Money. Banking. Central banking. Money and its functions.

Although the crucial feature of money is its acceptance as the means of payment or medium of exchange, money has other functions. It serves as a standard of value, a unit of account, a store of value and as a standard of deferred payment.Money as the Medium of Exchange and a barter economy:Workers exchange labour services for money then buy and sell goods in exchange for money.A barter economy has no medium of exchange. There has to be a double coincidence of wants. Trading is very expensive in a barter economy. People must spend a lot of time and effort finding others with whom they can make mutually satisfactory swaps. Since time and effort are scarce resources, a barter economy is wasteful.

Other Functions of Money.Money can also serve as a standard of value. Society considers it convenient to use a monetary unit to determine relative costs of different goods and services. In this function money appears as the unit of account, is the unit in which prices are quoted and accounts are kept.Money is a store of value because it can be used to make purchases in the future.To be accepted in exchange, money has to be a store of value. Nobody would accept money as payment for goods supplied today if the money was going to be worth/less when they tried to buy goods with it tomorrow. Finally, money serves as a standard of deferred payment or a unit of account over time. When you borrow, the amount to be repaid next year is measured in pounds sterling or in some other hard currency.

Different Kinds of Money.These are examples of commodity money, ordinary goods with industrial uses (gold) and consumption uses (cigarettes), which also serve as a medium of exchange.A token money is a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money.The essential condition for the survival of token money is the restriction of the right to supply it. Private production is illegal.In modern economies, token money is supplemented by IOU money.An IOU money is a medium of exchange based on the debt of a private firm or individual.A bank deposit is IOU money because it is a debt of the bank.

History of banking.In the past most societies used different objects as money. Some of these were valuable because they were rare and beautiful, others- because they could be eaten or used. Early forms of money like these were used to buy goods. But it was difficult to measure their value accurately, divide some of them into а wide range of amounts, keep some of them for а long time, use them to make financial plans for the future. For reasons such as these, some societies began to use another kind of money, that is, precious metals.People used gold, gold bullion, as money. People wanted а safe place to keep their gold. So they deposited it with goldsmiths, people who worked with gold for jewelry and sо on and also had а guarded vault to keep it safe in. And when people wanted some of their gold to pay for things with, they went and fetched it from the goldsmith.

Two developments turned these goldsmiths into bankers.The first was that people found it а lot easier to give the seller а letter than it was to fetch some gold and then physically hand it over to him. This letter we would nowadays call а cheque.The second development was that goldsmiths realized they had а great deal of unused gold. The goldsmith realized that some of the gold in his vault could be lent to the firm, and of course he asked the firm to pay it back later with а little interest.

Types of banks, the functions of each type.Commercial or retail banks are businesses that trade in money. They receive and hold deposits, pay money according to customers’ instructions, lend money, offer investment advice, exchange foreign currencies, and so on. They make a profit (margin) from the difference between the interest rates they pay to lenders or depositors and those they charge to borrowers. When lending money, bankers have to find balance between yield and risk.

Investment banks raise funds for industry. They offer stockbroking and portfolio management services to rich corporate and individual clients. It makes their profits from the fees and commissions they charge for their services.

Universal banks combine deposit and loan banking with share and bond dealing and investment services. American legislations separate commercial and investment banks.

CB and their functions.The first one is actually to implement monetary policy. There are 3 ways to do it.1) Setting interest rate, which means limiting, upwards or downwards, the fluctuations of the interest rate.2)Printing operation- coins, banknotes.3)Open market operation, which are simply buying and selling government bonds to and from Commercial banks.That was the first task of CB. The second one is exchange rates supervision. Third main task, commercial banking supervision, make sure that the commercial banks have enough liquidities, to avoid any bank run.The fourth main task would be to act as lenders of last resort, in case, one of these commercial banks goes bankrupt and the investors, the people putting money in the bank, have to get back their money.

Interest rates. A countries interest rate is usually fixed by central bank. This is the discount rate, at which CB makes secured loans to commercial banks. Banks lend to blue chip borrowers at the base rate or the prime rate.

Eurocurrencies. In most financial centers, there are also branches of lots of foreign banks, largely doing Eurocurrency business. A Eurocurrency is any currency held outside its country of origin. The first significant Eurocurrency market was for US dollars in Europe, but the name is now used for foreign currencies anywhere in the world. A CB can determine the min lending rate for its national currency it has no control over foreign currencies.

Clearing system – the system of settling payments due from one bank to another. The bank clearing is an arrangement to reduce the amount of funds which needs to be transferred to settle all the payments

A financial intermediary is an institution that specializes in bringing lenders and borrowers together. Commercial banks are financial intermediaries with a government licence to make loans and issue deposits, including deposits against which cheques can be written.

Reserves in terms of accounting are the amount of money or cash, currency and gold that is immediately available in the banks’ vaults to meet depositors' demands. The reserve ratio is the ratio of reserves to deposits. To be a borrower you must be a customer of the bank because the money will be lent to you through a bank account. There are two ways in which you may borrow. The first, and easy, is to spend more money than you have in your current account – to overdraw (to arrange an overdraft ). The second, and the normal way of borrowing larger amounts or for a long period of time is the loan. If the bank grants loans it should bear in mind the question of reserves.

Date: 2015-12-24; view: 1258