The Development of Money in the United States

          The two basic components of money supply in the United States are physical (coin and currency) money and deposit money. A review of the development of money in the United States will help us understand the characteristics of money today, as well as how U.S money performs the three functions of money listed.

Functions of Money

          Money is anything generally accepted as a means of paying for goods and services and for paying off debts. For something to serve successfully as money, it must be: easily divisible, so that exchanges can take place in small or large quantities; relatively inexpensive to store and transfer; and reasonable stable in value over time. Money must perform three basic functions. Money must serve as a "medium of exchange, " store of value, " and "standard of value".
          Money was first developed to serve as a medium of exchange to facilitate transactions. Primitive economies consisted largely of self-sufficient units or groups that lived by means of hunting, fishing, and simple agriculture. There was little need or occasion to exchange goods or services. As economies became more developed, however, the process of exchange became important. Some individuals specialized, to a degree at least, in herding sheep, raising grain, or making gold as metalsmith. To aid exchange of goods for goods, called barter, tables of relative values were developed from past experience. For example, a table might show the number of furs, measures of grain, or amount of cloth agreed to equal one now. This arrangement eased exchanges, but the process still had many serious drawbacks. For example, if a person had a cow and wanted to trade it for some nuts and furs, he or she would need for a simpler means of exchange led to the development of money, with its relatively low storage and transfer costs, to be used as a medium of exchange.

Savings-Investment Process

The savings-investment process involves the direct or indirect transfer of individual savings to business firms in exchange for their securities. Of course, a broader view of the savings-investment process would include the exchange of pooled individual savings for financial claims in the form of mortgage and other loans to individuals wanting to buy houses or make other purchase and hold debt securities issued by governmental units.

The Monetary System

          The monetary system is responsible for carrying out the financial functions of creating and transferring money. Money is needed to conduct day-to-day activities, facilitate the capital investment process, and support economic growth. To understand the monetary system requires a basic understanding of the savings investment process involving the flow of funds from individual server to businesses that want to invest in investors, buildings, and equipment.

Financial Management

Businesses seek to raise additional funds to finance investment in inventories, equipment, and buildings needed to support growth in sales. Bank loans are important financing sources along with the proceeds from the issuance of new debt and equity securities.

Investments

Securities markets are also important components of an efficient financial system. The primary securities market facilities raising funds by issuing new debt and equity securities. The secondary market for securities facilities the transfer of ownership of existing securities among investors.

Institutions and Markets

Financial institutions and financial markets are necessary components of an efficient financial system. Institutions perform an important financial intermediation role by gathering the savings of individuals and then lending the pooled savings to businesses that want to make investments.

Securities Markets and Investment Firms

          Securities firms and various investment-related businesses provide opportunities to start a finance career in the investment area. Opportunities include buying and selling seasoned securities, analyzing securities for investment potential, marketing new securities issues, and even helping individuals plan and manage their personal financial resources. Entry-level career opportunities include:

• Stockbroker (account executive): involves assisting clients in purchasing stocks and bonds and building wealth.
• Security analyst: involves analyzing and making recommendations on the investment potential of specific securities.
• Investment banking analyst: involves analyzing individual client insurance needs and investment plans to meet retirement goals.

          While we have focused on entry-level careers in profit-motivated businesses and financial organizations, careers in finance are also available in government or not-for-profit organizations. Finance opportunities at the federal or state government levels include managing cash funds, making asset expenditure decisions, and issuing debt securities to raise funds. Hospitals and other not-for-profit organizations also need expert financial managers to manage assets, control costs, and obtain funds. Financial and other analyst are hired both by government units and not-for-profit organizations to perform these tasks.

Contractual Savings and Real Property Organizations

          Insurance companies, pension funds, and real estate firms also provide opportunities for starting a career in finance. These institutions need a variety of employees willing to blend marketing or selling efforts with financial expertise. Entry-level career opportunities include:

• Insurance agent (broker): involves selling insurance to individuals and businesses and participating in the processing of claims.
• Research analyst: involves analyzing the investment potential of real property and securities for pension fund holdings.
• Real state agent (broker): involves marketing and selling or leasing residential or commercial property.
• Mortgage analyst: involves analyzing real estate loan applications and assisting in the arranging of mortgage financing.

Depository Financial institutions

          Banks and other depository institutions offer the opportunity to start a finance career in consumer or commercial lending. Banks also hold and manage trust funds for individuals and other organizations. Entry-level career opportunities include:

• Loan analyst: evaluating consumer and or/commercial loan applications.
• Bank teller: involves assisting customer with their day-to-day checking and banking transactions.
• Investments research analyst: involves conducting research on investment opportunities for a bank trust department.

