3 1MoneyandBanking124

3.
1Money and
Banking
3.1.1Money
• Why do we need money?
• To support specialization and exchange
• Your answer to both these questions will probably be no, but many years ago
• before the widespread use of money you would have had no choice. You
• would either have had to accept other goods or services as payment or be
• self-sufficient by producing everything you needed or wanted for yourself.
• Many of our ancestors had to be self-sufficient. All individuals or small
• communities would produce all the things they needed or wanted for
• themselves, for example by growing and hunting their own food supplies,
• building their own shelters, making clothes from wool and animal skins,
• producing cooking pots from clay and so on.
• However, it is difficult to produce everything you need or want for yourself.
• People have different skills.

• To overcome the problems of barter
• 1 Fixing a rate of exchange
• 2 Finding someone to swap with
• 3 Trying to save
The functions of money
1 Money is a medium of exchange
2 Money is a unit of account
3 Money is a store of value
4 Money is a means of deferred payment

What makes a good money?
1 Acceptability
2 Durability
3 Portability
4 Divisibility
5 Scarcity
So why is money so important?
If people specialize they must trade. A man concentrating on making pins
could not satisfy his need for food by eating pins or his need for clothes by
wearing pins. Therefore trade is a necessity for individuals to obtain those
things they cannot make on their own.
But in a barter system trade is difficult. There is no guarantee that an expert
pin-maker will be able to find people willing to swap their goods for his or
her pins at a fair rate of exchange.

• What is money?
• We now know that money is a generally acceptable medium
of exchange.
• However, we also know that to be money a commodity must
also act as store
• of value. Given this, our savings in banks and other financial
institutions can
• be classified as money because we can withdraw these
deposits so that they
• may be exchanged for the goods and services we want.
• Notes and coins (cash), and deposits with banks and other
financial institutions
• therefore make up the money supply in an economy.
• What is the market for money?
• Business organizations that specialize in providing
• these services are called financial institutions. Without financial institutions,
• specialized production and trade on the scale enjoyed today would not be
• possible, costs of production would be much higher, economies would be less
• developed and economic growth would be much slower.
• The money market is really no different from any other market. It is made
• up of all those people and organizations that want money, and all the people
• and organizations willing and able to supply money, namely a banking
• system that creates deposit money, and a central bank that issues notes and
• coins.
• What is a bank?
• The main types of financial institutions in the
market for money are banks.
• They are just like any other business except the
product they supply is money,
• in the form of Ioans and other financial
products.
• A bank is a financial intermediary because it
brings together customers who
• want to save money and customers who want to
borrow it.
• Types of bank
• 1 Commercial banks
• Commercial banks are often called 'high-street banks,
because they have retail
• branches located in most cities and towns. However, many
banks provide
• telephone and online banking facilities for their customers
so there is no need
• to visit a branch.
• 2 Credit unions
• A credit union is a cooperative, not-for-profit organization,
owned by and for
• its members.
• 3 Mutual societies
• 3 Investment banks
• 4 Islamic banks
• The role of a central bank
• It issues notes and coins for the nation's currency
• It manages payments to and from the government
• It manages the national debt
• It supervises the banking system, regulating the
conduct of banks,
• holding their deposits and transferring funds
between them
• It is the 'lender of the last resort' to the banking
system
• It manages the nations gold and foreign currency
reserves
• It operates the government's monetary policy
3.1.2Banking

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3.

• To support specialization and exchange

• would either have had to accept other goods or services as payment or be

• self-sufficient by producing everything you needed or wanted for yourself.

• Many of our ancestors had to be self-sufficient. All individuals or small

• producing cooking pots from clay and so on.

• However, it is difficult to produce everything you need or want for yourself.

• People have different skills.

1 Money is a medium of exchange

2 Money is a unit of account

3 Money is a store of value

4 Money is a means of deferred payment

If people specialize they must trade. A man concentrating on making pins

wearing pins. Therefore trade is a necessity for individuals to obtain those

things they cannot make on their own.

But in a barter system trade is difficult. There is no guarantee that an expert

her pins at a fair rate of exchange.

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