(1) Wheat

(2) Potatoes

Nebraska

Has surplus of wheat.

Wants potatoes.

Florida

Has surplus of oranges.

Wants wheat.

IDAHO

Has surplus of potatoes.

Wants oranges.

(3) Oranges

(3) Money

Figure 1. Money facilitates trade where wants do not coincide.

By the use of money as a medium of exchange, trade can be accomplished. By facilitating exchange, the use of money permits an economy to realize the efficiencies of specialization.

2. Measure of Value. Money is also a measure of value. Society uses the monetary unit as a yardstick for measuring the relative worth heterogeneous goods and resources. Just as we measure distance in miles or kilometres, we gauge the value of goods and services in dollars, pounds etc. With a money system, we need not state the price of each product in terms of all other products for which it can be exchanged; we need not specify the price of cows in terms of corn, crayons, cigars, Chevrolets and croissants.

This use of money as a common denominator means that the price of each product need be stated only in terms of the monetary unit. It permits buyers and sellers to readily compare the worth of various commodities and resources. Such comparisons facilitate rational decision making. Money is used as a measure of value for transactions involving future payments. Debt obligations of all kinds are measured in the monetary unit.

2. Store of Value. Finally, money serves as a store of value. Because money is the most liquid – the most spendable – of all assets, it is a very convenient way to store wealth. The money you place in a safe or checking account will still be available to you months or years later when you wish to use it. Most methods of holding money do not yield monetary returns such as one gets by storing wealth in the form of real assets (property) or paper assets (stocks, bonds etc). However, money does have the advantage of being immediately usable by a firm or a household in meeting all financial obligations.

2. Comprehension check.

Are the following statements true or false? Correct the false ones.

1. Money is any item which is generally acceptable by sellers in exchange for goods and services.

2. The exchange of one good or service for another good or service is barter.

3. By promoting exchange the application of money prevents an economy from realizing the efficiencies of specialization.

4. Monetary unit is a gauge of the value of goods and services.

5. Similar to barter economy the use of money needs to specify the price of each good and service in terms of the others.

6. The second major function of money as a measure of value is good for deals drawing in coming payments.

7. Being a store of value money is not used in meeting all financial liabilities.

3. Read the text once again. Find words in the text that mean the same as the following.

a. decisive	i. to evade	q. to simplify
b. means	j. to procure	r. liabilities
c. establishment	k. to achieve	s. to keep
d. to fulfil	l. priority	t. immovables
e. settlement	m. standard	u. securities
f. manufacturers	n. to measure	v. family
g. article	o. to indicate
h. accessible	p. merchandise

Discussion

Work in small groups.

Fully evaluate and explain the following statements:

1. “The invention of money is one of the great achievements of the human race, for without it the enrichment that comes from broadening trade would have been impossible”.

2. “In most modern industrial economies of the world the debts of government and of commercial banks are used as money.”

Reading

1. Read text 21 using your dictionary to help with new words. Think of the suitable title.

Text 21

Everything that functions as a medium of exchange, a measure of value and a store of value is money. Maintaining the purchasing power of money depends largely on the government’s effectiveness in managing the money supply. The Federal Reserve System recognizes three “official” definitions of the money supply. M₁ - the money supply is composed of two items:

1. Currency, that is, coins and paper money in the hands of the nonbank public.

2. All checkable deposits, meaning deposits in commercial banks and “thrift” or savings institutions on which checks can be drawn.

Coins and paper money are debts of government and governmental agencies. Checking accounts represent debts of the commercial bank or savings institution.

The safety and convenience of using checks have made checking accounts the most important form of money in many countries of the world. In dollar volume, for example, about 90 percent of all transactions are carried out by checks.

A check must be endorsed (signed on the reverse side) by the person cashing it; the drawer of the check subsequently receives the canceled check as an endorsed receipt attesting to the fulfillment of the obligation. Similarly, because of the writing of a check requires endorsement by the drawer, the theft or loss of your checkbook is not nearly as calamitous as losing an identical amount of currency. Furthermore, it is more convenient to write a check than to transport and count out a large sum of currency. People can convert checkable deposits immediately into paper and coins on demand; checks drawn on these deposits are thus the equivalent of currency.

There are some institutions offering checkable deposits:

1. Commercial banks – are the mainstays of the system. They accept the deposits of households and businesses and use these financial resources to make available a wide variety of loans. Commercial bank loans provide short-term working capital to businesses and farmers, finance consumer purchases of automobiles and other durables.

