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.