Money. Banking and monetary policy. Money: roles, forms, functions.

Money is necessary in most economies. It serves as a means of exchange and a store and standard of value. Currency, used in modern societies, fulfills these functions. In addition to currency, people may use checks and credit cards to purchase goods and services. Savings accounts, stocks, and bonds are stores of value that can easily be exchanged for money. All these forms of money and near money help the economy run smoothly.

Most people use money every day. It is so common that many people rarely think about why money is important and what gives it value. In general, money is any item that is widely accepted as payment for products. It is something people see and use almost every day. Though money is commonplace, its forms and functions are complex. The familiar paper bills and metal coins are only two of the forms money can take. In the past, many things served as money – beads, shells, dog’s teeth, cattle, stones, tobacco, fishhooks and even slaves. Precious metals, especially gold and silver, have been a favourite form of money. Some of the things used as money – fishhooks or cattle, for example – also had value as consumer goods. Most of the items used as money, however, have had value only because people agreed that they could be exchanged for goods and services. In other words, what is used as money often has little value of its own. Its value comes from the product for which it can be exchanged.

In most modern economies money serves several functions. As a means of exchange money is used to trade for goods and services. Less complex societies often do not use money at all. They simply barter, or trade, one product for another. Two farmers may trade a bushel of wheat for a jar of milk, for example. The more complex a country’s economy is, the harder it is to use a system of trading one good for another. Money is the answer to that problem.

As a store of value people use money to save their wealth for the future. Storing goods is not so easy as storing money. Many goods, such as food, spoil quickly. Others, such as cars, take up a lot of space. But money can be kept in a bank or a safe or a pocketbook until it is needed.

As a standard of value money is used to compare the worth of one product with that of another. Everyone knows about how much a dollar will buy. People can therefore compare the worth of one $100 item with other items worth the same amount of money. The value of all goods and services the economy produces can be determined by adding up their prices. In this way, of course, economists determine GNP.

In the United States, money comes in several forms. Money in the form of paper bills and metal coins is called currency. The supply of currency is only about $700 per capita. Most money is in the form of checking accounts.

Sometimes, time deposits also are considered a form of money. Several other things are used like money. Economists call things used for some, but not all, of the functions of money near money. Credit cards, for example, allow a purchaser to borrow money from the seller of the purchased goods. Insurance policies, stocks, and bonds are stores of value and can be exchanged for money. They are other examples of near money.

Money is very important in our society. As a store and a standard of value and as a means of exchange, money helps the economy run smoothly. We can judge the worth of such diverse things as pets, paintings, medical care, and car washes. Then we can compare their value using the amount they cost. The market system determines how much money everything is worth. People whose jobs are thought to be more important get higher salaries than those whose jobs are considered less important. Thus, people often are judged by how much money they earn.

You have your own beliefs about the value of goods, services, jobs, and people. Often the value you place on an item will differ from its monetary value. You may feel that some things are priceless and others are not worth as much as they cost. Your own values dictate what you are willing to do for pay.

 

The supply of money.

Your personal supply of money changes often. Increases and decreases in your supply of money probably affect how much you spend. Similarly, the amount of money in the total economy changes often. Changes in the economy’s money supply are more complex than changes in a personal money supply. Still, these fluctuations of the money supply influence not only how much spending occurs but also the general level of business activity. The money supply of the United States is constantly changing. Sometimes it expands and sometimes it contracts. The government prints new bills and mints new coins every year to replace those that are worn. It also changes the money supply to meet people’s needs. The supply of checking account money, or demand deposits, also changes. Banking laws in the United States require a bank to put a certain percentage of its deposits in reserve. A bank’s reserve is the money the bank must be 10 percent of total deposits. Of John Winslow’s $10000, the bank keeps $1000 in reserve. The other $9000 it lends to anyone able to pay it back with enough interest. So the process continues, with a succession of borrowers and depositors. None of these transactions involved currency. All were completed through checking accounts. This series of deposits caused the total supply of checking account money to expand.

This expansion of the money supply does not continue forever. A deposit in a checking account can increase the money supply by about 5 times the original amount. Several factors stop the process of expansion or even reverse it.

First, federal law requires the bank to keep a percentage of its demand deposits in reserve, usually 10 to 20 percent. Banks cannot loan out all of the money people deposit. After John Winslow’s original deposit, each successive deposit was less.

Second, expansion will stop if the bank stops making loans. Lending may cease if the bank cannot find any more people it believes will be able to repay a loan. Also, if people stop putting their money into checking accounts, the bank will not be able to make loans.

Finally, if many people suddenly withdraw their money all at once, the bank must do more than stop making loans. It will have to start calling for payment of its loans so that it can increase its reserves.

 

The role of central banks and commercial banks.

It is obvious that when it comes to dealing with money, the banks are the main institutions which can provide a great variety of services essential to trade and to the entire economy of any nation. There are two main types of banks:

· central banks control the banking of the whole country and work together with the government to supervise the country’s economy. The central bank of the United Kingdom is the Bank of England, in the United States of America it is the Federal Reserve System, in sin

 

Forms of money.

Everybody knows that there exist several forms of money. But few people can name them. I’ll try to encompass all of them to you.