2. Thrift institutions – are savings and loan associations (S&Ls), mutual savings banks and credit unions.

Savings and loan associations and mutual savings banks marshal the savings of households and businesses which are then used to finance housing mortgages.

Credit unions accept the deposits of “members” – usually a group of individuals who work for the same company - and lend these funds to finance installment purchases. The checkable deposits are known by various names – demand deposits, NOW (negotiable order of withdrawal) accounts, ATS (automatic transfer service) accounts, and share draft accounts.

Near-Monies: M₂ and M₃

Near-monies are certain highly liquid financial assets such as noncheckable savings accounts, time deposits, and short-term government securities. Although they do not directly function as a medium of exchange, they can be readily and without risk of financial loss converted into currency or checkable deposits. Thus, on demand you may withdraw currency from a noncheckable savings account at a commercial bank or thrift institution. Or, you may request that funds be transferred from a noncheckable savings account to a checkable account.

You can withdraw funds quickly from a money market deposit account (MMDA). These are interest-bearing accounts offered by banks and thrifts, which pool individual deposits to buy a variety of short-term securities. MMDAs have minimum balance requirements and limit how often money can be withdrawn.

As the term implies, time deposits only become available to a depositor at maturity. For example, a 90-day or 6-month time deposit is only available without penalty when the designated period expires. Although time deposits are somewhat less liquid than noncheckable savings accounts, they can be taken as currency or shifted into checkable accounts when they mature.

Or, through a telephone call, you can redeem shares in a money market mutual fund (MMMF) offered through a financial investment company. These companies use the combined funds of individual shareholders to buy short-term credit instruments such as certificates of deposit and U.S. government securities.

M₂ – the monetary authorities offer a second and broader definition of money:

M₁ + noncheckable savings

deposits + MMDAs + small

Money, M₂ = (less than $100,000) time deposits

+ MMMFs

In other words, M₂ includes (1) the medium of exchange items (currency and checkable deposits) comprising M₁ plus (2) other items such as noncheckable savings deposits, money market deposit accounts, small time deposits, and individual money market mutual fund balances. These other items can be quickly and without loss converted into currency and checkable deposits.

Money, M₃ consists of M₂ plus large time deposits (more than $100,000) time deposits.

Money, M₃ = M₂ + large ($100,000) time deposits

Near-Monies: Implications

Near-monies are important for several related reasons.

1. Spending Habits. These highly liquid asserts affect people’s consuming-saving habits.

Usually, the greater the amount of financial wealth people hold as near-monies, the greater is their willingness to spend out of their money incomes.

2. Stability. Conversion of near-monies into money or vice versa can affect the economy’s stability. For example, during the prosperity-inflationary phase of the business cycle, converting noncheckable deposits into checkable deposits or currency adds to the money supply which could increase inflation. Such conversions can complicate the task of monetary authorities in controlling the money supply and the level of economic activity.

3. Policy. The specific definition of money used is important for monetary policy. For example, the money supply as measured by M₁ might be constant, while money defined as M₂ might be increasing. If the monetary authorities feel it is appropriate to have an expanding supply of money, the narrow M₁ definition would call for specific actions to increase currency and checkable deposits. But the broader M₂ definition would suggest that the desired expansion of the money supply is already taking place and that no specific policy action is required.

2. Comprehension check.

Working in pairs, answer the questions.

1. What items constitute the M1 money supply?

2. What is the most important component of the M1 money supply?

3. What are near-monies?

4. What items constitute the M2 money supply?

5. What are the components of the M3 money supply?

6. Of what significance are near-monies?

Discussion

Work in pairs.

Discuss:

• What arguments can you make for including savings deposits in a definition of money?

• What are the basic functions of commercial banks and thrift institutions?

Writing

Put each of the following words or phrases into its correct place in the text below.

banks	savings accounts	investments	earn	coins	value
currency	beads	sell	money	exchange rate	change
goods	depositing	buy	shells	paper bills

Money

Money is what people use to … things. People spend money on … and services. Many people save part of their money by … it in a bank. People … money by performing services. They also earn money from … , including government bonds, and from … . … can be anything that people agree to accept in exchange for the things they … or the work they do. Ancient people used such varied things as … , … , and cattle as money. Today, most nations use metal coins and … . Different countries’ … and bills look different and have different names.

A person can … his money for the money of any country according to the … . Usually, such rates are set by the central … of a country. The … of a country’s … may change, depending on the economic and political conditions in that country.

Reading

1. Read text 22 using your dictionary to help with new words.

TEXT 22