IoUs as Money

Money is the credit side of a balance sheet relation. Every dollar of credit is matched by an equal amount of debt. A bank loan creates a credit for the borrower in the form of a negotiable IOU (the deposit) and a matching debt (the obligation to repay the loan). For the bank, it creates an often illiquid asset (the loan contract) and an equal liability (the negotiable IOU).

The term money is sometimes used in reference to high quality debt instruments nearing maturity.However such near-money is seldom acceptable as a medium of exchange.Besides being inconvenient to the seller, the monetary value of near-money is not really known until sold in the marketplace. 

Fed Funds and Bank Money

When the Fed purchases a financial asset from the public, it credits the seller's bank with a deposit at the Fed, known as Fed funds.  Banks can exchange Fed funds for Federal Reserve notes, and vice versa, on demand.  In either form, these Fed IOUs are the most negotiable in the economy.  This is because the private sector must surrender Fed funds in paying Federal taxes.  Conversely the government pays in Fed funds when it spends.  

Individuals usually pay taxes with bank money, i.e. a check against a bank deposit.  However the bank must cover the check with its own Fed funds.  It cannot issue an IOU to cover the check.  The Fed accepts bank money at par with its own IOUs.  Thus bank deposits are nearly as negotiable in the private sector as Fed funds.  Private party IOUs may be legally binding, but they are of uncertain monetary value and seldom negotiable.  They are simply private debt rather than money.

(2401 symbols)

Vocabulary list:_________________________________________________

IOU – I owe you - Я вам должен (форма долговой расписки)

store of value - сбережения

negotiate – договариваться, обсуждать

retain – удерживать, сохранять

bond – облигация, долговое обязательство

unit of account – расчетная единица

balance sheet – балансовый отчет

near-money - субститут денег

negotiable [nɪ'gəuʃɪəbl] – оборотный, договорной

maturity - наставший срок платежа

matching debt – сбалансированный долг

illiquid asset – неликвидные активы

monetary value - денежная стоимость

equal liability [ˌlaɪə'bɪlətɪ] – равная ответственность

vice versa – наоборот

Vocabulary Section

Exercise I. Find in the Text the English for:

бартерная система; справедливый обмен; принимать к оплате; сбережения; надолго сохранять ценность; долговое обязательство; выражать в определенной денежной единице; расчетная единица; измерить ценность одного товара относительно другого; баланс финансовых средств; неликвидные активы; денежная стоимость; финансовые активы; самый оборотный; юридически обязательный; неопределенная денежная стоимость.

Exercise II. Answer the following questions:

1. Is money used only for fair exchange of goods and services?

2. What is an IOU?

3. When does an IOU become money?

4. What is the definition of money as a credit?

5. Under what conditions can an IOU be accepted in exchange for goods and services?

6. Is any store of value defined as money?

7.  What factor defines money value?

8. When is money referred to as near-money?

9. Why is near-money seldom accepted as a medium of exchange?

10. How are Fed funds created?

11. What are the most negotiable bonds in the economy?

12. How do individuals pay taxes?

Exercise III. Render in English: