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 services.
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
Divisibility: Currency should be easily divisible, and easily given out. They also must have easily
Durability: Currency must be able to able to retain its value for a long period of time. It cannot spoil,
Stability: There must be a stoic demand for the currency. Inflation would result in less demand for
consumption while deflation would result in too much demand.
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
The use of credit cards has become so widespread that many people refer to them as “plastic money”.
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
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
In turn, its assets will be mostly loans invested in individuals and businesses and perhaps in government
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 branches each.
Services Offered by Banks: Pension services: most banks help customers establish savings plans or retirement. Banks serve as financial