Money, Banking, and Credit

     Money is anything that is used by a society to purchase products, services, or resources. It must serve as a medium of exchange, a measure of value, and a store of value. To perform its functions effectively, money must be divisible into units of convenient size, light and sturdy enough to be carried and used on a daily basis, stable in value, and difficult to counterfeit.

     The M1 supply of money is made up of coins and bills (currency) and deposits in checking accounts (demand deposits). The broader M2 supply includes M1 plus certain specific securities and small&-denomination time deposits. Another common definition&-M3&-consists of M1 and M2 plus large time deposits of $100,000 or more.

     A commercial bank is a profit&-making organization that accepts deposits makes loans, and provides related services to customers. In the United States, commercial banks may be chartered by the federal government or state governments. Savings and loan associations, credit unions, and mutual savings banks offer the same basic services that commercial banks provide. Insurance companies, pension funds, and brokerage firms provide some limited banking services.

     The Federal Reserve System is responsible for regulating the banking industry and maintaining a sound economic environment. Banks with federal charters must be members of the Fed. State banks may join if they choose to and if they can meet the requirements for membership.

     To control the supply of money, the Federal Reserve System regulates the reserve requirement, or the percentage of deposits that a bank must keep on hand. It also regulates the discount rate, or the interest rate the Fed charges member banks for loans. And it engages in open&-market operations, in which it buys and sells government securities. The Fed is responsible for clearing checks, inspecting currency, enforcing the Truth&-in&-Lending Act, and setting margin requirements for stock transactions.

     The Federal Deposit Insurance Corporation (FDIC), Savings Association Insurance Fund (SAIF), and National Credit Union Association (NCUA) insure all accounts in member banks, S&Ls, and credit unions, up to $100,000 per depositor.

     Credit is immediate purchasing power that is exchanged for a promise to repay it, with or without interest, at a later date. Businesses sell goods and services on credit because some customers cannot afford to pay cash, and because they must keep pace with competitors who offer credit. Decisions on whether to grant credit to businesses and individuals are usually based on the five Cs of credit: character, capacity, capital, collateral, and conditions. Credit information can be obtained from various credit&-reporting agencies, credit bureaus, industry associations, and other firms. The techniques used to collect past&-due accounts should be firm but flexible enough to maintain the borrower's goodwill.