THE FUNCTION OF BANKS IN NATIONAL ECONOMY

To be able to understand the role and the work of banks properly, we must first say what the term 'national economy' means. It covers three principal fields: industry, commerce and direct services.

Industry provides energy, raw materials and goods. The extractive industry produces coal, oil, gas, iron ore and a number of other metals and minerals from the ground or seabed. These are needed by the manufacturing industry for the production of machines and all those goods, which the customers buy: the car, the TV set, furniture, the dishwasher in the kitchen etc.

However, we do not get these goods direct from the factory but buy them in a shop or a department store. They are transported there and delivered to our homes by railroad, sometimes by ship or air, especially if they have been imported.

This brings us to another field of economy, commerce, which can be divided into trade and the service industries.

Trade is the buying and selling of any commodity. It can be divided into home trade and foreign trade.

A television set is transported several times before we can switch it on in our living room. Transport is, of course, a service which industry, trade and the consumer make use of. But it is only one of the service industries.

If the television set is damaged or gets lost while being transported, the insurance pays for this. Insurance is a service industry that specialises in covering risks of all kinds: damage, loss, fire, accidents - to give just a few examples.

Industry and commerce depend on precise, up-to-date information, which could not be provided, if we did not have our highly developed communication services like the telephone, telex and the post.

You may have noticed that banks have not been mentioned yet. Where does banking link up with the other sectors of a national economy? The simple answer is everywhere.

Banking:

• collects money from its clients in small or large amounts

• provides efficient means and methods of payment for goods and services

• finances industry, commerce and direct services

• grants credits to consumers for the purchase of consumer goods

• sells foreign currencies

• has contacts with all important national and international money and capital markets, etc.

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MONEY

Money is anything that is in general use in the purchase of goods and services and in the discharge of debts. Money may also be defined as an evidence of debt owed by society. The money supply in the US consists of currency (paper money), coins, and demand deposits (checking accounts). Currency and coins are government-created money, whereas demand deposits are bank-created money. Of these three components of the money supply, demand deposits are by far the most important. Thus, most of the money supply is invisible, intangible, and abstract.

The two most important inherent attributes that money must possess in a modern credit economy are acceptability and stability. In earlier times in the evolution of money and monetary institutions in the United States, the attributes of divisibility, portability, and visibility were important. The two legal attributes of 'legal tender' and 'standard money' are not of as much importance today as in the past.

The four functions that money often performs are (1) standard of value, (2) medium of exchange, (3) store of value, and (4) standard of deferred payment. In a modern specialized economy, (2) and, most especially, (1) are the most important of these.

Although it is agreed that the value of money has fallen in the US over time, there are three in part conflicting theories of value that have been advanced to explain this phenomenon: the commodity, quantity, and income theories. Most economists today espouse either the second or, more typically, the third of these. Any money can retain its value as long as its issuance is limited; it need not have a commodity backing. Inflation or rising prices have been explained by demand and/or supply theories in recent years, although historically the former has been thought to provide the more satisfactory explanation.

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Date: 2015-12-11; view: 861