unit 2

Monitory system

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text 1

The Monetary Base

Credit is the lifeblood of the economy.  The amount and quality of credit market debt is a measure of the size and vitality of a nation's economy.  All such debt rests like an inverted pyramid on a small foundation of money known as the monetary base.  The implicit assumption is that credit market debt is convertible at maturity into base money.

The monetary base is the definitive money of a nation, meaning the State has no obligation to convert it on demand into some other form of money.  The State defines the unit of account in base money, makes it legal tender for all debts, public and private, and requires that payments to the State be in base money. 

Bank Credit and Base Money of the u.S.

A private enterprise with sufficient financial capital may obtain a charter that permits it to accept deposits of base money from the public, and to issue loans in the form of credit convertible to base money on demand.  These depositories, commonly known as banks, must hold sufficient base money, called reserves, for that purpose. 

When one deposits a check or cash in his account at a bank, he receives credit in exchange which we will refer to as bank money.  We expect banks to redeem those credits for cash on demand. 

Most of the money in use today exists as credits issued by private banks.  However when one pays by drawing on his bank account, if the check is deposited in another bank, the payer's bank must transfer an equal amount of reserves to the payee's bank.  Thus base money is the foundation of the bank money system.

Base Money as Credit

In reality, base money itself is a form of credit.  In the same way a contract can be viewed as a document or the agreement it represents, money can be viewed as a token or the credit it represents.  And since credit for the holder is debt for the issuer, money can also be viewed as a token representing third party debt.  In the case of base money, the third party is the Fed.

All base money originates with the Fed.  For the most part, it is issued in exchange for securities the public bought from the Treasury with base money previously acquired from the Fed. 

Base money is simply another form of credit.  The Fed issues base money in exchange for credits issued by the Treasury which the public previously bought with base money.  This circular system of credit works as long as the State broadly enforces tax collection.  Price inflation varies in the short run for a number of reasons not directly under the control of the State.  In the long run, Fed policy in setting the cost to banks of acquiring base money is the key to controlling the average inflation rate.

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Vocabulary List: __________________________________________________

monetary base - денежная база, денежная масса

vitality – жизнеспособность

debt – долг, обязательство

definitive – окончательный, определенный, отличительный

charter – чартер (документ на право ведения операций)

depository – хранилище

redeem – выкупать, выплачивать

drawing on a bank account - снятие денег со счёта

Vocabulary Section

Exercise I. Find in the Text the Russian for:

the lifeblood of the economy; credit market debt; the size and vitality of a nation's economy; an inverted pyramid; implicit assumption; at maturity; the definitive money of a nation; define the unit of account; a private enterprise; obtain a charter; to issue loans; redeem credits; pay by drawing on one’s bank account; in exchange for securities; as long as; price inflation; in the short run; In the long run; the average inflation rate.

Exercise II. Find in the Text the English for:

источник жизненной силы; объем и жизнеспособность; опираться на; денежная масса; скрытое предположение; обратимый при наступлении срока; выпустить заем; оплачивать снятыми с банковского счета деньгами; получатель денег по чеку или векселю; в обмен на ценные бумаги; взыскивать налоги; взвинчивание цен; кратковременно; в конце концов; средний уровень инфляции.

Exercise III. Answer the following questions:

1. Why is credit the lifeblood of the economy?

2. What is the monetary base?

3. What is the function of bank?

4. How can one get bank money?

5. Why is base money the foundation of the bank money system?

6. How can base money be a credit?

7. Who is the issuer of base money?

8. What does it exchange for?

9. Describe the circular system of credit.

10. How can Fed control the average inflation rate?

Exercise IV. Fill in the proper words: