The role of central banks and commercial banks.
A Central Bank is a financial institution that controls country’s monetary policy. It is trying to control the rate of inflation, protect the value of the currency, issuing national currency, maintaining the value of the currency, ensuring financial system stability, controlling credit supply, serving as a last-resort lender to other banks and acting as government’s banker.
In many countries, the central bank collects financial data and publishes statistics. In most countries, the central bank prints and issues currency – putting banknotes into circulation. It also participates in clearing cheques and settling debts among commercial banks.
Commercial banks have to keep reserves-a certain amount of their deposits – for customers who want to withdraw their money.
If one bank goes bankrupt, it can quickly affect the stability of the whole financial system. In such a situation central banks can act as lender of last resort, which means lending money to financial institutions in difficulty, to allow them to make payments. But central banks don't always bail out or rescue banks in difficulty.
Central banks manage a country’s reserves of gold and foreign currencies.
The short-term interest rate is the overnight interbank lending rate. Lowering the short-term interest rate in effect lowers the cost of credit, thus stimulating people and businesses to borrow in hope to expand the economy. Increasing interest rates, makes borrowing more expensive, and is usually used to control overheating economies and inflation.
Forms of money.
Everybody knows that there exist several forms of money.
In the United States most money is in the form of checking accounts. A checking account is a bank account in which money has been deposited. A withdrawal can be made at any time using a check. Check is a written order to a bank to pay a certain amount of money to the person or business to whom the check is made.
Sometimes time deposits are considered a form of money. A time deposit is a bank deposit that can be withdrawn at a certain time in the future, or on advance notice. Time deposits cannot be withdrawn using a check. A savings account is an example of a time deposit.
The bank book is a record of a person’s deposits and percentage the bank paid for use of the money.
It’s common knowledge that almost all firms use checks to pay their accounts, and most people also are paid by check. But that does not mean that checks are substitutes of money. Checks are more convenient and safe to use than currency.
However, although most people and institutions accept them, checks are not legal tenders. Legal tender is money that, by law, must be accepted in payments of debts. So, on balance, the only legal tender in the United States is currency.
Credit cards are a common way to purchase goods and services. Credit cards are not money, though, since they can be traded only for certain products from certain companies. As for money, it can be exchanged for anything.
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