Money is an intrinsic part of our life. By money we mean any commodity generally accepted in payment for goods, services and debts. The main use of money is to make the trading process simpler and more efficient, but actually money has various uses in the modern world and various functions, such as means of payment, medium of exchange, standard of value, unit of account, store of value, standard of deferred payment.
Money, as 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 There has to be a double coincidence of wants. 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.
Although the crucial feature of money is its acceptance as the means of payment and medium of exchange, other functions are also in great importance. 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, the unit in which prices are quoted and accounts are kept. It is usually convenient to use the units in which the medium of exchange is measured as the unit of account as well.
We can talk about different kinds of money.
In prisoner-of-war camps, cigarettes served as money. In the 19th century money was mainly gold and silver coins. These are examples of commodity money, ordinary goods with industrial uses (gold) and consumption uses (cigarettes), which also serve as a medium of exchange. To use commodity money, society must either cut back on other uses of that commodity or devote scarce resources to producing additional quantities of the commodity. But there are less expensive ways for society to produce money.
A token money is a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money. The essential condition for the survival of token money is the restriction of the right to supply it. Private production is illegal. Society enforces the use of token money by making it legal tender. The law says it must be acceptable as a means of payment.
In modern economies, token money is supplemented by IOU money. IOU money is a medium of exchange based on the debt of a private firm or individual. A bank deposit is IOU money because it is a debt of the bank. When you have a bank deposit the bank owes money. You can write a cheque to yourself or a third party and the bank is obliged to pay whenever the cheque is presented. Bank deposits are a medium of exchange because they are generally accepted as payment.
As you know each country has its own national currency, but there is such a phenomenon as euro – it’s European currency, which is acceptable in 12 countries of European Union. On 1 January 2002, the euro, which has been adopted in 1999, started circulating in notes and coins. This was a historical moment in the integration of Europe. From 1 January 2002 the euro existed as cash, but before it could be used only for banks and financial transaction.
What are the advantages of the euro?
- the euro is a safe currency against counterfeiting,
- the euro is based on one of the strongest economies in the world with stable prices,
- the euro is business friendly,
- the euro is convenient and transparent for tourists.
But let’s turn to the history and see how everything began, what is the background of banks.
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. Early forms of money like these were used to buy goods. They were also used to pay for marriages, fines and debts. But although everyday objects were extremely practical kinds of cash in many ways, they had some disadvantages too. For example, it was difficult to measure their value accurately, divide some of them into a wide range of amounts, keep some of them for a long time, and use them to make financial plans for the future. For the reasons such as these, some societies began to use another kind of money that is precious metals.
People used gold, gold bullion, as money. Those were dangerous times, and people wanted a safe place to keep their gold. So they deposited it with goldsmiths, people who worked with gold for jewelry and so on and also had a guarded vault to keep it safe in. And when people wanted some of their gold to pay for things with, they went and fetched it from goldsmith.
Two developments turned these goldsmiths into 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 nowadays call a cheque. And, of course, once these letters or cheques became acceptable as a way of paying for goods, people felt that the gold they had deposited with the goldsmith was just as gold in their own pockets. And as letters or cheques were easier to carry around than gold and a lot less dangerous, people started to say that their money holdings were what they had with them plus their deposits. So a system of deposits was started. The second development was that goldsmiths realized they had a great deal of unused gold lying in their vaults doing nothing. This development was actually of greater importance than the first.
Now let’s turn to the first bank loan and see what happened. A firm asked a goldsmith for a loan. The goldsmith realized that some of the gold in his vault could be lent to the firm, and of course he asked the firm to pay it back later with a little interest.
The goldsmith bankers were early examples of a financial intermediary.
A financial intermediary is an institution that specializes in bringing lenders and borrowers together. Banks are not the only financial intermediaries. Insurance companies, pension funds and building societies also take money in order to relend it. The crucial feature of banks is that some of their liabilities are used as a means of payment and are therefore part of the money stock.
Assignments
I. Answer the questions.
1. What do we mean by money?
2. What is the main use of money?
3. What is IOU money?
4. What are the advantages of the euro?
5. What did people use as money?
6. What developments turned goldsmiths into bankers?
II. Translate the following sentences into Ukrainian. Put questions to any two of them.
1. By money we mean any commodity generally accepted in payment for goods, services and debts.
2. In a barter economy, the seller and the buyer each must want something the other has to offer.
3. A token money is a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money.
4. You can write a cheque to yourself or a third party and the bank is obliged to pay whenever the cheque is presented.
5. The goldsmith realized that some of the gold in his vault could be lent to the firm, and of course he asked the firm to pay it back later with a little interest.
III. Translate the following sentences into English.
1. Гроші є невід’ємною частиною нашого життя.
2. Люди купують та продають речі в обмін на гроші.
3. Гроші у вигляді найпростішого боргового документу є засобом обміну, що базується на борзі приватної фірми чи фізичної особи.
4. У минулому більшість суспільств використовували різні предмети як гроші.
5. Вирішальною особливістю банків є те, що частина їхніх пасивів використовується як засіб оплати і, отже, є частиною грошового фонду.
IV. Name the following definitions.
1. The medium through which people exchange goods and services.
2. Means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money.
3. Medium of exchange based on the debt of a private firm or individual.
4. European currency, which is acceptable in 12 countries of European Union.
5. People, who worked with gold for jewelry and so on and also had a guarded vault to keep it safe in.
6. It is an institution that specializes in bringing lenders and borrowers together.
V. Make a scheme to money functions.
VI. Work in groups of three. In pairs make a dialogue based on the text. Ask the third student to report it.
VII. Sum up what the text says about:
1) money: its functions, its history and kinds;
2) history of banks.
Text 2
