Features of Money

Features of Money

Functions of Money:

Money is something which people generally accept in exchange for a good or a service. Money performs four main functions:

* a medium of exchange for buying goods and services;

* a unit of account for placing a value on goods and services;

* a store of value when saving;

* a standard for deferred payment when calculating loans.

Properties or Characteristics of Money

Any item which is going to serve as money must be:

* acceptable to people as payment;

* scarce and in controlled supply

* stable and able to keep its value

* divisible without any loss of value

* portable and not too heavy to carry.

Origins of Money

The earliest method of exchange was barter in which goods were exchanged directly for other goods. Problems arose when either someone did not want what was being offered in exchange for the other good, or if no agreement could be reached over how much one good was worth in terms of the other.

Valuable metals such as gold and silver began acting as a medium of exchange. Governments then decided to melt down these metals into coins.

By the seventeenth century people were leaving gold with the local goldsmith for safe keeping. Receipts of Ј1 and Ј5 were issued which could then be converted back into gold at any time. Soon these receipts were recognised as being 'as good as gold' and were readily taken in exchange for goods. Goldsmiths became the first specialist bankers and their receipts began to circulate as banknotes.

Only the Bank of England can now issue banknotes in England and Wales. However, notes are not usually used to buy expensive items such as cars. The buyer is more likely to write out a cheque, which instructs his bank to transfer money from his account into the account of the seller. Hence bank deposits act as money.

Commercial Banks

Banks are authorised institutions and perform four functions. They accept deposits, make loans, arrange payment of bills and provide a number of customer services. The four main high street or clearing banks in the UK are Barclays, Lloyds, Midland and National Westminster.

Types of Bank Account

Banks provide different types of account for different needs. Customers can open:

* A current account which provides a cheque book but usually pays no interest. Current accounts are mainly used to pay bills.

* A deposit account which does pay interest but money can only be taken out by visiting the bank. Deposit accounts are mainly used for short term saving.

* An investment or savings account which pays a higher rate of interest but written notice of withdrawal must be given. Accounts of this type are used mainly for long-term saving.

Types of Bank Loan

* An overdraft is when the bank allows a customer to take out more money than is in his account. Overdrafts are up to an agreed limit, and must be paid off whenever the bank asks. Interest is charged daily on any outstanding balance.

* A loan account is when a customer borrows a fixed sum of money to be repaid in monthly instalments over a number of years. A fixed rate of interest is charged.

Methods of Payment

These include:

* Cheques when the bank is ordered to pay money to someone else. The people involved in writing a cheque are:

1. The person writing out the cheque (drawer).

2. The bank ordered to pay the money (drawee)

3. The person receiving the money (payee).

A cheque card is issued to trusted customers which guarantees payment by the bank of any cheque up to the sum of Ј50, though some will now go up to Ј100.

* Standing orders when a fixed sum is paid out on set dates.

* Direct debits when a variable sum is paid out on set dates.

* Credit cards when customers have a special card (eg Visa or Access) which can be used to buy goods. Cardholders receive a statement every month and no interest is charged if the account is settled in full. Interest is changed monthly on any outstanding balance.

* EFTPOS.

Other Services

Banks have cash points; exchange foreign currency and issue travellers' cheques; provide night safes and store valuables; execute (carry out) wills and trusts; and factor (collect) debts.

Commercial Bank Balance Sheet

A balance sheet shows the present position of a company. One for a commercial bank is shown here.

The balance sheet of a commercial bank

Liabilities Assets

(a) Current a/c Ј100 (e) Cash in tills Ј20

(b) Deposit a/c Ј200 (f) Money at the Bank of England Ј40

(c)