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 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 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.
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.