Английский язык экономика. Учебно-методическое пособие по научно-техническому переводу, аннотированию и реферированию

UNIT 8

Part 1. Text. Money and Banking

In songs and popular language, ‘money’ is a symbol of success, a source of crime and makes the world go around. Dogs’ teeth in the Admiralty Islands, sea shells in parts of Africa, gold in the nineteenth century: all are examples of money. What matters is not the commodity used but the social convention that it is accepted, without question, as a means of payment.

Money is any generally accepted means of payment for delivery of goods or settlement of debt. It is the medium of exchange.

In exchanging goods or labour services for money, we accept money not to consume it directly but for its later use in buying what we really want. Imagine an economy without money.

A barter economy has no medium of exchange. Goods are simply swapped for other goods.

In a barter economy, if you want an economics textbook, not only must you find someone wanting rid of one, you must have what that person wants in exchange. People spend a lot of time and effort finding others with whom to swap. Time and effort are scarce resources. Using money makes trading cheaper and more efficient. Society can use the time and effort for better purposes.

Other functions of money

British prices are quoted in pounds, American prices are quoted in dollars. However, there are exceptions. During rapid inflation, people may quote prices in foreign currency even if they still take payment in local currency, the medium of exchange.

The unit of account is the unit in which prices are quoted and accounts are kept.

Nobody would accept money as payment for goods today if the money was worthless when they tried to spend it later. But money is not the only store of value. Houses, paintings and interest-bearing bank accounts all store value. Storing value is necessary but not the key feature of money, which is its role as medium of exchange.

Money is also a store of value, available for future purchases.

61

Different kinds of money

In prisoner-of-war camps, cigarettes served as money. In the nineteenth century, money was mainly gold and silver coins. These are examples of commodity money, ordinary goods with industrial uses (gold) and consumption uses (cigarettes) that also serve as a medium of exchange. But society need not waste valuable commodities by using them as money.

A token money has a value as money that greatly exceeds its cost of production or value in consumption.

A £10 note is worth far more as money than as a 7.5 × 14 cm piece of high-quality paper. By collectively agreeing to use token money, society economises on the scarce resources required to produce money. A token money survives only if private production is illegal. Society also enforces the use of token money by making it legal tender. In law, it must be accepted as a means of payment. Modern economies supplement token money by IOU money.

An IOU money is a medium of exchange based on the debt of a private bank.

A bank deposit is IOU money. You pay for goods with a cheque, which the bank must honour when a shopkeeper presents it. Bank deposits are a medium of exchange, a generally accepted means of payment.

Modern banking

When you deposit your coat in the theatre cloakroom, you do not expect the theatre to rent your coat out during the performance. Banks lend out some of the coats in their cloakroom. A theatre would have to get your particular coat back on time, which might be tricky. A bank finds it easier because one piece of money looks just like another.

Bank reserves are cash in the bank to meet possible withdrawals by depositors. The reserve ratio is the ratio of reserves to deposits.

Tab. 6 shows the balance sheet of UK commercial banks in 2005. Their assets were mainly loans to firms and households, and financial securities, such as bills and bonds, issued by governments and firms. Since many securities are very liquid – easily sellable at a predictable price – banks can lend short-term and still get their money back if depositors then withdraw their money. In contrast, many loans to firms and households are illiquid. The bank cannot easily get its money back in a hurry. Modern banks get by with tiny cash reserves in the vault. In Tab. 6 they are not even recorded separately.

62

Banks’ liabilities are mainly sight and time deposits. Sight deposits mean a depositor can withdraw money ‘on sight’ without any notice; cheque accounts are sight deposits. Time deposits, which pay higher interest rates, need a period of notice before withdrawing money. Banks have more time to organise the sale of some of their high-interest assets in order to have the cash available to meet these withdrawals. The other liabilities of banks are various ‘money market instruments’, short-term and highly liquid borrowing by banks.

The business of banking

A bank is a business to make profits by lending and borrowing. To get money in, the bank offers favourable terms to potential depositors. UK banks increasingly offer interest on sight deposits, and often offer free cheque facilities to people whose sight deposits or current accounts are not overdrawn. And they offer better interest rates on time deposits.

Table 6 shows how the banks lend out this money. In sterling, most is lent as advances or overdrafts to households and firms, at high interest rates. Some is used to buy securities such as long-term government bonds. Some is more prudently invested in liquid assets, which pay less interest but can be easily sold if necessary. Some is held as cash, the most liquid asset of all.

The bank acquires a diversified portfolio of investments. Some of this income pays interest to depositors, the rest is for the bank’s expenses and profits. Individual depositors have neither the time nor the expertise to decide which of these loans or investments to make.

