About Money Clearing and Banking system ...
You Don't Have to Trade When You Have Money
Function of Money
In many parts of the world, people are increasingly turning towards a cashless society where goods are bought with credit cards, electronic transfers, and mobile phone chips.
However, giving up cash does not mean the money is not used. Money is at the center of all our transactions.
The disturbing effects of money are well known and provoke everything from stinginess to crime and war. The money was used as a tribute (token of respect), in religious ceremonies, and as ornaments.
"Blood money" is paid in return for murder; brides are bought with "bride's money (bride's money)" or given with dowries to enrich their husbands.
Money gives status and power to individuals, families and nations. In the barter economy, people could only trade without Money. Most of us are trading on a small scale even as we are halfway through.
For example, a man might offer to fix his neighbor's broken door in exchange for a few hours of babysitting.
Yet it's hard to imagine these personal exchanges operating on a larger scale.
What if you wanted a loaf of bread and all you had to trade was your new car?
The exchange depends on the double chance of requests, where not only the other person has what I want, but also what he wants.
Money solves all these problems. You don't need to find someone who wants what you have to trade; you only pay for your goods. The seller can then take the money and buy it from someone else.
Money can be transferred and deferred, the seller can hold it and buy it at the right time. Many argue that complex civilizations could never arise without the flexibility of exchange that money allows. Money also gives a measure to decide the value of things.
If all goods have monetary value, we can know and compare every cost.
Different Types of Money
There are two types of money: Commodity and Fiat
Commodity money has an intrinsic value as well as its stated value, for example when gold coins are used as currency.
The fiat money, which was first used in China in the 10th century, is a currency that has no value other than the value the government assigned to it.
A paper banknote is fiat money. Many paper currencies were initially "promises to pay" against gold held in reserve.
In theory, dollars issued by the Federal Reserve can be exchanged for gold values.
Since 1971, the value of a dollar is no longer convertible to gold and is entirely determined by the US Treasury regardless of gold reserves.
These types of fiat currencies are based on people's trust in the economic stability of a country and this cannot always be guaranteed.
Payment method
Wampum was a string of white and black shell beads valued by the native North Americans of the Eastern Woodland tribes.
Before European settlers reached the 15th century, wampum was mainly used for ceremonial purposes.
People can trade wampum to save a deal or pay tribute. Its value came from the tremendous skill involved in its making and ceremonial associations.
When the Europeans arrived, their tools revolutionized wampum making, and Dutch colonists mass produced the beads for millions.
Soon they were using wampum to buy and sell things from indigenous peoples who were not interested in coins but valued wampum.
Wampum soon became a currency with an accepted exchange rate. In New York, eight white or four black wampums were equal to one stuiver (Dutch coin of the time).
The use and value of wampum declined in the 1670s.
MAKE MONEY WITH MONEY
FINANCIAL SERVICES
People have been busy borrowing and lending for a long time. There is evidence that these activities took place 5,000 years ago in Mesopotamia (today's Iraq) at the dawn of civilization.
However, modern banking systems did not appear in northern Italy until the 14th century. The word "bank" comes from the Italian word for "bank" where bankers sit to do business.
In the 14th century, the Italian peninsula was a country of city-states that benefited from the income and influence of the papacy in Rome.
The peninsula was in an ideal location for trade between the developing countries of Asia, Africa and Europe.
Wealth began to accumulate, especially in Venice and Florence. Venice relied on its naval power: institutions were set up there to finance and insure voyages.
Florence focused on manufacturing and trade with Northern Europe, where traders and financiers met at the Medici Bank.
Florence was already home to other banking families such as Peruzzi and Bardi, and different types of financial institutions, from moneylenders secured with personal belongings to local banks that dealt with foreign currencies, accept deposits and lend money. The bank founded by Giovanni di Bicci de 'Medici in 1397 was different.
Medici Bank financed long-distance trade in commodities such as wool. It differed from existing banks in three ways.
It first reached a great size. During his heyday under the founder's son Cosimo, it opened branches in 11 cities, including London, Bruges and Geneva.
Second, the network was decentralized.
The branches were managed not by one employee, but by a local junior partner who shared the profits.
The Medici family in Florence were senior partners who watched the network, earning most of the profits and holding the family brand symbolizing the bank's solid reputation.
Third, the branches took large deposits from wealthy savers, multiplying loans that could be made for a modest start-up capital and thus the bank's profits.