Financial Management

          Larger businesses typically divide their finance activities into treasury and control functions, whereas smaller firms often combine these functions. The treasurer is responsible for managing the firm's cash, acquiring and managing the firm's assets, and selling stocks and bonds to raise the financial capital necessary to conduct business. The controller is responsible for cost a accounting, financial accounting, and tax record-keeping activities. Entry-level career opportunities include:

• Cash management analyst: involves monitoring and managing the firm's day-to-day cash inflows and outflows.
• Capital expenditures analyst: involves estimating ash flows and evaluating assest investment opportunities.
• Credit analyst: involves evaluating credit applications and collecting amounts owed by credit customers.
• Financial analyst: involves evaluating financial performance and preparing financial plans.
• Cost analyst: involves comparing actual operations against budgeted operations.
• Tax analyst: involves preparing financial statements for tax purposes.

Career in Finance

Career opportunities in finance are available in areas of financial management, depository financial institutions, contractual savings and real property organizations, and securities markerts and investment firms. While you may aspire to own your own business or be a chief executive officer (CEO) or chief financial officer (CFO) in a major corporation, most of us must begin our careers in an entry-level position.

Transferring Financial Assets

Several types of financial institutions facilities or assist the processes of lending and selling securities. Brokerage firms market and facilitate the transferring of existing "seasoned" instruments and securities. Also, if share of stock are to be sold to the general public, it is desirable to have a ready market in which such stocks can be resold when the investor desires. Organized stock exchanges and the over-the-counter market provide active secondary markets for existing securities. The ability to buy and sell securities both quickly and at "fair market values" is important in an efficient financial system.

Marketing Financial Assets

New financial instruments and securities are created and sold in the primary security market. For example, a business may want to sell shares or ownership, called stock, to the general public. It can do so directly, but the process of finding individuals interested in investing funds in that business is likely to be difficult, costly, and time-consuming. A particular financial intermediary, an investment banking firm, can handle the sale of shares of ownership. The function of the investment banking firm is essentially one of merchandising. Brokerage firms market existing or "seasoned" instruments and securities.

Lending and Investing Savings

Another basic function of financial institutions is lending and investing. The money that has been put into these intermediaries may be loaned to businesses, farmers, consumers, institutions, and governmental units. It may be loaned for varying time periods and for different purposes, such as to buy equipment or to pay current periods and for different purposes, such as to buy equipment or to pay current bills. Some financial institutions make loans of almost all types. Others specialize in only one or two types of lending. Still other financial institutions invest all or part of their accumulated savings in the stock of a business or in debt obligations of businesses or other institutions.

Accumulating Savings

          A function performed by financial institutions is the accumulation or gathering of individual savings. Most individuals, businesses, and organizations do not want to take the risks involved in having cash on hand. Even id cash amounts are relatively small, they are put into a depository institution for safekeeping. When all the deposits are accumulated in one place, they can be used for loans and investments in amounts much larger than any individual depositor could supply. Depository institutions regularly conduct advertising campaigns and other promotional activities to attract deposits.

Transferring Money

          Individuals and businesses hold money for purchases or payments they expect to make in the near future. One way to hold money is in checkable deposits at depository institutions. When money is held in this form, payments can easily be made by check. The check is an order to the depository institution to transfer money to the party who received the check. This is a great convenience, since checks can be written for the exact amount of payments, can be safely sent in the mail, and provide a record of payment. Institutions can also transfer funds between accounts electronically, making payments without paper checks. Funds transfer can be made by telephone or at automated teller machines (ATMs) connected to a bank's computer.

Creating Money

          Since money is something that is accepted as payment for goods, services, and depts, its value lies in its purchasing power. Money is the most generalized claim to wealth, since it can be exchanged for almost anything else. Most transactions in today's economy involve money, and most would not take place if money were not available.
          One of the most significant functions of the monetary system within the financial system is creating money, which serves as a medium of exchange. In the United States, the Federal Reserve System is primarily responsible for the amount of money that is created, although most of the money is actually created by depository institutions. A sufficient amount of money is essential for economic activity to take place at an efficient rate. Too little money constrains economic growth. Too much money often results in increases in the prices of goods and services.

