Money and banking
Chapter one
Origin of money
Barter trade is the first kind of trade ever to take place in the social world. The trade involved the direct exchange of produce or services that may be possessed for each other. The people of this era were faced with trade related issues such as lack of common interest in the products offered. In some cases quantifying the terms of exchange were a problem particularly measuring goods for services. Some of the products produced were perishable thus the trade had a lot of wastage. The need to produce more food led to specialization that meant that many households produced what their resources supported. The exchange became increasingly complex such that a generally acceptable method of paying for goods had to be devised. The mode was generally acceptable as a way of exchange and was referred to as money.
According to economics, the definition of money commonly mistaken for income, the two are very different. Money is anything generally accepted as a mode of exchange during trade. Income can be paid in terms of money; it can also be quantified in services offered or other goods.
The supply of the countries legal tender must be controlled due to the effects money has to the economy. The federal government is tasked with this duty. In the event that the supply is more than the required levels the result is inflation, inflation makes commodities to be priced highly. If there is low supply of money, a resection is the result. In recession time purchases are avoided by the public thus slow growth in the economy.
Types of money
Many forms of money are used in the different transactions in everyday life; the need to acquire services and goods is paid for in what people refer to as money. Most of what people refer to as money is generally instruments for payment for produce procured. Money that is not in use should not be referred to as money because its contribution to the economy is constant. The money that is idle doesn’t affect the economy. The components of money are checking accounts and currency whether in coins or notes. These components determine the value of money in the economy. The federal governments always announces the money in circulation in the country, this is done so that the public can be aware of the funds available to them. The money in the bank reserves are not considered in the calculation of the components of money. Depositing or withdrawal from the current accounts affects the component of money although the change in the money available to the public is constant. Unless the money component of cash is increased, an increase in the currency in circulation should correspond in the decrease of money in the checking accounts.
Velocity of money
Money is used to pay for transactions an individual has benefited from, the individual pays for transactions in currency form. The recipient of the currency then uses the received currency for other transactions; the cycle goes with this currency funding various deals. This depicts the velocity of money. Its determined by the way the citizens tend to spend money. When the individuals have money to spend, the velocity is high and when finances are scarce, the velocity lessens due to the tendency of the people to save more. The velocity deals with acquisition of domestic products. This is because of their tendency to move faster and they are not a store of money, the measure of velocity should be related to the acquisitions that provide employment. Employment leads to spending thus ensuring continuity in the cycle. Both velocity and constituents of money are important in the valuation of a countries currency. Money may be stored by in other countries thus including them in the component or velocity of money could give wrong information about an economy. To accurately evaluate an economy, the two must be considered.
Money and gold
Gold backing of currency was used in the past; the currency was controlled in such a way no more currency could be produced in the event the government had not planned for finances. Some countries printed money after squandering public money thus causing inflation. The concept doesn’t apply because money value is dependent on its availability. The concept was later abolished in the US due to its ambiguity and the gold used in the international reserves to facilitate international business.
Chapter two
Production and regulation of money
The money in the US is regulated by three systems that works together to ensure inflation an recessions are avoided. The treasury is one of the bodies in this system and it is concerned with the financial department of the federal government. The treasury takes care of the government expenditure through the taxes and the money it has obtained through government bonds. The trade of securities is a form of borrowed fund that the government uses to finance its activities. The treasury also regulates the imprint of currency.
The system if the federal reserve, this was necessitated by the problems faced earlier by the banking sector and thus the government decided to form a special body concerned with control of US money and the banking system. The Federal Reserve banks are controlled by the government, they are owned by individual banks who are their affiliates. The banks are very profitable, they generate revenue capable of covering the operational cost and paying members dividend.
The surplus is given to treasury to subsidize borrowing ad preventing increase in tax. The purpose of this branch is to regulate amount of money supplied. It is a bank not only to the central government but also banks the member banks money, the international governments and agencies bank their money with federal banks. The bank regulates the actions of the other commercial banks through dictating the interest on the loans advanced.
Banks comprise the other mode of contorting money. They give the customers who are the public with instruments of making payments. Banks require charters for establishment, prospective banks should prove to the charters that there is a deficiency of services in the locality they want to start offering the service and they have the financial capability to do so. The banks are regulated by the charters. Without these checks the public may be exploited by the banks that are profit oriented. Regulation also ensures stability in the economy and efficiency in the banking organization. The banks receive payment from the customer making the customer a debtor to the bank, in the event the bank collapses, the debtor risks losing his money. Regulation also prevents management of the banks from misuse of the customers’ deposits.