In the United States most money is in the form of checking accounts. A checking account is a bank account in which money has been deposited. A withdrawal can be made at any time using a check. Check is a written order to a bank to pay a certain amount of money to the person or business to whom the check is made. Depositing $100 in a bank checking account increases the sum the depositor can draw on by that amount. From then on, the depositor need not have $100 in paper bills or coin in order to buy something worth $100. Simply writing a check will cover the cost. By the way, checking accounts are also known as demand deposits, because their owners have the right to demand them from the bank whenever they wish.

Sometimes time deposits are considered a form of money. A time deposit is a bank deposit that can be withdrawn at a certain time in the future, or on advance notice. Time deposits cannot be withdrawn using a check. I can add that a savings account is an example of a time deposit. When savings accounts are used as a store of value, savers deposit their money for use in the future instead of in the present. The bank book is a record of a person’s deposits and percentage the bank paid for use of the money.

Now I would like to come back to checks. It’s common knowledge that almost all firms use checks to pay their accounts, and most people also are paid by check. But that does not mean that checks are substitutes of money. Checks are more convenient and safe to use than currency. They are flexible in that they can be written for any amount. They provide a legal record of financial transactions. However, although most people and institutions accept them, checks are not legal tenders. Legal tender is money that, by law, must be accepted in payments of debts. So, on balance, the only legal tender in the United States is currency. Just as a matter of interest I’d like to stress that several other things are used like money. Credit cards are a common way to purchase goods and services. If the card is used to buy gasoline, the gas station will record the name and number and send it, along with the bill for the gasoline, to the credit card company. The credit card company will then pay the gas station and send the buyer a bill for the amount of the gasoline. Credit cards are not money, though, since they can be traded only for certain products from certain companies. As for money, it can be exchanged for anything.

Types of bank accounts.

 

People may have three basic types of bank account:

· current account is the most popular one which is used for handling day-to-day finances. It is used for everyday transactions such as paying bills, transferring money and drawing cheques. Though the current account holder doesn’t usually receive any interest on the money he pays in this type of account has some advantages. Firstly, it enables people to hold their money in a safe place. Secondly, this type of account allows people to withdraw their money at any time. Thirdly, it provides people with a cheque book so that they don’t have to carry much cash.

When a person intends to open a current account he should see the branch manager who wants to get the necessary background information about the applicant. As a rule, the banking officer wants to know the applicant’s occupation and place of work. Probably he will want to have a reference from the applicant’s employer. Then after the interview if the manager is satisfied with the applicant’s status he will approve the application, arrange for the applicant to be given a cheque book and arrange for a monthly statement to be sent to the account holder.

The current account holder can have an overdraft on this type of account, i.e. he can withdraw more money than he has in the account.

· deposit account is another popular account which is really designed for saving money and may be used for short-term, small savings. The money paid into this type of account earns a small amount of interest. The customer receives no cheque book and therefore he cannot pay bills so easily as with the current account. Though it is not possible to draw cheques or have an overdraft on this type of account, it has some advantages over a current account. Firstly, it is easier to open a deposit account than a current account because there is no need to have an interview with the branch manager. A client only has to fill in a form and deposit the minimum amount of money required by the bank. Then the client is provided with a pass book. It is necessary to bring it to the bank every time the client wishes to withdraw or deposit money as the pass book is the client’s record of the account. Secondly, a deposit account earns for the account holder. It occurs because the bank invests the money that the depositor pays in and in return the bank pays the client interest.

But the client should remember that if he wants to take his money out of the deposit account he mustn’t forget to give a bank a week’s notice. If the client wants his money immediately, he loses some interest.

· investment account may be used for larger, long-term savings. Money paid into this type of account usually earns more interest, but the customer can’t get his money immediately. He has to inform the bank in advance when he wishes to withdraw the money. The customer may have a fixed-term account. In this case the account holder may not be able to withdraw the money for a certain period agreed with the bank, for instance, 3-5 years.

 

Making a personal budget.

When you live on your own you understand that something should be done with your unlimited wants and limited resources. You should use your income as effectively as possible. Choices must be made concerning spending and saving. You never know whether you can afford another outing, or a disco, or a concert. Then you come to the conclusion that you must develop a useful personal budget. And if you want to do it you should keep track of your actual income and expenses for a month, and, of course, at first you have to clear out what should be recorded.

Money resources may include allowance, part-time jobs, baby­sitting, errands, interest on savings. You must list all sources of income. And it means that if somebody presented you with a sum of money on an account with a bank, so you can rely on interest on savings and allowance have to be included.

Then you should record how much you spend for food, enter­tainment, clothing, college supplies, personal care, transportation, and miscellaneous items. You wonder in which category you spend the most and the least. You think that you should decide what changes to make in the budget if you want to reduce your expenses.

You have to understand that there is some difference between fixed, optional and flexible expenses. Fixed expenses are set in advance and must be paid regularly (e.g. rent payments, tuition, higher purchase installments). Flexible expenses are necessary but change with circumstances (food, clothing, college supplies). Optional expenses vary and are not always necessary (entertainment, personal care).

Thus you can compare your income and expenses. And of course you understand if you want to live good expenses should not be higher than income.