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Money and methods of payment.
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To function as money a commodity must be widely acceptable to the population of the region or country. There must be not only its voluntary acceptability, it must also be recognized by the government of the country and have legal acceptability, that is, payment with this commodity must be regarded as a legal means of settlement of debts. To acquire acceptability a commodity must have the following attributes:
Medium of exchange: people must be willing to give and receive the commodity in exchange for goods and services. More significantly a medium of exchange allows peoples to specialize in particular areas, so that they and the economy can become more efficient. They will receive money for their labour and in exchange will be able to purchase the fruits of other people's labour. With this specialization, the volume of trade increases, the range of services and goods expands and money assumes a greater and greater role in the economy.
Store of value: Let us assume that cabbage is money and that we have it, say 1, 000 pounds` worth. If we hold it for a long time it will go bad and deteriorate in value. But if we sell the total stock for 1, 000 pounds we can hold the money in a bank without loss. This money can be used at any time for purchasing other goods. Of course, if we want to hold the money, we can invest it in an interest-bearing account and so obtain additional funds.
Unit of account: To act as a unit of account, money must be able to place a specific value on goods and services. Thus, it is able to act as a measure to value goods relative to other goods. It is a yardstick which enables people to compare the relative value of goods and services. In the UK we use the pound for valuing our income and household expenditure. At government level, the pound is used to calculate the national income, government expenditure, and so on.
Standard of deferred payment: We have mentioned that money acts as a medium of exchange and as a unit of accounting that its debts are stated in a currency and are settled in that currency. But in modern society contracts are made for settlement at some future date. For example, a national savings certificate, repayable in five years’ time, will have a future known value. Contracts made between one person and another, for completion at some future date, will have to show the amount to be paid or received on conclusion of that contract. Money must, therefore, act as a standard of deferred payment.
In order to fulfill the functions of money, a commodity must have the following properties: portability, durability, divisibility, stability, transferability, and recognizability.
Most of the terms referring to various kinds of money have been already introduced. In view of the large number of terms in use, some of which mean the same thing, it is worth pausing to recapitulate. Coins refer to all metallic money. Examples are the l0p and 50p coins in your pocket. Notes refer to paper money. Taken together, notes and coins are commonly referred to as cash or currency. Deposit money or bank money refers to deposits held at banks.
Legal tender is money that must be accepted if offered in payment for a purchase or settlement of a debt. In the UK, legal tender consists of coins (up to certain maximum amounts) and notes. Cheques drawn on bank deposits are not legal tender, although they are commonly used in purchases and in the settlement of debts.
Money is said to be convertible if it can be converted into some other form of money that is legal tender. In the UK, bank deposits are convertible money since they are convertible into legal tender and they are so converted every time a customer withdraws currency from his bank account.
Today, all notes and coins in circulation are fiat money. Modern coins, unlike their predecessors, contain a value of metal that is characteristically only a minute-fraction of the face value of the coin. Nevertheless, they function satisfactorily as money. Since notes and coins are acceptable, they are medium of exchange; since their purchasing power remains relatively stable in normal times, they are a satisfactory store of value; and they also serve as a unit of account and a standard of deferred payments.
Payment terms are the agreed way in which a buyer pays the seller for goods. The commonest are: 1) cash with order or cash on delivery; 2) prompt cash (i.e. within 14 days of delivery); 3) cash in 30, 60, or 90 days from date of invoice; 4) letter of credit; 5) cash against documents.
Cash on delivery (COD) means the terms of trade in which a supplier will post goods to a customer, provided the customer pays the postman or delivery man the full invoice amount when they are delivered. It was extensively used in mail order (see mail-order house), but the use of telephone ordering using credit cards has reduced the amount of COD business.
Cash price is the price at which a seller is prepared to sell goods provided that he is paid immediately in cash, i.e. he does not have to give credit or give a commission to a credit-card company. This is invariably below the price that includes a hire-purchase agreement.
Cash against documents (CAD) means payment terms for exported goods in which the shipping documents are sent to a bank, agent, etc., in the country to which the goods are being shipped, and the buyer then obtains the documents by paying the invoice amount in cash to the bank, agent, etc.
Letter of credit is letter from one banker to another authorizing the payment of a specified sum to the person named in the letter on certain specified conditions. Commercially, letters of credit are widely used in the international import and export trade as a means of payment. In an export contract, the exporter may require the foreign importer to open a letter of credit at his local bank (the issuing bank) for the amount of the goods. This will state that it is to be negotiable at a bank (the negotiating bank) in the exporter’s country in favour of the exporter; often, the exporter (who is called the beneficiary of the credit) will give the name of the negotiating bank. On presentation of the shipping documents (which are listed in the letter of credit) the beneficiary will receive payment from the negotiating bank.
On foreign trips nowadays people use widely traveller’s cheques which can be acquired practically at any branch of a bank. For tourists they have at least two main advantages: they are much cheaper than credit cards, and are a safe and reliable way of keeping money. The most popular traveller’s cheques are those issued by Thomas Cook, VISA and American Express.
Task 1. Learn the following words and word-combinations:
medium of exchange – засіб обміну;
store of value – міра вартості;
unit of account – одиниця розрахунку;
yardstick – мірило, критерій;
standard of deferred payment – засіб відкладеного платежу;
portability – nopтативність;
durability – довговічність;
divisibility – подільність;
monies – грошові суми;
to ascertain – визначати;
transferability – здатність обміну;
recognizability – пізнаваність;
counterfeit – фальшиві гроші;
to recapitulate – називати;
legal tender – легітимний засіб платежу;
to back – підтверджувати;
fіat moneyAm. – паперові гроші(не забезпечені золотом).
Task 2. Answer the questions on the text:
1. What are the functions of money?
2. What are the properties of money?
3. What kinds of money are coins and notes?
4. What institutions are responsible for issuing money?
5. What is legal tender?
6. What is the peculiarity of convertible money?
7. What does fiat money mean?
8. What are payment terms?
9. What is the difference between cash on delivery and cash against documents?
10. What is a letter of credit?
11. Why do tourists prefer to use travellers cheques instead of cash?
Task 3. Substitute the following definitions with the words below:
deposit, puchasing power, deferred, outstanding, depreciation, counterfeit, legal tender, yardstick, to withdraw cash.
1. … – money placed in a bank account.
2. … – deduction in the value of a currency against other currencies.
3. … – money in notes and coins.
4. … – amount of goods that can be bought for a contain sum of money.
5. … – to take from the account.
6. … – issued for circulation.
7. … – form of money which must, by law, be accepted in payment of a debt.
8. … – put off to a later time.
9. … – standard of comparison.
10. … – made in imitation of another thing in order to deceive.
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