Chartering more banks in the economy leads to competition, the banks straggle to compete for more customers through the provision of better services to the consumers to ensure that they retain customers. The banks regulate themselves adequately to remain operational. In the country, banks handle huge volumes of transactions daily and without adequate measures, the banks may cause an imbalance in the economy that may be risky. Banks thus control the volumes of money that the consumers withdraw to ensure that inflation is prevented.
Principle investors
These are those organizations entrusted in the regulation of banks. The organizations interrelate together to ensure that uniformity in their actions. The organizations have authority to close a bank among other forms of punishment that they might find deserving of a bank conducting unethical practices. All the regulatory bodies are represented by FFIEC; office of the comptroller of currency was the first to be formed. Other offices include that of the thrift supervision, the federal system, state owned banking agencies. All these corporations among others work together to facilitate the adequate regulation of the nation’s banks.
The Federal Reserve System is managed by a board of governors. The work of the governors is to formulate policies for the system. The governors check the systems functions also activity of component banks. The members of the board are selected by the president and the senate confirms the candidate. The nominate serves for 14 years with no option for reappointment. The governors approve all dealings in the Federal Reserve.
All the Federal Reserve depositories are located strategically to cater for the needs of the population around it. In areas of high population the banks are located close to each other to ensure that the population is adequately served. The need to have an intermediary between the board of governors and the commercial banks is handled by the federal advisory council. All the districts have their own representative and they are twelve. The members are habitually top bankers and they help facilitate talks with the governors.
Chapter three
Treasury and money supply
The work of the treasury is to control economies money; it achieves these through the Federal Reserve banks and other specialized institutions. The treasury controls funds through taxes and loans. The taxes collected are used to pay for government’s expenditure. If the government had sold securities, the money from taxes is used to make the payments for the bonds. The payments deplete the reserves and reducing the funds available to the public as loans. The treasury draws up checks which are later deposited in the banks.
The Federal Reserve reduces these checks balances from treasury’s account. With these transactions, the fluctuation of the supply of money is dependent on the amount of money in distribution. The process is a cycle and is what determines growth in the economy. The increase in expenditure causes a subsequent increase in the taxes levied. Payment of existing loans to the security holders increases the money flow in the area. Fund in the reserves depreciate requiring the banks to obtain funding for those with checks from treasury from Federal Reserve’s.
Currency minting
The treasury undertake the creation of new currency to use when need arises. The notes might be used to replace old worn out currency or fund the reserves in case the customers make huge withdrawals. Head quarters are located in Washington. All the money minted is deposited in the Federal Reserve banks as currency bought from treasury. This currency doesn’t constitute money as it is not in circulation yet. One a customer deposits a check, the banks pays the customer, subsequently the money that the bank owes the reserves decrease creating a balance in the money circulation.
Sale of secures
The government at times auctions securities to reduce the amount of money circulating. If a bank has procured the bonds, the reserves of the bank are reduced. The public buys the bonds using cash. The bonds finance the government’s expenditures. The expenditure results in amplified money quantizes in the economy. The banks don’t usually buy securities, the rate of return of the loans to customers are more than benefits from securities.
Federal Reserve’s lending treasury
The implication of such a transaction to the economy is disastrous, the transaction causes hyper inflation casing the prices of commodities to rise. This is as a result of extensive money supply. Increase of the money in flow causes those with no resources to have the money suffer. Is treasury borrows from the reserves; it credits the borrowed amount into the treasury. Treasury will use this money and any one issued with a check deposits it to the banks. The bank demands payment from treasury for payment thus increasing the money in flow. This is the basis of hyper inflation. The same borrowing of money from the public has no effect on the cash in circulation thus less risky to the economy.
Treasury controls the finances of government, in some financial years, budget deficits arise. The deficits are funded by Federal Reserve’s and depending on the mode of borrowing, the results may have significant implication on money supply. Borrowing from the public has less implication than borrowing from banks and the reserves.
Circulating new cash
New currency is minted under the supervision of treasury; the money is deposited in the Federal Reserve’s where banks borrow money from. The use of the money by treasury would cause an influx of money in the society and thus inflation. The Federal Reserve’s procure currency from treasury for the value on the currency. The reserves make a gain called seigniorage. This profit is revenue to treasury. The cost of production of notes is covered by treasury.
The Federal Reserve’s pay this amount to treasury and the other profit arising from selling the note to banks at face value used as a income to treasury and cover operating costs. The currency leaves the reserves o procurement from the banks who buy the currency for face value replenishing the reserves. Once the currency is in the bank’s the customers can acquire the currency through depositing checks. The customers get money from the counter and may use it to make various transactions.
