Money and banks (Деньги и банки)

Exercise 1. Read the text and understand it.

All values in the economic system are measured in terms of money: goods and services are sold for money. But before money was invented people traded without it. That system was called bartering and implied exchange of one good for another. Bartering was very inconvenient because, on the one hand, it was difficult to achieve double coincidence of wants, and on the other hand, some goods could not hold their value. That is why after some time goods which could hold their value and were easy to carry around were used to trade with. Commodity money such as cattle, shells, salt and valuable metals appeared: things which have inherent value and can be exchanged for any good or service. But commodity money lacked liquidity, i.e. these things could not circulate easily. Besides, not all of such objects were considered valuable everywhere to represent value of other things.

To overcome this difficulty hard money – gold and silver coins which had intrinsic value – was introduced so that everyone could agree on their ability to measure the value of other things and to serve a unit of account. Currently valuable metals were replaced by fiat money – paper notes (soft money) and coins which do not have any real intrinsic value, but represent value of other things. They are issued by governments and authorized banks as national currencies and are also known as “legal tender”. Because gold has been universally regarded as a very valuable metal, national currencies were for many years judged in term of the so-called “gold standard”. Nowadays, however, national currencies are considered to be as strong as the national economies which support them.

In modern economy money has several functions: a medium of exchange, measure of value, standard of deferred payment, and store of value. Besides, money has developed the new form – substitute money consisting of bank deposits and credits transferable by cheque, bills of exchange, money orders, etc., which are not legal tender. Money and substitute money are managed by banks or other financial institutions. Bank was originally a bench set up in the marketplace for the exchange of money. Later it became a place to which people took their valuables for safe keeping. Today the bank is a business organization or establishment, usually a limited company, which trades in money.

Types of banks vary in different countries, but the most common are savings banks and commercial banks. Banks provide traditional services such as currency exchange, lending money at interest, discounting bills of exchange, buying and selling securities, transferring money securely, etc. Modern services include financial advising, investment banking, equipment leasing, customer loans, arranging travel and insurance and many others. Banks make money more accessible for customers by means of providing ATV machines so that people can get it any time of the day or night.

Banks make a living by charging interest on loans when it lends the deposited money to those who need capital. The rate the bank pays savers is less than the rate it charges borrowers. The extra money makes bank profit, while interest is a kind of security for banks. If clients do not pay back the borrowed money (i.e. defaults on a loan), the bank covers the loss with the money earned from the interest. Banks do not lend all the money deposited by customers and keep a certain amount so that they can make withdrawals. This amount is called the reserve and set by the Central bank. In this way the government can control the amount of money in circulation.