11. The supply of money.

Your personal supply of money changes often. Increases and decreases in your supply of money probably affect how much you spend. Similarly, the amount of money in the total economy changes often. Changes in the economy’s money supply are more complex than changes in a personal money supply. Still, these fluctuations of the money supply influence not only how much spending occurs but also the general level of business activity. The money supply of the United States is constantly changing. Sometimes it expands and sometimes it contracts. The government prints new bills and mints new coins every year to replace those that are worn. It also changes the money supply to meet people’s needs. The supply of checking account money, or demand deposits, also changes. Banking laws in the United States require a bank to put a certain percentage of its deposits in reserve. A bank’s reserve is the money the bank must be 10 percent of total deposits. Of John Winslow’s $10000, the bank keeps $1000 in reserve. The other $9000 it lends to anyone able to pay it back with enough interest. So the process continues, with a succession of borrowers and depositors. None of these transactions involved currency. All were completed through checking accounts. This series of deposits caused the total supply of checking account money to expand.

This expansion of the money supply does not continue forever. A deposit in a checking account can increase the money supply by about 5 times the original amount. Several factors stop the process of expansion or even reverse it.

First, federal law requires the bank to keep a percentage of its demand deposits in reserve, usually 10 to 20 percent. Banks cannot loan out all of the money people deposit. After John Winslow’s original deposit, each successive deposit was less.

Second, expansion will stop if the bank stops making loans. Lending may cease if the bank cannot find any more people it believes will be able to repay a loan. Also, if people stop putting their money into checking accounts, the bank will not be able to make loans.

Finally, if many people suddenly withdraw their money all at once, the bank must do more than stop making loans. It will have to start calling for payment of its loans so that it can increase its reserves.

12. The role of central banks and commercial banks.

It is obvious that when it comes to dealing with money, the banks are the main institutions which can provide a great variety of services essential to trade and to the entire economy of any nation. There are two main types of banks:

• central banks control the banking of the whole country and work together with the government to supervise the country’s economy. The central bank of the United Kingdom is the Bank of England, in the United States of America it is the Federal Reserve System, in sin

13. Forms of money.

Everybody knows that there exist several forms of money. But few people can name them. I’ll try to encompass all of them to you.

In the United States most money is in the form of checking accounts. A checking account is a bank account in which money has been deposited. A withdrawal can be made at any time using a check. Check is a written order to a bank to pay a certain amount of money to the person or business to whom the check is made. Depositing $100 in a bank checking account increases the sum the depositor can draw on by that amount. From then on, the depositor need not have $100 in paper bills or coin in order to buy something worth $100. Simply writing a check will cover the cost. By the way, checking accounts are also known as demand deposits, because their owners have the right to demand them from the bank whenever they wish.

Sometimes time deposits are considered a form of money. A time deposit is a bank deposit that can be withdrawn at a certain time in the future, or on advance notice. Time deposits cannot be withdrawn using a check. I can add that a savings account is an example of a time deposit. When savings accounts are used as a store of value, savers deposit their money for use in the future instead of in the present. The bank book is a record of a person’s deposits and percentage the bank paid for use of the money.

Now I would like to come back to checks. It’s common knowledge that almost all firms use checks to pay their accounts, and most people also are paid by check. But that does not mean that checks are substitutes of money. Checks are more convenient and safe to use than currency. They are flexible in that they can be written for any amount. They provide a legal record of financial transactions. However, although most people and institutions accept them, checks are not legal tenders. Legal tender is money that, by law, must be accepted in payments of debts. So, on balance, the only legal tender in the United States is currency. Just as a matter of interest I’d like to stress that several other things are used like money. Credit cards are a common way to purchase goods and services. If the card is used to buy gasoline, the gas station will record the name and number and send it, along with the bill for the gasoline, to the credit card company. The credit card company will then pay the gas station and send the buyer a bill for the amount of the gasoline. Credit cards are not money, though, since they can be traded only for certain products from certain companies. As for money, it can be exchanged for anything.