Money and central banking

Money and central banking Money is one of the man’s greatest inventions, an essential tool of civilization, because every society has a money economy based on coins and paper notes. In primitive society there was a barter system which is the direct exchange of goods and services for goods and services. As the extent of specialization increases, the barter system proves very inefficient. The great disadvantage of barter is the fact that it depends upon a “double coincidence of wants”.

It means that the seller and the buyer each must want something the other has to offer. Each person is simultaneously a seller and a buyer. A hunter who wants to exchange his skins for corn must find, not merely a person who wants skins, but someone who wants skin and has surplus of corn for disposal. Trading is very expensive in a barter economy. Time and energy, which could be devoted to production,

is spent to laborious system of exchange. Quite early in his history man discovered a much more convenient arrangement. The use of some commodity as a medium of exchange makes exchange triangular and removes the major difficulty of the barter system. If the commodity is generally acceptable in exchange for goods and services, it is money. A producer now exchanges his goods for money and the money can be exchanged for whatever goods and services he requires. There are 4 general functions of money: -

Money as a medium of exchange. - Money as a standard of value. - Money as a store of value. - Money as a standard of deferred payment. Money, the medium of exchange, is used in one-half of almost all exchange. Workers exchange labor services for money. People buy and sell goods in exchange for 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. Money is a store of value because it can be used to make purchases in future. But money can became worthless because its real purchasing power is eroded by inflation that is why houses, stamp collections, and interest-bearing bank accounts all serve as store of value and can be exchanged to money. Finally money can be used as a standard of deferred payment.

We can define commodity money, token money and IOU money. They are 3 kind of money. Commodity money is ordinary goods with industrial uses (gold) and consumption uses (cigarettes), which also serve as medium of exchange. A token money are usual coins and banknotes. Society enforces the use of token money by making it legal tender, usually they must be accepted as a means of payment by law.

Private production is illegal. In modern economies, token money is supplemented by I Owe You (IOU) money. IOU money is a medium of exchange based on the debt of a private firm or individual. A bank deposits cheques securities are IOU money. 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. But it was difficult to measure goods value accurately, divide some of them into a wide range of amounts, and 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 bullion as money. To keep gold safely they deposited it with goldsmiths, people who worked with gold for jewelry and so on and also had a guarded vault.

Two inventions turned goldsmiths to bankers. The first was that people found it a lot easier to give the seller a letter than it was to fetch some gold and then physically hand it over to him. This letter transferred some of the gold they had at the goldsmith’s to the seller. This letter we would now days call a cherub. The second development was that goldsmiths realized they had a great deal of unused gold lying in their vaults doing nothing, and they can land it for some payment

over the loan. The goldsmiths were an early example of a financial intermediary. A financial intermediary is an institution that specialized in brining lenders and borrowers together. All kind of banks, insurance companies, pension funds and building societies can be called financial intermediaries. All banks act with each other, make transactions. A clearing system is a set of arrangements in which debts between bank are settled by adding up all

the transactions in a given period and paying only the net amounts needed to balance inter – bank accounts. Technical innovations and increased competition in the face of deregulation are changing the face of World Banking. Banks and other financial institutions are using computer technology now. With traditional services modern banks offer services based on innovations. Current account and deposit account are traditional services.

Current account can be withdrawn without restrictions but it pays a little interest. Deposit account pays higher interests but can be withdrawn only on mentioned in contract time. Regular, monthly bills can be played by the way of a standing order; the bank pays them according to customer’s instructions. Cheques used to pay irregular bills. Credit card – a card which guarantees payments for goods and services purchased by the cardholder,

who pays back the bank or finance company at a letter date. Building society or bank can offer you a mortgage, which is a loan for buying property. An arrangement by witch a customer can withdraw more from a bank account than has been deposited called overdraft. Investment advices are usual bank’s services. Not all banks offer the same services. According to this difference there are several types of banks.

Commercial banks are businesses that trade in money. They receive ant hold deposits, pay money according to customers instructions, lend money, offer investment advise, exchange foreign currencies, and so on. They make a profit from the margin between the interest rates they pay to lenders or depositors and those they charge to borrowers. Merchant banks in Britain raise funds for industry on the various financial markets, finance international

trade, issue and underwrite securities, deal with takeovers ant mergers, and issues governmental bonds. They also generally offer stockbroking and portfolio management services to rich corporate and individual clients. Investment banks in USA are similar, but they act only as intermediaries offering advisory services, and do not offer loans itselves. Investment banks make their profit from the fees and commissions they charge for their services. Deregulation in the

USA and Britain is leading to the creation of “financial supermarkets”: conglomerates combining the services previously offered by banks, stockbrokers, insurance companies, and so on. Such “supermarkets” or universal banks combining deposit and loan banking with share and bond dealing and investment services. Central bank supervise the banking system; fix the minimum interest rate; issue bank notes; control the money supply; influence exchange rates; and act as lender of last resort.

Interest rate is the discount rate, at which the central bank makes secured loans to commercial banks. Banks lend to blue chip borrowers at the base rate or the prime rate; all other borrowers pay more, depending on their creditworthiness: the lender’s estimation of the present and future solvency. Borrowers can usually get a lower interest rate if the loan is secured or guaranteed by some kind of asset, known as collateral.