rights. Imagine a society where everything belongs to everyone. This will help you comprehend that our rules and institutions are only traditions. A representative of such a society would be taken aback by our actions. Why can’t someone in a hurry use a vehicle that is idling in a parking lot? He, more than anybody else, including some “owner,” requires it! Why should somebody go hungry in the midst of massive buildings with endless aisles of food simply because he lacks the bits of paper that would make this food “his”? The right of ownership includes not only the right to own and utilize property, but also the right to sell it. A person can deliberately transfer his or her ownership to others in exchange for a value that he or she considers equivalent. As a result, a car owner can swap his or her ownership for anything, including furniture, land, and services.
Liquidity refers to a property’s ability to be used to purchase other goods or services. The higher the liquidity of a property item, the more likely it is that other individuals will give something away or provide their labor in return for ownership of the object. Because of its ability to grant its owner economic influence in society rather than due to the item’s consumer features, the object with higher liquidity is more valued. We’re talking about money when item ownership becomes more significant than its consumer characteristics due to its great liquidity.
Money is a universal tool for establishing ownership in a community. Money is a declaration of one’s right to own something. Money offers us the freedom to select what we want to own, use, and dispose of. If ownership means that society has given us the right to own, use, and dispose of something, money gives us the freedom to choose what we want to own, use, and dispose of. As a result, if you know how to forge cash notes, you can obtain possession of any item at your leisure—at least until you’re detected. Because counterfeiting poses a greater danger to ownership in many nations, the penalty for counterfeiting is often heavier than the penalty for ordinary theft. It would be appropriate to use counterfeiting as an example to clarify our notion of money as a social institution. Even if someone manages to get their hands on a real printing machine from a mint and begins creating currency notes that are 100% identical to actual money, these notes will never become real.
The physical form of modern paper money, as well as the central bank’s right to issue it, are both included in the idea. The notes, notwithstanding their “typographic authenticity,” would not be genuine because this rule would be broken. As a result, modern money is something that 1) has no other purpose than to provide liquidity, and 2) is recognized and acknowledged by all members of society. When something develops these characteristics, it is referred to as money. Money, on the other hand, ceases to be money as soon as these properties are lost.