This chapter began with the question ‘What is money?’ In fact, there is no general agreement on what should be counted as money. If we define money as something which can be directly exchanged for goods and services, then we can only count those things which are ‘immediately spendable’. We can only include, therefore, notes and coins, and bank deposits which can be transferred by cheque.
Money, however, also acts as a store of value. Most people would include, as part of their stock of money, time deposits in banks, deposits in building societies and deposits in various saving banks. These deposits cannot be directly exchanged for goods and services, but they can usually be converted into cash fairly quickly and easily. These deposits are frequently described as near money.
Answer these questions based on the text above:
1. When does a bank make a loan?
2. Why can’t the banks create deposits to an unlimited extent?
3. What types of bank deposit do you know?
3.5 Banking services
3.5.1 Receiving deposits
Bank deposits are a safe and convenient way of holding money. Banks will also act as a safe deposit for valuables other than money.
3.5.2 Making payment
· The cheque system
Each day more than eight million cheques are handled by banks in England and Wales. In order to make cheques more acceptable to sellers of goods and services, the banks provide cheque guarantee cards or bankers’ cards. These cards guarantee that cheques for up to 50$ will be honored by the bank.
· Standing orders
These enable depositors to instruct their banks to make regular payments of fixed amounts. They are very useful for paying for such items as rent, rates, insurance premiums, mortgage payments and so on.
· Direct debits
Some bills are payable at regular intervals, but the amounts are variable. Obvious examples are the quarterly bills for the electricity, gas and telephone services. Direct debits are instructions to a banker to pay these bills, whatever their amounts, when they fall due.
· Bank giro credits
This system enables depositors to use only one cheque to pay several bills. A form is filled in to show the names and bank account numbers of all the persons to be paid, and the amounts due to each of them. One cheque is then made out for the total amount.
The bills from the gas, electricity, telephone and water companies and other large enterprises usually have bank giro slips attached to them. These bills can be paid at any bank, either by cash or by cheque.
· Credit cards
These plastic cards (e.g. Access and Barclaycard) are now widely used by bank depositors. They enable cardholders to buy goods and services from those shops, restaurants, garages, etc. which have joined the scheme, without paying in cash or by cheque. Each cardholders is given a limit to his or her total spending, and receives a monthly account which can be paid in full or by installments. Interest is charged when the payment is made by installments.
· Cash dispensers
These machines are set into the outside walls of certain banks and provide bank customers with a 24-hour service for the supply of banknotes. Each bank customer is given a secret personal code number and a card. By inserting this card into the machine and tapping out the code number on a keyboard, a customer can obtain cash up to some agreed limit.
· Travellers’ cheques and foreign currency
For people traveling abroad, and for householders and firms making payments to other countries, the banks provide travellers’ cheques and foreign currencies.
3.5.3 Making loans
Lending is the most profitable activity of the banks – the interest they charge on loans is their most important source of income. Householders, firms (or all sizes and in all industries), local Authorities, the nationalized industries, and the government itself, all borrow from the banks. There are two methods by which banks provide money for customers who wish to borrow:
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