Financial Functions in the U.S Financial System

          In the U.S economy, the government and private financial institutions of many kinds have developed instruments and procedures to perform the financial functions. These financial functions may, in turn, be viewed as characteristics of the financial system that evolved to support the U.S. market economy. The monetary system is responsible for creating and transferring money. Financial institutions efficiently accumulate savings and then lend or invest these savings. Financial institutions play important roles in the savings investment process both through financial intermediation activities and in facilitating direct investments by individuals. Financial markets, along with certain securities firms, are responsible for marketing and transferring financial assets or claims.

International Securities and Markets

          Dept and equity markets also are well developed in many foreign countries. Corporations domiciled in foreign countries are able to issue bonds and stocks in their own home currencies and markets. Corporations also sell their stocks in securities markets outside their home countries as a way of broadening investor recognition and raising more funds. For example, a U.S corporation may simultaneously sell a new stock issue in the United States and in Germany and Italy.
          Corporation and governments also can sell debt securities in the Eurobond and foreign bond markets. A Eurobond is a bond denominated in U.S dollars that is sold to investors located outside the United States. For example, a German corporation may sell a $20-million Eurobond to German and Swiss investors that will pay interest and repay the amount borrowed at maturity in U.S. Dollars. Likewise a U.S. corporation may issue its own $20-million U.S. dollar-denominated Eurobond for sale to German and Dutch investors. In contrast, a foreign bond is a bond issued by a corporation or government that is denominated in the currency of a foreign country where it is sold. For example, a U.S. corporation may issue bond denominated in euros to investors in Belgium and the Netherlands. The euro is the common currency that has replaced the individual currencies of 12 member countries of the European Union.

Types of Securities

          Money is the fundamental measure of wealth. In addition to money, an individual of a business also measures its wealth in terms of the real and financial assets or claims that it holds. Real assets include the direct ownership of land, buildings or homes, equipments, inventories, durable goods, and even precious metals. Financial assets or claims are dept instruments, equity securities, and other financial contracts that are backed by real assets. A loan to you to purchase an automobile usually provides for the lender to hold the auto title (ownership) until the loan is repaid. Long-term dept issued by a corporation may represent a claim against specific assets, such as buildings and equipment, or the general assets of the issuer. A mortgage loan to you will be backed by the house against which the loan is being made.
          Relatively few of the many types of financial assets actually require the use of secondary financial markets. Checkable deposits, such as checking accounts and share drafts, and time deposits, such as savings accounts held in depository institutions, are also examples of financial assets. In fact, all kinds of promissory notes or IOUs represent financial assets to their holders. When the public holds currency issued by the U.S government, the currency is a financial assets. At the same time, it is a financial liability to the government.

Currency Exchange Markets

          Currency exchange markets are electronic markets in which banks and institutional traders buy and sell various currencies on behalf of businesses and other clients. In the global economy, consumers may want to purchase goods produced, or services provided, in other countries. Likewise, an investor residing in one country may wish to hold securities issued in another country. For example, a U.S. consumer may wish to purchase a product in a foreign country. If the product is priced in the foreign currency in order to complete the transaction. Businesses that sell their products in foreign countries usually receive payment in the foreign currencies. However, because the relative values of currencies may change, firms often use the currency exchange markets to reduce the risk of holding too much of certain currencies.

Derivatives Markets

          Derivatives markets facilitate the purchase and sale of derivation securities, which are financial contracts that derive their values from underlying securities or from other related financial assets. A familiar form of derivative security is the opportunity to buy or sell a corporation's equity securities for a specified price and within a certain amount of time. Derivative securities may be used to speculate on the future price direction of the underlying financial assets, or to reduce price risk associated with holding the underlying financial assets. Organized exchanges handle standardized derivative security contracts, while negotiated contracts are handled in electronic markets often involving commercial banks or other financial institutions.

Mortgage Markets

          Mortgage markets are markets in which mortgage loans, backed by real property in the form of buildings and houses, are originated and sometimes trade. Mortgage loans are usually long-term loans backed by real property and typically are repaid in monthly installments of interest and a partial repayment of the loss amount that was borrowed. If a mortgage loan is not repaid by the borrower, the lender can seize and sell the pledged real property under foreclosure laws. While in continues to be difficult to buy and sell individual home mortgage in a secondary markets, standardized high-quality mortgage have been "pooled" together in recent years into mortgage-backed securities that have active secondary markets. Home mortgage loans to individuals are made available primarily through depository institutions and mortgage companies.

