Barter trade
In primitive societies, people use a system called barter trade. This involves the exchange of goods for other goods that the buyer wants (Ashby, 2009). Normally, in such a society, people produce their products for use and only purchase a little from the outside to supplement what they do not produce. In modern society, people make use of specialization in the production of goods and services. Specialization involves the production of a single or small range of products in which society has expertise in production skills. Since specialization leads to reduced sufficiency, there is a need to increase the exchange of goods for one society to acquire what they do not produce (Ashby, 2009).
This exchange of goods and services requires a good medium of exchange and thus, money is used as a medium of exchange. In the United States of America, money refers to currency in the form of coins, paper, or check account balances.
Anything else that does not fall in this category, but is used as a medium of exchange is not money. For example, checks, credit cards, electronic money transfers, and savings among others do not qualify to be called money. The federal government through various organizations such as banks controls the amount and flow of money in the economy. When there is too much money flowing in the economy, inflation occurs, and when it is little, a recession occurs (Ashby, 2009).
On the other hand, stored currency as customer savings in banks is not money. This is because money is limited to the currency that is being used by citizens in their daily transactions. Saved currency in banks is referred to as idle cash. Federal banks and the treasury have a role of controlling the amount of money circulating in the economy. They store currency saved by customers through deposits in commercial bank accounts (Ashby, 2009).
The velocity of money is the number of times on average; a single dollar has been used in transactions per year (Ashby, 2009). The velocity of money helps the treasury to determine the amount of money required in the economy for transactions. In some countries, they use gold backing for the money in banks or treasury. Gold backing helps in controlling the amount of money in supply, and it is also sold to suffice deficits that occur in the budget. However, the U.S. government stopped the use of gold backing in 1945 (Ashby, 2009).
Distribution of money
The United States treasury is a section within the executive arm of government. It is concerned with the creation of money through several departments within it. One department collects government revenue in the form of tax which is used to pay bills for government expenditure. On the other hand, another department is concerned with ordering the printing of coins and paper money that is then distributed to federal banks. The Federal Reserve System (FRS) performs various functions within the U.S. economy under the treasury. Some of its functions include distributing money from the treasury, acting as the reserve bank for money from commercial banks; regulating the amount of money in supply, and offer banking services to other banks (Ashby, 2009).
The U.S. commercial banks are concerned with providing transaction services to the citizens. FRS offers two types of charters to a person willing to start-up commercial banking services in the country (Ashby, 2009). FRS also oversees the operations of the commercial banks under its jurisdiction. One function of commercial banks is the depository. Bank customers deposit money into their bank accounts and the bank lends that money to other customers in form of loans.
They also maintain a percentage amount of money for withdrawals by customers. In case customers request more money than the bank can provide, insolvency occurs to the bank. In the banking system, there is a regulatory commission that aids in maintaining stability in transaction operations (Ashby, 2009). The regulatory commission helps the bank to spot problems that arise during payments or lending and advice the management on the way forward. Another role of the bank regulatory system is creating a healthy competition environment for commercial banks. This allows a balance between the number of banks and the population within an area.
Thus, it avoids too many or a small number of banks providing banking services to people within that area. The last role is the protection of customers from exploitation by banks. This is achieved by ordering banks to disclose all transaction charges and provision of equal banking services to all customers regardless of their race, religion, and gender among other factors. Within the banking regulatory system, there are agents involved in regulating various commercial bank operations (Ashby, 2009). These regulatory agents are referred to as principal regulators. Some of the agents include the Federal Reserve System (FRS), Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA).
Loans and taxes
The U.S. Treasury uses loans and taxes to carry out its services within the country. Since the treasury has established accounts in all banks in the country, it pays for government services through the local banks. When making payment, treasury requests for a reduction in the loan funds within that area from the reserve fund of a bank equal to the amount of money to be paid. Then, the treasury writes a payment bill to the person or firm for the amount to be paid. When the individual receives the payment bill, he presents it to the bank, and the amount is transferred to him from the bank. The bank takes the payment bill to the Federal Reserve Bank for compensation of the amount of money paid to the customer. The same process is followed by the treasury when selling securities to the public (Ashby, 2009).
The treasury is also concerned with authorizing the printing of coins and paper currency. Newly printed money is transferred from the treasury to the twelve federal banks in the country for distribution to commercial banks (Ashby, 2009).
When commercial a bank requests funds from a federal bank, the newly printed money is sent to the commercial bank. On the other hand, the federal bank reduces the commercial bank reserve fund by an equal amount. This money is then transferred to the bank customers through withdraws. Therefore, the customer is the determinant of the amount of newly printed money that will be in circulation. Few withdraw leads to the little amount of newly printed money released into the economy for transactions (Ashby, 2009).
Commercial banks also have an opportunity to purchase treasury securities. When a commercial bank buys the securities, it pays through its reserve fund in the federal bank. However, if commercial banks buy treasury securities, it results in expansionary measures in the economy. In some instances, the treasury may also borrow money from the reserve banks although it rarely happens. If this happens, the reserve fund adds an equal amount of money requested by the treasury to the treasury’s account from nowhere. Moreover, this also results in to increase in the money supply in the economy (Ashby, 2009).
Reference
Ashby, D., B. (2009). Money Mechanics: Monetary Economics Reengineered with an Attitude and a Policy Agenda Week 1 Lecture: Money and Banking. Web.