Money and Monetary Systems

Introduction 

Real estate finance requires knowledge on how mortgage markets operate within the monetary system. Some institutions such as the Federal government are responsible for a greater extent in the control of finance in the country as well as the creating and distributing that money. The body is also responsible for the regulation, and supervising other financial institutions. In the United States, some of the federal contributors who take part in real estate markets include Federal Reserve (FED), the Federal Home Loan Bank (FHLB), and the treasury. So generally, money is a medium in which people can convert their mental or physical partaking in exchange for it comfortably and conveniently. That is, it is a method of payment, a widely accepted value and a storehouse of the purchasing power (Lotz & Zhang, 2016). These definitions vary since, in some societies that are still developing, money to them is anything that serves as a means of exchange for a given service or favor, for example, beads, shells and other ways depending on the environment and the culture of that society. Moreover, money can be in the form of bills, coins, and stamps. Currently, the monetary system relies on the convenience, and thus coins and paper money are acceptable and can be used as a means of exchange anywhere. People within a given society struggle to acquire money to be able to use it possess goods that are essential to their lives or even pleasures but majorly, to cover for the basic needs (Lotz & Zhang, 2016). On the other hand, the monetary system defines the set of policies in a manner that the state generates the money in an economy. Earlier before the introduction of fiat system money took the form of gold or silver which made it practical to visit a bank and make an equivalent exchange of the metals. However, in the current world, the case is different, and thus the countries are backed by debt, which is a promise to make payments on a paper form. 

Uses of Money 

Money is a trust system where people believe that their mode of payment is acceptable and standard and can be used later for different payments. Money is a standard that can serve several functions: 

Medium 

It is a means of paying for a good or service rendered which thus eliminates a situation where people have to wait for coinciding needs arising from barter system. This coincidence results from one person requiring a need which and possesses a requirement that another person requires leading to difficulty in trading. 

Measurement 

It is a commodity that can be used in a standard way to give a price to products as well as the comparison of their values. 

Value 

It is a storage of asset value, but the limitation is that is affected by inflation, that is, the value dropping after a given span of time. 

Types of Monetary Systems 

Commodity Money 

It comprises of exchange medium resulting from certain precious metals or those components termed in the society as having a given intrinsic value. That is, the monetary system involves the use of a physical commodity, and thus its value remains constant despite being melted down (Decker, 2017). Examples of this case include gold or silver coins which, over an extended period has been used in exchange for other commodities, which is, as money. It is a system that is evident in economies that are reliant on bartering. Usually, it is a commodity that traders know that it has sufficient demand and thus can use it to trade with another product. 

Commodity-based Money 

This form is just a step from commodity money, sometimes, known as representative money. The value of money it this case is drawn from a commodity however the commodity itself is not handled on a frequently. That is, the notes have no physical value but can be traded with the commodity representing it (Decker, 2017). For instance, gold can be awarded a given amount in Dollars thus fulfilling the role of the gold standard, the silver standard in the case of silver, and the double standard when both are acceptable. They have little or no intrinsic value, but it has some face value. Generally, it is a claim of a commodity, and therefore its value is more than the material value. 

Fiat Money 

In this system, the government is the guarantor of the currency value. The government gives out a legal tender. This form has extensive use in the current system because people can use notes to acquire the products they require or get some services. The money, in this case, is paper money or coin and can also take the form of bank balances or any other type of records such as credit cards. It has no backing of the physical commodity, but the fact that there is demand for it is what it gives it the intrinsic value be (Decker, 2017). It uses a debt mechanism, that is, if one is debt, then there is need to obtain the pieces of paper to repay the debt. It derives its value from the government, that is, through government re-assurance/ 

The Supply and Costs of Money 

For a country to achieve economic stability, the supply and cost of money should be sufficient and robust. The more a state has more money in circulation, the better the economic activities. That is if a country has an economy where there is an infusion of cash towards spending, their expenditures increases which translate to an increase in production to replace those goods which have been utilized or consumed. This increase will directly lead to increase in job opportunities, and thus more people again can spend money (Lotz & Zhang, 2016). This expenditure results in an economic cycle. On the other hand, the reverse of this will lead to low economic activity. Therefore, the supply of money within a country refers to the cash in public hands, accounts, union accounts, and the demand deposits added to deposits and savings by various individuals and institutions. 

The cost of money regarding the interest charges on money that have been borrowed by individuals or institutions reveals that the borrowing activity has a relationship with the cost and the economic activity, for instance, if there is high cost, the borrowing activity will be low resulting to a slow economic upgrade. However, if the interest rates are low, there will be higher demand and more money will be borrowed leading to the increase in the economic activities. With this, it means that to attain some economic balance; there is need to manipulate the supply and cost of money. For this to be possible, the financial agencies and bodies need to intervene. The money supply, therefore, depends on the monetary base, current-deposit ratio, and reserve ratio. 