Secondary Securities Markets

          Secondary securities markets for securities facilitate the transfer of previously issued securities from existing investors to new investors. Security transaction or transfer typically take place on organized security exchanges or in the electronic over-the counter market. Individuals and other investor can actively by and sell existing securities in the secondary market. While these secondary markets investors may make gains or losses on their security investments, the issuer of the securities does not benefit (nor does it lose) from these activities. The secondary market for securities is typically divided into short-term (money) and long-term (capital) market categories.

Types of Financial Markets

          There are four types of financial markets--securities markets, mortgage markets, derivatives markets, and currency exchange markets. Most of us have some idea about the markets for securities. Securities Markets are physical locations or electronic forums where debt and equity securities are sold and traded. Debt securities are obligations to repay borrowed funds. Federal, state, and local governments can issue debt securities, while business corporations and financial institutions can issue both debt and equity securities. Equity securities are ownership rights in businesses and institutions. Corporations can raise funds either through a private placement that involves issuing new securities directly to specific investors or through a public offering that involves selling new securities to the general public.           There are primary and secondary markets for debt and equity securities. The initial offering of debt and equity securities to the public takes place in primary securities markets. Proceeds, after issuing costs, from the sale of new securities goes to the issuing business or government issuer. The primary markets is the only "markets" where the security issuer directly benefits (receive funds) from the sale of its securities.

Finance Firms

          Provide loans directly to consumers and businesses, as well as help borrowers obtain mortgage loans on real property. Some consumer-focused finance companies finance installment loan purchase of automobiles and other durable goods, while others provide small loans to individuals and households. Businesses that are unable to obtain financing from commercial banks often turn to finance companies that make commercial or business loans. Mortgage banking firms, sometimes just called mortgage companies, "originate" real state mortgages by bringing together borrowers and institutional investors. However, finance organizations usually don't perform financial intermediation roles since they obtain their own financing from other financial institutions rather than from individual savers.
          Few of today's financial institutions existed during the American colonial period. Only commercial banks and insurance companies (life and property) can be traced back prior to 1800. Savings banks S&Ls began developing during the early 1800s. Investment banking firms (and organized securities exchanges) also can be traced back to the first half of the 1800s. No new major financial intermediaries evolved during the last half of the nineteenth century. Credit unions, pension funds, mutual funds, and finance companies began during the early part of the twentieth century. Thus, throughout much of the 1900s and into the 21st century, emphasis has been on redefining and restructuring existing financial institutions rather than introducing new ones.

Investment Banking Firms

          Sell or market new securities issued by businesses to individual and institutional investors. Brokerage firms assist individual who want to purchase new securities issues or who want to sell previously purchased securities. Investment banking and brokerage activities are often combined in the same firms. However, unlike mutual funds, investment banking and brokerage firms are not actively involved in financial intermediation. Rather than gathering the savings of individuals, these firms obtain their financial capital to carry out their activities from their own resources or from other financial institutions.

Securities Firms

          Accepts and invest individual savings and also facilitate the safe and transfer of securities between investors. Investment companies sell shares in their firms to individuals and others and invest the pooled proceeds in corporate and government securities. One type of investment company, commonly called mutual funds because they can issue an unlimited number of their shares to their investors and use the pooled proceeds to purchase corporate and government securities. Mutual funds grow by investing the funds of their existing investor in securities that will pay or distribute cash and will appreciate in value. Successful mutual funds are able to attract more investor funds and, in turn, invest in more securities. Like depository institutions and contractual savings organizations, investment companies (particularly mutual funds) perform an important financial intermediation function.

Contractual Savings Organization

          Collect premiums and contribution from participants and provide retirement benefits and insurance against major financial losses. Insurance companies provide financial protection to individuals and businesses for life, property, liability, and health uncertainties. Customers, called policyholders, pay premiums to insurance companies that invest these funds until the insured claims must be paid. Pension funds receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees. Many business organizations provide private pension plans for their employees. State and some local governments also provide pension (retirement) funds for employees. Like depository institutions, both insurance companies and pension funds are actively involved in the financial intermediation process of gathering the funds of individuals (premium payments and employee contributions) and investing these pooled funds so that businesses can grow and government units can provide more benefits for its citizens.

