Characteristics and Functions of Money

Money is anything generally accepted as a means of paying for goods and services. Before it was invented, people got what they needed by trading their services or possessions; in some primitive societies, this system of trading, or bartering, still prevails. However, barter is inconvenient and impractical in a modern industrial society, where many of the things we want are intangible or require the combined work of many people. Materials as diverse as salt, cattle, fish, rocks, shells, as well as precious metals such as gold, silver, and copper have long been used by various cultures as money.

When the Phoenicians created money millennia ago, it was worth its weight in gold or silver or copper. But people grew tired of all that metal ripping holes in their pockets and governments consolidated, becoming stable enough to earn the trust of their citizens. So paper IOUs, or slips of paper that could be exchanged for some commodity were issued. Henry Ford Sr. once said that if the people of the nation actually understood our banking and monetary system, there would be a revolution the following morning. Perhaps he was referring to the fact that money is simply a representation of value and is built on faith. Paper money was first used in North America in 1685.

To be an effective medium for exchange, money must have certain characteristics. It must be divisible, portable (easy to carry), durable, and difficult to counterfeit or secure. When people lose faith in the value of their money, they begin to abandon it and look for different ways to store their wealth, such as precious metals.

Additionally, money must perform three basic functions: Firstly, it must serve as a medium of exchange – a tool for simplifying transactions between buyers and sellers. Secondly, it must serve as a measure of value – a common standard for measuring the value of goods and services. Thirdly, money must serve as a temporary store of value – a way of keeping accumulated wealth until you need it to make new purchases.

Vocabulary notes

barter n - обмен; бартер

Phoenicians n - финикийцы

millennia (pl от millennium) n - тысячелетия

IOU = I owe you долговая расписка

faith n - вера; доверие

divisible adj - делимый

durable adj - долговечный; прочный

to counterfeit v - подделывать

secure adj - надёжный; надёжно защищённый

to abandon v - отказываться; оставлять

medium of exchange phr - средство обмена

1. What is money?

2. How did people get what they needed without money?

3. Why is barter inconvenient and impractical in modern society?

4. What materials could be used as money in ancient times?

5. Who created money? When?

6. What are IOUs? What for were IOUs used?

7. How did Henry Ford characterize the banking and monetary system?

8. When was paper money first used in North America?

9. Name the four characteristics of money.

10. Enumerate the three functions of money.

4. In your opinion, which of the following give the best return on your money?

Which are very risky? Which are less risky?

* gold * currencies * a high-interest deposit

* precious stones * property * antiques and paintings

* stocks and shares * land/real estate * a new business venture

5. How do you say each of these numbers?

1) 67% 2) 3/4

a) sixty-seven percent a) three over four

b) sixty-seven percents b) three quarters

c) sixty-seven percentages c) three of four

3) 3:45 (time) 4) $765

a) forty-five after three a) seven hundred and sixty-five

b) three forty-five dollars

c) fifteen before four b) dollars seven hundred and sixty-five

c) seven hundred sixty-five dollars

5) 5.8 m 6) 4 March

a) five dot eight meters a) the fourth of March

b) five and eight meters b) four of March

c) five point eight meters c) fourth March

7) 1989 (year)

a) one thousand nine hundred and eighty nine

b) nineteen hundred and eighty nine

c) nineteen eighty -nine

6. Translate the following sentences into English:

1. Основной задачей финансового менеджмента является эффективное приобретение и использование денежных средств.

2. Деньги, необходимые для того, чтобы основать дело, называются на­чаль­ным капиталом.

3. Компании нуждаются в фондах для различных повседневных опера­ций, таких как выплата окладов, зарплат, пенсий и гонораров, предостав­ление кредита покупателям, реклама, страхование и многих других.

4. Чтобы успешно конкурировать на рынке, предприятию нужно вкла­ды­вать деньги в развитие нового ассортимента изделий и новых техноло­гий производства. Капитал также необходим для роста и расширения компании.

5. Все предприятия нуждаются в финансовой поддержке. Долевое фи­нан­­сирование (продажа акций) и финансирование путём получения зай­мов (продажа облигаций) играют важную роль в приобретении компа­ниями капитала.

6. Обычно при краткосрочном финансировании долги предприятия дол­жны быть погашены в пределах одного года, в то время как долго­срочные долги оплачиваются в течение более длительного периода вре­мени.

7. Компания Foxton & Sons была доведена до банкротства, так как не смог­ла выполнить обязательства по займам и облигациям в срок платежа.

8. При составлении финансового плана финансовые менеджеры дол­ж­ны учитывать такой важный фактор, как стоимость капитала.

9. Компании удалось бы снизить стоимость капитала, если бы руко­водст­во компании выбрало правильные механизмы финансирования.

10. Наша фирма пережила бы трудные времена, если бы мы распро­да­ли ненужное имущество и устаревшее оборудование.

