24. Money

Lead-in:

1. medium of exchange – засіб обміну

2. unit of account – одиниця розрахунку

3. store of value – засіб збереження

4. notes and coins – банкноти і монети

5. purchasing power – купівельна спроможність

6. standard of deferred payment – стандарт відкладеного платежу

7. Legal Tender – законний платіжний засіб

8. bank liabilities – банківські зобов’язання

The main function of money is a medium of exchange, but it performs other functions: a unit of account and a store of value.

The use of money as a medium of exchange is as fundamental to the development of economic systems as the invention of the wheel for transport. In all advanced economies the greater part of the supply of money consists of deposits in bank accounts, rather than notes and coins.

To act as an efficient medium of exchange, money must also function as a store of value. With money, the act of purchase can be separated from the act of sale, money then acts as a temporary means of holding purchasing power.When the overall price level is stable, or even falling, money can be more than a temporary store of value.

Even in periods of rapid inflation people continue to hold money in order to carry out transactions, because of the great convenience it allows.There may be better stores of value, but they lack the liquidity (i.e. the ability to be used directly to make purchases) which is the characteristic of money. Other assets may be better stores of value, but they can not be converted into purchasing power without some cost.

Money also acts as a measuring unit to assess the relative values of different commodities. Money performs this measurement function when it becomes a standard of deferred payment: if I wish to borrow a given sum now an interest charge will be added to it so that I know how much I will have to repay in the future. Inflation erodes the usefulness of money in this role.

One of the requirements for money is that the item should be limited in supply. The supply of the monetary unit should also be relatively stable. From the convenience point of view it is desirable that money should be portable and durable, and also homogeneous. Money should also be divisible into small units for minor transactions.

In Britain, the most obvious form of money is the currency in circulation, known as Legal Tender. Since the greater part of money supply now consists of bank deposits, it is necessary to mention the banking system. The banking system of Great Britain consists of a number of institutions, with the Bank of England playing a crucial role. The Bank of England regulates the supply of money, influences interest rates and oversees the operations of commercial banks; it also manages the National Debt. Banks are distinguished from other intermediaries by the fact that their liabilities (bank deposits) can be spent directly as money, which makes them the focus of monetary policy.

 Questions for comprehension check-up and discussion:

1. What are the main functions of money?

2. Why do people continue to hold money even in periods of rapid inflation?

3. What is liquidity?

4. Explain the term ‘standard of deferred payment’.

5. Why is it necessary that money should be portable, durable and homogeneous?

6. What are the functions of the Bank of England?

7. What is the main difference between banks and other intermediaries?