63

UK banks’ reserves are only 2 % of the sight deposits that could be withdrawn at any time. At short notice, banks can cash in other liquid assets easily and for a predictable amount. The skill in running a bank is judging how much to hold in liquid assets including cash, and how much to lend in less-liquid assets that earn higher interest rates.

Banks as creators of money

The money supply is money in circulation, namely cash outside the bank vaults, plus bank deposits on which cheques can be written.

For simplicity, suppose banks use a reserve ratio of 10 %. In Tab. 7, initially citizens have £1000 in cash, which is also the money supply. This cash is then paid into the banks. Banks have assets of £1000 cash and liabilities of £1000 deposits, which is money they owe to depositors. If banks were like cloakrooms, that would be the end of the story. However, since all deposits are not withdrawn daily banks do not need then to be fully covered by cash in the bank.

In the third row, banks create £9000 of overdrafts. Think of this as loans to customers of £9000, an asset of the banks. But these are loans of deposits, against which cheques can be written, and hence also a liability of the banks. Now the banks have £10 000 of total deposits – the original £1000 of cash paid in, plus the £9000 deposits newly lent – and £10 000 of total assets, comprising £9000 to keep track of the loans plus £1000 cash in the vaults. The reserve ratio is now 10 %. It does not matter whether this ratio is imposed by law or is merely the profit-maximising behaviour of banks balancing risk and reward.

How did banks create money? Originally, the money supply was £1000 of cash in circulation. When paid into bank vaults, it went out of circu-

64

lation as money. The public instead got £1000 of bank deposits against which to write cheques. The extra bank reserves were then used to create new loans and deposits, and the public had £10 000 of deposits in cheque accounts. The money supply rose from £1000 to £10 000. Banks created money.

The monetary base and the money multiplier

Cash is supplied by the central bank, which in the UK is the Bank of England and in Russia – Centrobank. The government controls the issue of token money in a modern economy.

The monetary base is the supply of cash, whether in private circulation or held in bank reserves. The money multiplier is the ratio of the money supply to the monetary base.

In our previous example, cash was £1000 and the money supply £10 000, so the money multiplier was 10. Suppose instead that banks operate on a 5 % reserve ratio. When £1000 cash is paid into the banks, they now create an extra £19 000 of new loans and deposits. Banks’ assets are £1000 cash + £19 000 loans, and their liabilities are £1000 deposits when the cash was paid in, plus £19 000 deposits as counterparts to new loans. Now a monetary base of £1000 leads to a money supply of £20 000. The money multiplier has risen to 20. Hence, a lower reserve ratio means that more loans and deposits are created for any given cash in the vaults. The money multiplier is larger. Conversely, the more cash the public keeps under the bed, the less of the monetary base goes into bank vaults, and the lower is the money multiplier for any given reserve ratio. Without cash reserves, banks cannot create additional money.

Measures of money

The money supply is cash in circulation (outside banks) plus bank deposits. It sounds simple, but it is not. Two issues arise: which bank deposits, and why only bank deposits?

There is a spectrum of liquidity. Cash is completely liquid. Sight deposits (cheque accounts) are almost as liquid, and time deposits (savings accounts) only a little less liquid than that. Where people can make automatic transfer between savings and cheque accounts when the latter run low, savings deposits are as liquid as cheque accounts.

Until the 1980s, everyone knew what a bank was, and whose deposits counted in the money supply. Financial deregulation has now blurred

65

this distinction, ‘Banks’ lend for house purchase, ‘Building societies’ issue cheque books, and even supermarkets are joining the banking business.

Different measures of money draw different lines in the continuous spectrum of liquidity, and include the deposits of different institutions. The narrowest measure is M0, the wide monetary base. M0 measures all cash plus the banks’ own deposits with the Bank of England.

Wider measures of money ignore bank reserves but add various deposits to cash in circulation outside the banks. M1 adds sight deposits of banks. M3 also adds other banks deposits. Adding also the deposits in building societies we get the M4 measure of broad money.

Since we can no longer distinguish between banks and building societies, routine statistics are now published only for the narrow measure M0 and for the broad measure M4. Once we leave the monetary base, the first sensible place to stop is M4.

Tab. 8 gives data for 2006. Of the £33 billion monetary base, only £7 billion was in bank reserves. Since this was multiplied up into £904 billion of M4, the reserve ratio was below 1 per cent. Modern banks need little cash because financial markets and liquidity are so well developed. Hence, the money multiplier must be huge. In fact, Tab. 8 implies it was 904 / 33 = 27.

