SAVINGS AND LOAN ASSOCIATIONS

Savings and loan associations (S & Ls) obtain funds primarily through sav-

ings deposits and time and checkable deposits. The acquired funds have tradition-

ally been used to make mortgage loans. S& Ls are the second largest group of fi-

nancial intermediaries, numbering in the USA around 2000. In the 1950s and

1960s, S & Ls grew much more rapidly than commercial banks, but when interest

rates climbed sharply from the late 1960s to the early 1980s, S & Ls encountered

difficulties that slowed their rapid growth. Because many mortgages are long-term

loans, with maturities in excess of 25 years, many in existence today were made

years ago when interest rates were substantially lower. When interest rates rose,

S & Ls frequently found that the income from their mortgages was well below the

cost of acquiring funds. Many of them began to suffer large losses; many have

gone out of business. Until 1980, savings and loan associations were restricted to

making mortgage loans and could not establish checking accounts. Their troubles

encouraged Congress to pass legislation in the early 1980s allowing them to offer

checking accounts, make consumer loans, and pursue many activities previously

restricted to commercial banks. In addition, they are now subject to the same re-

quirements as the commercial banks regarding deposits with the Federal Reserve

Banks. The result of this legislation is that the distinction between savings and

loan associations and commercial banks is being blurred, and these intermediaries

have become more competitive with each other.

INFLATION

Inflation is generally defined as a persistent rise in the general price level

with no corresponding rise in output, which leads to a corresponding fall in the

purchasing power of money.

In this section we shall look briefly at the problems that inflation causes for

business and consider whether there are any potential benefits for an enterprise

from an inflationary period.

Inflation varies considerably in its extent and severity. Hence, the conse-

quences for the business community differ according to circumstances. Mild inflation of a few per cent each year may pose few difficulties for business. However,

hyperinflation, which entails enormously high rates of inflation, can create almost

insurmountable problems for the government, business, consumers and workers.

In post-war Hungary, the cost of living was published each day and workers were

paid daily so as to avoid the value of their earnings falling. Businesses would have

experienced great difficulty in costing and pricing their production while the incentive for people to save would have been removed.

Economists argue at length about the causes of, and “cures” for, inflation.

They would, however, recognize that two general types of inflation exist:

– Demand-pull inflation;

– Cost-push inflation.

Demand-pull Inflation.

Demand-pull inflation occurs when demand for a nation’s goods and services outstrips that nation’s ability to supply these goods and services. This causes

prices to rise generally as a means of limiting demand to the available supply.

An alternative way that we can look at this type of inflation is to say that it

occurs when injections exceed withdrawals and the economy is already stretched

(i.e. little available labour or factory space) and there is little scope to increase

further its level of activity.

Cost-push Inflation

Alternatively, inflation can be of the cost-push variety. This takes place when

firms face increasing costs. This could be caused by an increase in wages owing to

trade union militancy, the rising costs of imported raw materials and components

or companies pushing up prices in order to improve their profit margins.

MONEY AND 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.

We discuss each of the functions of money in turn.

The Medium of Exchange. Money, the medium of exchange, is used in one-half of almost all exchange.

Workers exchange labour services for money. People buy and sell goods in exchange for money. We accept money not to consume it directly but because it can subsequently be used to buy things we do wish to consume. Money is the medium through, which people exchange goods and services. To see that society benefits from a medium of exchange, imagine a barter economy.

A barter economy has no medium of exchange. Goods are traded directly or

swapped for other goods. In a barter economy, the seller and the buyer each must want something the other has to offer. Each person is simultaneously a seller and a buyer. In order to see a film, you must hand over in exchange a good or service that the cinema

manager wants. There has to be a double coincidence of wants. You have to find a

cinema where the manager wants what you have to offer in exchange.

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.

The use of money-any commodity generally accepted in payment for goods, ser-

vices, and debts-makes the trading process simpler and more efficient.

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.

In Russia prices are quoted in roubles; in Britain, in pounds sterling; in the

USA, in US dollars; in France, in French francs. It is usually convenient to use the

units in which the medium of exchange is measured as the unit of account as well.

However there are exceptions. During the rapid German inflation of 1922-1923

when prices in marks were changing very quickly, German shopkeepers found it

more convenient to use dollars as the unit of account. Prices were quoted in dollars

even though payment was made in marks, the German medium of exchange.

The situation in Russia nowadays reminds of that of in Germany.

Date: 2016-04-22; view: 1227