Chapter 8: Understanding Money and Banking
What is Money?
The Characteristics of Money:
Money: any object generally accepted by people as payment for goods and
Characteristics of money included:
Portability: Currency that is easily affected by deterioration or is too large
or uncomfortable to be carried around is not the best kind of money. That is
why currency is usually lightweight and easy to handle.
Divisibility: Currency should be easily divisible, and easily given out. They
also must have easily determined values.
Durability: Currency must be able to able to retain its value for a long
period of time. It cannot spoil, nor die.
Stability: There must be a stoic demand for the currency. Inflation would
result in less demand for consumption while deflation would result in too
The Functions of Money:
Medium of exchange: money is used as a way to buy or sell things. Without
money, society would be bogged down in a system of barter.
Stores of value: In the form of currency, money can be used for future purchases
and therefore “stores” value.
Unit of account: money lets us measures the relative values of goods and services.
It also acts as a unit of account because all products can be valued and accounted
for in terms of money.
Credit Cards = Plastic Money:
Credit – especially extended through credit cards has become a major factor in the
purchase of consumer goods in Canada
The use of credit cards has become so widespread that many people refer to them as
However, credit cards do not qualify as money, but more as a money substitute.
They serve as a temporary medium of exchange but are not a store of value.
Credit cards are big business for two reason:
They are very convenient
They are also very profitable for issuing companies. These profits stem
from two sources:
Some cards charge annual fees to holder, and all cards charge
interest on unpaid balances
Merchants who accept credit cards pay fees to card issuers The Canadian Financial System
Many forms of currency especially demand deposits and time deposits, depends on
the existence of financial institutions to provide a broad spectrum of services to
both individuals and businesses.
Businesses need stable financial institutions to underwrite modernization and
expansion, and individuals need them to handle currency.
The main function of financial institutions is to ease the flow of money from sectors
with surpluses to those with deficits.
They do this by issuing claims against themselves and using the proceeds to buy the
assets of – and thus invest in – other organizations.
A bank for instance can issue financial claims against itself by making available
claims for chequing and saving accounts.
In turn, its assets will be mostly loans invested in individuals and businesses and
perhaps in government securities.
There are a variety of financial intermediaries in Canada.
in the types of sources they appeal to
in the form of the claim they give to sources of funds
in the users they supply credit to
in the type of claim they make against the users of funds
For many years, the financial community in Canada was divided rather clearly into
four distinct legal areas.
Often called the four financial pillars, they include:
Alternate banks such as trust companies and credit unions
Life insurance companies and other specialized lending and saving
intermediaries (factors, finance companies, venture capital firms, mutual
funds and pension funds)
Financial Pillar #1 – Chartered Banks
Chartered bank: a privately owned, profit-seeking firm that serves individuals,
non-business organizations, and businesses as a financial intermediary.
They are the largest and most important financial institution in Canada.
They also offer a unique service, in which their liability instruments (the claims
against their assets) are generally accepted by the public and by business as money
or as legal tender. Canada has a branch banking system. Unlike the United States, which has hundred
of banks, with only a few branches each, Canada has a few banks with hundreds of
Services Offered by Banks:
Pension services: most banks help customers establish savings plans or retirement.
Banks serve as financi