Money-Creation by Banks 

As much as fractional-reserve banks cannot create wealth, they are responsible for the creation of money. To understand this kind of banking system, it whereby a given bank gives out loans on the deposits made or investments from various clients. The only condition is that they are cannot hold reserves more than the deposit liabilities fraction. Here, the bank owns the reserves as currency within the bank or at the central bank in the form of bank’s balances. These banks, therefore, at as a link between those saving and the borrowers as well as creating a provision of liquidity to those depositing. The only challenge that they may encounter is bank run which may occur as a result of depositors requiring to withdraw more than the amount held as reserves by the bank. Some countries take part in controlling and regulating the commercial banks as well the provision of deposit insurance to avert the risk of banks running this problem. Since the banks have lesser money in their reserves than the value at the deposit liabilities, and the fact that the deposit liabilities is the money that they are free to manipulate, the federal-reserve banks allow the supply of money even beyond what they have as the underlying base money that the central bank initially had created. If we have a particular bank practicing fractional-reserve banking, the loans they give those borrowing creates a new debt of equal amount (Lotz & Zhang, 2016). 

To better this understanding if for example a given bank holds 20% of deposits in the reserve and decides to generate profit with the remaining money and we assume that currency is $1000 (Lotz & Zhang, 2016). Given that the supply of money is equal to currency in addition to demand, again, if we have the bank making $800 in loans, the money supply will be equal to $1800. If the depositor has $1000 in demand deposits and a borrower holding $800 in currency and then, he or she decides to deposit $800 in another bank, that bank will be able to loan out 80% of this deposit (Lotz & Zhang, 2016). Again if he does it with another third bank, the third bank will store 20% in reserve and give the rest as loans. This process finally leads to the generation of more money. 

The Money Multiplier 

Money multiplier involves the process of making an initial amount of money to multiply and attain a more significant value leading to an increase in the total supply. It is a crucial element in the fractional banking system. It involves an increase in the monetary base through banks holding some fractions in the reserves and loaning out the rest. (Haghighat & Salahesh, 2016) After that, the loan is again deposited in banks increasing more lending and the increase. To get the money multiplier, one can divide the change in the total money supply by the difference in the monetary base. 

The Reserve Ratio 

The reserve ratio is the percentage of money that banks have in their liquid reserves. It is an essential tool of the monetary policy that is substantially responsible for controlling the supply of money. That is, it is the reciprocal of the money multiplier. In other words, it is possible to predict the money multiplier using reserve ratio (Haghighat & Salahesh, 2016). It can be used to influence the monetary policy, that is, if the Central Bank requires a higher reserve ratio, then the bank loaning will reduce therefore leading to a reduction in the money supply. 

Money Demand 

Money demand is the representation of people’s tendency to possess a given amount of, and it varies according to the different ways in which people channel their incomes. The demand is a function relies on those activities that depend on money. Some theories have been put forward to expound the concept of money demand. The Monetarist Theory is based on the Quantity Theory of money (Haghighat & Salahesh, 2016). In this case, it regards the need for money as any other good or service. Here, he outlines various types of wealth which include: Money, bonds, shares, equities and individual’s capacity to take part in work. The demand relies on an individual’s income, cost of money, expected inflation, and one’s preferences to possess to possess several types of wealth. This theory argues that the more there is the growth of the national income, inflation is bound to be there. However, if the supply of money matches the real output, then there is minimal risk of running into inflation. 

Conclusion 

To conclude, from the above, it is evident that the modern economies use money and make its transmissions through the bank. Money has undergone evolution from commodity currency, commodity-based currency to the current fiat money system where its power relies on the government assurance and debt system. The monetary system relies on fiscal policies, that is, the actions of the central bank, the currency board and the committee that is responsible for the regulation in determining the growth rate of money supply. To achieve a sustainable monetary system, therefore, the modification on interest rates, trade on government bonds and the adjustments of the money in banks are vital. Banks, as well, have a significant role in creating money, that is, through interest achieved from loaning out cash, therefore, creating a “money as debt” system leading to the growth of the economic activities. The central bank, also, has a crucial role to play in the monetary policy. Generally, money is a standard that is based on assurance and can be manipulated to suit the economy. 

References 

Decker, F. (2017). Central Bank or Monetary Authority? Three Views on Money and Monetary Reform. Economic Affairs , 37 (3), 343-356. doi: 10.1111/ecaf.12258 

Haghighat, J., & Salahesh, T. (2016). The role of money multiplier in monetary transmission mechanism in Iran (bank lending and money supply). International Journal of Monetary Economics and Finance , 9 (2), 212. doi: 10.1504/ijmef.2016.076476 

Lotz, S., & Zhang, C. (2016). Money and credit as means of payment: A new monetarist approach. Journal of Economic Theory , 164 , 68-100. doi: 10.1016/j.jet.2015.08.003