Ch. 12: Money & Banking

Gr. 11 Economics (CIE3M1)

M. Nicholson

MONEY

Money is anything that people are willing to accept as payment for goods & services

In the past cows, stones, beads, beaver pelts and playing cards have functioned as money

Canadian dollars are legal tender in Canada whereas credit cards and Canadian Tire bills do not have to be accepted as payment

MONEY

Cheque - order to pay an individual a specific amount of money from demand deposit or chequing account

Money supply (M1) = Currency + Chequing

BARTER

One good or service must be exchanged for another good or service

Problem of double coincidence of wants arises which wastes a lot of time

Problem of indivisibility of bartered goods and services also arises

Money solves both of these problems

USES OF MONEY

Medium of exchange

1. Generally acceptable

2. Portable

3. Divisible

4. Unique

5. Uniform in value

USES OF MONEY

Measure of value Store of value

BANKING

Chartered banks have a federal charter (e.g. Royal, CIBC, Montreal, TD Canada Trust, Nova Scotia)

Schedule 1 banks are the six largest banks in Canada and have immense financial power with over 95% of M1 (most an individual can own is 10%)

BANKING

Schedule 2 banks are subsidiaries of foreign banks and have little impact on the Canadian economy

Branch banking in Canada vs. unit banking in USA

BANK OF CANADA

Central bank of Canada founded in 1935 is now a Crown corporation

The bank of the banks supplies Canada with currency

Federal government uses B of C to manage its financial affairs (e.g. bonds)

Main function is controlling the money supply to meet the needs of the Canadian economy

OTHER FINANCIAL INSTITUTIONS

Trust companies Mortgage companies Credit unions and caisses populaires

MONEY CREATION

loans by the banks of customer’s deposits creates money

Cash-reserve requirements or fractional reserves determine how much the money supply can be increased based on the amount of the deposits

The banks only need enough money for the daily needs of customers and can lend out the rest to earn interest and profits for the bank

REGULATION OF THE MONEY SUPPLY

Open market operations are the buying and selling of federal government bonds by B of C

Expansion of the money supply B of C buys CSBs (Canada Savings Bonds)

Contraction of the money supply B of C sells CSBs

REGULATION OF THE MONEY SUPPLY

REGULATION OF THE MONEY SUPPLY

Changes in the bank rate or lending rate to banks influences the prime lending rate to the banks’ best customers

Moral suasion used by the Gov. of the B of C (Carney) to influence lending policies at banks