Table 8

66

Exercises

Exercise 1. Suggest the Russian equivalents for the words and word-combinations given below.

Medium of exchange, interest-bearing bank accounts, commodity money, balance sheet, sight deposits, time deposits, high-interest assets, current accounts, liquid assets, reserve ratio, bank vaults, counterparts, retail deposits, wholesale deposits.

Exercise 2. Find in the text synonyms for the following words.

Mean, invoice, receipt, to bank, taking back, flowing, proportion, credit, capital, recycling, currency.

Exercise 3. Explain in English

Money, a barter economy, the unit of account, a token money, an IOU money, bank reserves, the reserve ratio, the money supply, the monetary base, the money multiplier.

Exercise 4. Arrange the jumbled words into the right order.

1.fallen / on / money / has / dollar / value / the/ market / world / in.

2.is / 10 / to / 1 / the / 2 / to / ratio / 5 / of.

3.an / rates / major / announced / the / in / interest / banks / have / increase.

4.cheques / we / only /don’t / hard / take / cash / accept / we.

Exercise 5. Increase your vocabulary:

67

Make some sentences of your own with the above expressions. Exercise 6. Describe the tab. 7.

Exercise 7. Do the written translation of the passage.

“A bank is a business to make profits ... to decide which of these loans or investments to make”.

Exercise 8. Review questions.

1.a) Is a car taken in “part exchange” for a new car a medium of exchange?

b) Could you tell by watching someone buying mints (white discs) with coins (silver discs) which is money?

2.How do commercial banks create money? What happens if their reserve ratio is 100 %?

3.a) Are travellers’ cheques money?

b)Season tickets?

c)Credit cards?

4. Sight deposits – 30, time deposits – 60, banks’ cash reserves – 2, currency in circulation – 12, building society deposits – 20. Calculate M0 and M4.

Exercise 9. Look through the text once more, find key-words in it and write an abstract of the text using the key-words.

Part 2. An insight into how economics applies to the real world

Travellers’ Tales

Life without money

‘Some years since, Mademoiselle Zelie, a singer, gave a concert in the Society Islands in exchange for a third part of the receipts. When counted,

68

her share was found to consist of 3 pigs, 23 turkeys, 44 chickens, 5000 cocoa nuts, besides considerable quantities of bananas, lemons and oranges . . . as Mademoiselle could not consume any considerable portion of the receipts herself it became necessary in the meantime to feed the pigs and poultry with the fruit.’ W.S. Jevons (1898).

Marco Polo discovers paper money

“In this city of Kanbula [Beijing] is the mint of the Great Khan, who may truly be said to possess the secret of the alchemists, as he has the art of producing money ... He causes the bark to be stripped from mulberry trees . . . made into paper . . . cut into pieces of money of different sizes. The act of counterfeiting is punished as a capital offence. This paper currency is circulated in every part of the Great Khan’s domain. All his subjects receive it without hesitation because, wherever their business may call them, they can dispose of it again in the purchase of merchandise they may require.”

The Travels of Marco Polo, Book II

Assignments

1.Study the article and express your opinion.

2.Comment on the following.

“This contrast between a monetary and barter economy is taken from the World Bank”.

Source: World Development Report, 2004. 3. Write a report on the theme

“International money must have intrinsic value: therefore we need more gold”.

4. Discuss in your group.

Why are these statements wrong?

a)Since their liabilities equal their assets, banks do not create anything.

b)Tax evasion raises the money supply since people keep more cash under the bed.

69

SUPPLEMENTARY READING

Text 1. International Trade

This text looks at the world economy as a trading system. Why does international trade occur? Why have some countries been left behind while others prosper as never before? And what can we say about globalisation, so frequently a source of fear and concern in the public debate? Is globalisation a threat or an opportunity?

International trade is part of daily life. Britons drink French wine, Americans drive Japanese cars, and Russians eat American wheat. Through exchange and specialisation, countries supply the world economy with things that they produce relatively cheaply, receiving in exchange things made relatively more cheaply elsewhere.

These gains from trade are reinforced by scale economies in production. Instead of each country having many small producers, different countries specialise in different things so that all countries benefit from the cost reductions that ensue. Because foreign competition may make life difficult for some voters, governments are often under pressure to restrict imports. Is it ever a good idea to restrict imports?

Fig. 15. Exports (% of GDP)

World exports are now 20 % of world GDP. World trade has grown by 7.5 % a year since 1950, as transport costs and other barriers to trade keep falling. Countries are becoming steadily more open to trade, as Fig. 15 confirms. Events in other countries affect our daily lives much more than they did 20 years ago. Smaller countries are of course more open; when New York trades with California it does not count as international trade.

70