Banking Economy These elements of Medici's success story correspond to three economic concepts that are quite suitable for today's banking.
The first is "economies of scale". It is expensive to draw up a single legal loan agreement for an individual, but a bank can issue 1,000 such contracts at a fraction of the cost “per contract”.
Money trading (cash investments) is suitable for economies of scale. The second is “diversification of risk”.
Medicis reduced the risk of bad lending by spreading its loans geographically.
Moreover, since the smaller partners shared profit and loss, they had to lend wisely - they actually took on some Medici risks.
The third concept is "transformation of existence".
Traders may want to deposit profits or borrow money. A trader may want a safe place to store gold where he can quickly pull it out if needed.
Someone else may ask for a loan - which is more risky for the bank and can withdraw money for a longer period of time. So the bank began to stand between two needs: "to take a short loan and a long loan."
This suits the depositor, the borrower, and of course the bank that uses customer deposits as borrowed money (“leverage”) to multiply profits and get high returns on capital invested by their owners.
However, this practice also makes the bank vulnerable - if multiple depositors simultaneously demand their money back (“in a transaction at the bank”), the bank may not be able to provide this as the bank will use the depositors.
It holds only a small part of the money and depositors' money as ready cash to make long-term loans.
This risk is a calculated risk and the advantage of the system is that it creates a useful link between savers and borrowers.
Financing long-distance trade was a high-risk business in 14th century Europe.
It involved time and distance, so he suffered from the so-called "fundamental change problem," the danger of someone escaping with goods or money after a deal was made.
To solve this problem, a "bill of exchange" was developed.
This was a piece of paper testifying to a buyer's commitment to pay for goods in a specified currency when the goods arrive.
The seller of goods could also sell the bill immediately to raise money. Italian commercial banks have become particularly skilled in dealing with these bills, creating an international market for money.
By purchasing bills of exchange, a bank risked the buyer of the goods not paying.
Therefore, it was very important for the bank to know who will and will not pay. Lending - indeed finance in general - requires specialized, skilled knowledge because the lack of knowledge (known as "information asymmetry") can cause serious problems.
Borrowers with the least chance of repayment are those most likely to demand a loan; and once they get a loan they have a tendency not to repay.
The most important function of a bank is the development of financial districts in big cities. Economists call this phenomenon "network externalities" and refer to the fact that all banks benefit from a deepening network of skills and knowledge when a cluster begins to form.
Florence was such a cluster. With the jewelers and shipping experts, the City of London has become another.
In the early 1800s, the far north hinterland province of Shanxi became China's leading financial center.
Today, the internet is creating new ways of clustering online. The benefit of specializing is why savings, mortgages, auto loans, etc. Explain that there are so many different types of banks that cover.
The form a bank receives can also address information problems. For example, mutual associations and credit unions, actively owned by their customers, first emerged in the 19th century to increase trust between the bank and its customers in a period of social change.
Because the members of these organizations controlled each other and the managers had good local knowledge, they were able to provide the long-term loans their clients needed.
They have been successful in some countries such as Germany. The Dutch bank of Rabobank is an example of the cooperative model, such as India's "microfinance" Grameen Bank, which provides a large number of small loans.
However, clustering can also lead to risky competition and crowd-like behavior.
It is particularly important for banks to have a good reputation because they have asset conversion roles - they convert deposits into loans - and loan assets are more risky, longer, and easier to cash in (less “liquid”) than banks. deposit debts.
Bad news can cause panic.
Bank failures could have serious consequences for other banks and the government and society, as witnessed by the failure of the German brand of Creditanstalt Bank in Austria in 1931, which led to the decline of the British pound and then the US dollar.
As a result, banks need to be regulated and in most countries there are strict rules about who can form a bank, the information they need to disclose, and the scope of business activities.
Finance Banking in general is just the biggest part of finance, but all finance is about connecting people who have more money than they need, people who need more money than they have and will use it efficiently.
Exchanges link these needs directly through stocks (shares that provide ownership of a company), bonds (lending that can be traded and sold) or other instruments.
These exchanges are either physical locations, such as the New York Stock Exchange, or regulated markets, such as the international bond market, where trading is conducted through phone calls and computers.
The clustering created by the exchanges makes these long-term investments more liquid: they can be easily sold and converted into money.
In addition, savings can be pooled to reduce transaction costs and diversify risks. Mutual funds, pension funds and insurance companies all play this role.