Small Business Practice

As the American economy moves from the industrial age to the information age, dramatic changes have been taking place in the importance of small businesses. While large firms with 500 or more employees continued to downsize and restruction throughout the 1990s, small firms provided the impetus for economic growth.
          Between 1976 and 1990 firms with fever than 500 employees provided over one-half of total employment and 65 percent of net new jobs in the U.S. During the 1990s, small firms provided almost all of the new jobs. For example, data for the 1992-1996 period show that small firms were responsible for creating nearly 12 million new jobs while large firms exhibited a decline in their number of employees.
          Why have small firms been so successful in creating new jobs? A recent white paper by the Small Business Administration suggest two reasons. First, small firms provide a crucial role in technological change and productivity growth. Market economics change rapidly and small firms are able to adjust quickly. Second, small firms provide the mechanism and incentives for millions of individuals to pursue the opportunity for economic success.
          Others may argue that is the entrepreneurial spirit and activity that account for the importance of small firms in the U.S economy. Whatever the reason(s), the ongoing growth of small businesses continue to be an important stimulus to the economy as we enter the 21st century.

Overview of the Financial System

An effective financial system is a complex mix of government and policy makers, a monetary system, financial institutions, and financial markets that interact to expedite the flow of financial capital from savings into investment. Depicts a simplified view of the U.S, financial system. First, an effective financial system must have several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies. These policies makers include the President, Congress, the U.S, Treasurer, and the federal Reserve Board. Since the U.S operates within a global economy, political and economic actions of foreign policy makers impact, although indirectly, on the U.S financial system and its operations.
          Second, an effective financial system needs an efficient monetary system for creating and transferring money. Third, an effective financial system also must have financial institutions that support capital formation either by channeling savings into investment in physical assets or by fostering direct financial investments by individuals in financial institutions and businesses. We refer to these activities as the savings-investment process. Fourth, an effective financial system must have financial markets that facilitate the transfer of financial assets among individuals, institutions, businesses, and governments.
          The monetary system must provide an efficient medium for exchanging goods and services. A way to measure prices, called a unit of account, is a basic requirement. The unit of account in the United States is the U.S dollar. The unit of account must be universally accepted if exchange is to function smoothly.

The Informal Organization

So far we have talked only about formal aspects of internal organization, the structures that are designed to accomplish a group's goals. These structures let all employees know how they fit into the company; they spell out reach employee's responsibility and authority. This is desirable. But there is more to a business firm than its internal organization. Every company of any size also has an informal organization, a network of social interactions among employees that cannot be specified by a formal structure or demonstrated on an organization chart.
          Employees may work in one department, but they develop relationships with people in other departments, too. They make new friends in the cafeteria, or on the company bowling team, or in the credit union. An employee's friends or acquaintances in other departments may help to solve business problems or provide needed advice or information. Such relationships make work more pleasant in many cases, and they go a long way toward maintaining employee's morale--how they feel about their jobs. Everyone is happier when they work with people they know and care about.
          On the other hand, the informal organization may also create problems for management and other workers. For example, an unhappy employee may use the informal organization to spread complaints about another workers or about the firm. The gossip and misinformation that often are spread through the "grapevine" can break down the morale among employees and can turn a firm into a "rumor factory."
          Effective business managers recognize that they are dealing with an informal organization as well as a formal one, and they use it to help accomplish the group's stated objectives.

Internal Organization and Parkinson's Law

          We have reviewed the five basic forms of internal organization, and we have noted the differences between a centralized (tall) organization and a decentralized (flat) one. However, we  still have no basic rules to guide the organization of all business firms. This is why the management principle of minimal levels of authority is so important: The levels of authority should be limited to the fewest possible to accomplish the goals of a specific firm.
          As any firms grows in size, it adds supervisory personnel and more and more specialists to the payrolls. Usually, some of this growth is necessary; but much of it is not. If we can trust the judgement of many experienced executives and business consultants, staff additions do not always bring comparable increases in production, efficiency, or profits. In fact, many additions set the stage for Parkinson's Law, which states that "work expands to fill the time available for its completion." (Have you noticed that if you have only one hour to prepare for an exam, that's how long it will take; but if you have three hours, or six, the work will expand to fill all the time?)
          The author of this "law" was the British historican C. Northcote Parkinson, who developed it from lengthy observation of British industry and government during the early twentieth century. But examples of how Parkinsons's Law works can be found throughout our business world and our government today, too. Why should it be the case that what once took only a few people's time to accomplish now requires the efforts of many people? What causes Parkinson's Law to apply even in the modern business world?
          At least three aspects of modern business combine to complicate the matter of internal organization by bringing Parkinson's Law into play.

1.   The desire of managers to build "empires" of their departments, believing that this will increase their importance and salaries.

2.   The increased paperwork needed in modern business -- even in the hiring of employees.

3.   The failure of many managements to establish effective control in an era of permissiveness and strong union bargaining power.

Only through strong top management that is constantly aware of productivity and personnel needs can business avoid, or at least minimize, the operation of Parkinson's Law.