11. Работа финансового менеджера чрезвычайно сложна. Помимо фи­нан­сового планирования и контроля, его обязанности включают взаимо­действие с банками и рынками капитала.

12. Глава бухгалтерского отдела называется главным бухгалтером: гла­ва финансового отдела называется казначеем.

13. Бухучёт и финансы тесно связаны между собой, но имеют различный круг обязанностей (focuses). В небольших компаниях бухгалтеры часто выполняют функции финансовых менеджеров.

7. Read and translate the dialogue. Make up your own dialogue concerning finance.

Cindy - Look, Phil! This music bores me to death. Could you switch off the recorder?

Philip - Sure, honey. What’s the problem?

Cindy - You could tell me something about your job, Phil. We’re going to get married in a month and I know nothing about your business except you’re a financial manager at Nordstrom.

Philip - Good Grief! If finance were not so complicated and such a specific field of business I could tell you a lot about it, but I think…

Cindy - I know what you think! I’m so stupid and empty-headed that I won’t be able to understand anything!

Philip - Never in my life! I only mean it might be uninteresting for you.

Cindy - On the contrary! If it concerns my future husband I’m always interested.

Philip - Okay, darling. Let’s talk about my job. What do you want to know first?

Cindy - First, Phil I want to know why you chose the job of a financial manager. After graduation from Yale with an honors degree in economics you had various opportunities for a business career. If I were you I would prefer working in banking business for instance, or in some governmental agency. Why did you choose the finance department of a private company?

Philip - Choosing a career is a decision you need to make on your own, Cindy. Of course, I could have got a job in a bank or in some government structure if I wanted, but I hope I’ve made the right choice. The department I work at manages the financial resources of the whole company. It means that the financial strength of such a giant as Nordstrom depends on its financial management. I’m glad to know that my work makes a real contribution to the company’s success.

Cindy - What does it mean – to manage the financial resources of the company? I always thought that everything connected with money was the responsibility of accountants.

Philip - That’s not quite true, Cindy. Accountants prepare financial statements, analyze financial information, and deal with preparing budgets and providing tax services. Financial managers, on the other hand, find ways of obtaining the money a company needs and investing it to best advantage. Though in smaller companies accountants may perform the functions of financial managers.

Cindy - What are your direct responsibilities?

Philip - Interacting with banks and capital markets for credit extension. They say money makes the world go round. But it isn’t money. It’s credit. For when the corporations of the world buy, they buy on credit. And if your credit is good, no one asks the color of your money.

Cindy - But if you borrow money, you’ll have to repay it. Moreover, it must be repaid in time. What will happen if a company has serious cashflow problems and cannot meet its debts?

Philip - If worse comes to worst, a company might go down the tubes. But in reality companies often pay their bills late, keeping creditors waiting a month and more past the agreed deadline for the bills to be paid.

Cindy - I wonder why creditors agree to wait! What makes them so patient with their debtors?

Philip - Creditors have to take into account a combination of circumstances. Well, Cindy, imagine you’re a creditor. Some company, let’s say Galactic Tours owes you $210,000 and is three months late in paying its debt. They explained that it was the result of the temporary cashflow difficulties caused by their recent expansion. You have been doing business with Galactic Tours for 15 years. They were, in fact, your first major client and are currently your second biggest customer. Galactic Tours probably have the funds to pay you if you press them, but it may seriously damage their business. Would you risk damaging customer relations?

Cindy - I guess I wouldn’t.

Philip - Or some other company, Holliday Pineapples for instance, is four months late with the $190,000 it owes you. Holliday Pineapples is a relatively new customer. Financially, the company is in extremely good shape with its share price more than doubling in the last two years. You believe that late payment is simply regarded as a money-saving policy in their finance department. And apparently they used to enjoy a fairly flexible agreement with their previous creditors from whom you won their business. Would you risk losing their business in the future?

Cindy - I think I could be patient with them if they were my clients. It’s better to accept a modest loss in order to prevent a huge one. You’ve convinced me that bad debt does not necessarily mean bad business.

Philip - That’s true. Have you ever heard about the legendary Tokushichi Nomura? Many years ago he was racing round the streets of Osaka in a rickshaw to escape angry creditors. They are not angry now, for today Nomura is the biggest securities company in Japan. Nomura knew what all good financial managers know: that what distinguishes the effectively managed commercial operation from the badly managed one is the way it manages its money.

Cindy - Can I learn the secret of successful money management?

Philip - This secret is the skill with which a company can stall its creditors and at the same time put pressure on its debtors. Well, darling, so much for finance today.

Cindy - Oh, Phil, you are a pleasure to talk with! I’ve learnt lots of interesting things. If you have some free time later, will you tell me something more that is interesting about finance?

Philip - Sure, sweetheart! We’ll get married soon. I’ll be glad if you take on the responsibilities of being our family financial manager.

Cindy - Why, it would be just if we shared the responsibilities equally! You will obtain money and I will use it to best advantage.