Money and Banking

Money: an item generally acceptable as a means of payment

The main form of money used in countries is ; coins, notes and bank accounts

-coins are often used to make small purchases and are given as change

-notes are used to purchase more expensive items

-in most countries the main form of money is bank accounts. These are responsible for the largest proportion (in terms of value) of payments made. These include direct debits, credit cards and mobile phones.

Legal tender: any form of payment by law, has to be accepted in settlement of debt.

Sometimes bank accounts are NOT legal tender. But in practice most people and firms find payments from bank accounts convenient and hence are willing to accept it.

The functions of money

It acts as a:

Medium of exchange
Store of value
Unit of account
Standard of deferred payment

Money allows people to buy and sell products.

The function: products are exchanged for money, and that money is used to buy other products.

Productsà money à products

-money can also be used to place value on an item. Prices are expressed in monetary terms

-money can also be preserved unlike other products so it’s a great medium of exchange. Acting like a store for value means it can be saved.

-money is to act as a standard of deferred payments. This means money allows people to borrow and lend.

The characteristics of money

-to act as money, an item doesn’t need to have an intrinsic value. This means that it doesn’t have to be worth something in its own right. E.g. both silver and bank can be used as money, where silver is wanted for a variety of purposes and bank notes have no intrinsic value.

-an item has to posses a number of characteristics for it to serve as money. The most important one is that it should be generally acceptable.

-money is durable, portable, divisible, homogenous and recognisable.

Banking

Commercial banks: banks which aim to make profits by providing a range of banking services to households and firms (like retail or high street banks)

The role and importance of commercial banks

3 main roles:

1)to accept deposits

2)to lend money

3)enable customers to make payments

-the first function enables customers to keep their money in a safe place.

-deposits can be made in two types of accounts:

1) one way is called a current account (demand account). They are easy and immediate access to money in this type of account, but usually interest is not payed. Current accounts are usually used to receive and make payments.

2)the other account is called a deposit account (time accounts).a period of notice often has to be given before money is withdrawn from this account. Interest is paid and customers use debit accounts as a way of saving.

There are ways to borrow money from banks:

Overdraft: taking more money from an account but with interest. This can be relatively expensive.
Loan: borrowing a fixed sum of money for a set period of time, but the borrower has to pay full interest.

A customer may be asked to provide some form of security known as collateral when taking a loan. This is to ensure that if the loan us not repaid, the asset given ass collateral can be sold and the money can be recovered.

-with practice banks try to avoid doing this by carefully checking whether the person seeking the loan will be able to repay it.

-in case of a firm, this is likely to involve the scrutiny of the firms accounts and business plans.

-banks accept deposits from those with more money than they currently want to spend and lend it to those with an immediate desire to spend more money than they currently have in hand.

In other words, they channel money from lenders to borrowers

The aims of commercial banks

The main aim of commercial banks is to make a profit for shareholders

Central banks: a government owned bank, which provides banking services to the government and commercial banks and operates monetary policy

Role and importance of a central bank

Acts as a banker to the government – tax revenue is paid to governments account at the central bank, and payments by the government for goods and services are made out of this account
It issues notes and coins for the nations currency
It manages all the payments relating to the government
It manages national debt. Central banks can issue and repay public debts on the governments behalf
It is the lender of ‘last resort’ to commercial banks. When other banks are having financial difficulties, the central banks lend them money to prevent them from going bankrupt
It manages the country’s gold and foreign currency reserves. These reserves are used to make international payments and adjust their currency value. (adjust their interest rates)
It operates the monetary policy in the economy

Stock exchange : is a business organisation that enables individuals, companies, and the government to buy and sell shares on the global stock market. It is the most important source of finance for most businesses.

Functions of stock markets

It brings together the buyers and sellers of stocks (shares)
It provides information on the market prices of stocks
It supervises the conduct of firms of brokers that buy and sell stocks on behalf of investors