Money in the US Economy

MONEY

The work which people undertake provides them with money. People buy essential commodities for money. All values in the economic system are measured in terms of money. Our goods and serv­ices are sold for money, and our money is in its turn exchanged for other goods and services.

Coins are adequate for small transactions, while paper notes are used for general business.

Originally, valuable metal (gold, silver or copper) served as a constant store of value, and even today the American dollar is technically 'backed' by the store of gold which the US government maintains. Because gold has been universally regarded as a very valuable metal, national currencies were for many years judged in terms of the so called 'gold standard'.

Valuable metals have been generally replaced by paper notes. These notes are issued by govern­ment and authorized banks, and are known as 'legal tender'. Other things such as cheques and money orders are not legal tender. They perform the function of substitute money and are known as 'instruments of credit'.

The value of money is basically its value as a medium of exchange or its 'pur­chasing power'. The purchasing power depends on supply and demand. The demand for money is related to the rapidity with which the business is done. The supply of money is the actual amount in notes and coins available for business purposes. If too much money is available, its value decreases. This condi­tion is known as 'inflation'.

FUNCTIONS OF MONEY

Money performs the function of a medium of exchange or means of payment where goods are exchanged for money and money for goods. At the same time it also acts as a unit of account. Money is a store of value and may be set aside for future consumption.

These three functions of money - medium of exchange, unit of account and store of value - can only be fulfilled if there is great confidence in its stability of value.

Safeguarding monetary stability is the primary task of the central banks all over the world. Moreover, the central bank has the function of regulating the money supply in order to guarantee a normal functioning of the monetary system.

Forms of Money

A great variety of commodities (wheat, salt, gold, silver) has served at one time or another as a medium of exchange in economies based on the division of labour. This form of money is generally referred to as commodity money.

At the same time other forms of money developed. They are referred to as credit money or money without material value because their value as a means of payment is greater than their real value. For instance, the paper on which a $100 banknote is printed is worth much less than the banknote's face value. This is also true of most of the coins used nowadays.

In addi­tion to the notes and coins in circulation, 'cashless' means of payment were introduced. These include checks, transfer orders and credit cards, which have become more and more popu­lar in recent years.

Deposit money

Deposit money is a form of money that has only gained great importance in the recent past. It is created by deposits held at banks on current accounts, on which the holder can draw at any time by check or transfer.

In contrast to notes and coins, these are cashless means of payment, which are created by the banks themselves. The amount given to the borrower is put on a current account and becomes bank money. This money serves as the basis for further lending if the funds remain within the banking system.

To ensure the solvency of the banking system and for monetary policy reasons, banks are required to hold a certain per­centage of their liabilities as deposits with the central bank. This obligation limits banks' lending power and their ability to create bank money.

Money in the US Economy

The quantity of money in an economy is a central task to determine the state of that economy - it affects the level of prices, the rate of economic growth and the level of employment.

Money in the United States consists of coins and paper currency. According to the federal law, only the U.S. Treasury and the Federal Reserve System can issue U.S. currency. All U.S. currency carries the nation's official motto, "In God We Trust."

Coins come in various denominations based on the value of a dollar: the penny, one cent; the nickel, five cents; the dime, 10 cents; the quarter, 25 cents; the 50-cent piece or half-dol­lar; and the one-dollar coin.

Paper money issued in the United States consists almost entirely of Federal Reserve notes, which are issued by the 12 Federal Reserve Banks in the Federal Reserve System. These notes come in denominations of $1, $2, $5, $10, $20, $50, and $100. Until 1969 the Federal Reserve Banks also issued $500, $1,000, $5,000, and $10,000 notes.

Today the U.S. Treasury only issues paper money in $100 denominations. Both United States notes and Federal Reserve notes carry the printed signatures of the secretary of the treasury and the treasurer of the United States.

Date: 2015-12-24; view: 1728