Money & Banking

Money is one of the most sought after "commodities" in the world, everyone wants it even though it is just small pieces of metal or paper. It's hard to believe that a small piece of paper 1/4 the size of an A4 page can get you a laptop, a phone or even a car.

Back in the old days, people used to trade something they had for something they wanted. For example I want Pepsi and I can teach Economics, I'd probably be willing to give grinds to someone in exchange for Pepsi, but instead the person gives me money and I then give that money to a shopkeeper in exchange for pepsi.

** You must know a little more about money and banking if you want to be successful in June, The first couple of questions I think you should concentrate on are related to why and how we use money..


What do we use money for? What are its functions?

Money is a

• Medium of Exchange
• it can be used to buy something removing the need for barter. 

• Unit of Account
• It allows you to put a comparable value on everything. (A €10 book is worth twice as much as a €5 cake)

• Standard of Deferred Payment
• Money allows you to buy something now and pay later.

• Store of Wealth
• Money lets you save up for future purchases

Why use paper and coins as money? why don't we use gold or rocks or apples? 

Money should have a number of characteristics to be considered a good money form....

It should be 

• Acceptable          - accepted by everyone
• Scarce                - scarce in relation to the demand for it
• Homogeneous     - identical 
• Portable              - easy to carry
• Durable               - it should last a long time 
• Recognisable      - easy to recongnise and not easy to copy
• Divisible              - come in small denominations to buy small items and get change

Australian dollars are particularly durable as they are made from Polymer and are waterproof

How do banks create Credit (**a favorite exam question for teachers)

In the little video above we saw that the money lender (bank) lent out more iou's or money than he actually had on site, this is how our banks of today still work.

Banks take in savings from one customer and lend it out to another. Banks however do not have to hold all of the money saved with them on site as they know that on any given day only a small percentage of savers will want to withdraw their savings. The amount of money an Irish bank must keep on site is set by the ECB and is known as the reserve ratio. 

Example                                             (reserve ratio of 10%)

• John lodges €100 in the bank
• the bank knows that they only need to keep 10% (RR) of all debts on site. 

• The Bank can now lend €900 to Kate in the form of money in an account. 

• The bank now owe €1,000 with only €100 deposited.

• So the bank has created €900 credit. 

This is how banks create credit, it obviously wouldn't work if there was only two customers as it would be very easy for more money to be requested than is currently held on site. But when we have a commercial bank with 1,000's of customers they know that only a small percentage of their debtors will want their money on a given day. So this works........ most of the time..

A run on the banks happens when depositors confidence is knocked for some reason and all of the depositors want to withdraw their money on a given day and the bank doesn't have the money on site like happened in the video. This can cause the bank to go bankrupt if they do not have the money to give to its depositors.