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Balance Of Payments

Balance of payments

The balance of payments is a measure of the payments that flow into and out from a particular country from and to other countries. It is determined by a country's exports and imports of goods, services, and financial capital, as well as financial transfers.

Overview

If there is more money flowing into a country than there is flowing out, that country has a positive balance of payments; if, on the other hand, more money flows out than in, the balance of payments is negative. A country's international transactions can be grouped into three categories: :(I) Current Account ::
- Exports ::# Merchandise (tangible goods) ::# Services (invisible trade, eg. legal, consulting, royalties, patents etc.) ::# Factor Income (interest, dividend or any other foreign investment income) ::
- Imports ::# Merchandise ::# Services ::# Factor income ::
- Unilateral Transfers (one way "unrequitted" payments, eg.foreign aid, grants, gifts etc.) :(II) Capital Account ::# Foreign Direct Investment (FDI) ::# Portfolio Investment ::#
- Equity Securities ::#
- Debt Securities ::# Other Investment (transactions in currency, bank deposits, trade credits etc.) ::# Statistical discrepancies :(III) Foreign Reserves ::
- Official Reserve account, includes gold, foreign exchanges, SDRs, reserves in IMF
- current account: records net flow of money into a country resulting from trade in goods and services and transfer payments made from abroad. The current account itself comprises of 3 accounts : trade account, income account and transfers account. A trade deficit(surplus) arises when there is a deficit(surplus) in the Merchandise trade within the current account
- capital account: records net flow of money from purchases and sales of assets such as stocks, bonds and land. Money coming in (+), or leaving (−):
- + Exports
- − Imports
- − Increase of owned assets abroad
- + Increase of foreign-owned assets in the country An account may show a surplus or a deficit. For example, a trade surplus implies that a country's exports are higher than its imports and hence there is a net flow of money into the country. A trade deficit, on the other hand, implies that the country's imports exceed its exports and hence there is a net flow of money out of the country. For a country to have a zero balance of payments, a current account deficit must be balanced by a capital account surplus. The US have been running a negative current account for a long while, which is financed through a positive financial account. The only way to buy more than you sell is to borrow money. A country will have a negative balance of payments (i.e., there is to be a net flow of money out of the country) if the net of the current account and the capital account is a deficit. Similarly, there will be a positive balance of payments (i.e., a net flow of money into a country) if the net of the current and the capital account results in a surplus.

History

Historically these flows simply were not carefully measured, and the flow proceeded in many commodities and currencies without restriction, clearing being a matter of judgement by individual banks and the governments that licensed them to operate. Mercantilism was a theory that took special notice of the balance in payments and sought simply to monopolize gold, in part to keep it out of the hands of potential military opponents (a large "war chest" being a prerequisite to start a war, whereupon much trade would be embargoed). As mercantilism gave way to classical economics, these crude systems were later regulated in the 19th century by the gold standard which linked central banks by a convention to redeem "hard currency" in gold. After World War II this system was replaced by the Bretton Woods institutions (the International Monetary Fund and Bank for International Settlements) which pegged currency of participating nations to the US dollar, which was redeemable nominally in gold. In the 1970s this redemption ceased, leaving the system without a formal base. Some consider the system today to be based on oil, a universally desirable commodity due to the dependence of so much infrastructural capital on oil supply. Since OPEC prices oil in US dollars, the US dollar remains a reserve currency, but is increasingly challenged by the euro, and to some degree the Japanese yen.

United States balance

External links

Data

- [http://dsbb.imf.org/Applications/web/sddsnsdppage/ IMF DSBB]
- [http://www.fedstats.gov/imf/ United States DSBB] (See "External Sector")
- [http://www.bea.gov/bea/international/bp_web/simple.cfm?anon=71&table_id=1&area_id=3 BEA U.S. International Transactions Accounts Data] You can also download historical balance of payments information from 1960 under the "All Tables" link of the following page:
- [http://www.bea.gov/bea/international/bp_web/list.cfm?anon=71®istered=0 BEA Balance of Payments Section] Category:Economic indicators Category:Macroeconomics

Exports

In economics, an export is any good or commodity, shipped or otherwise transported out of a country, province, town to another part of the world, typically for use in trade or sale. Export products or services are provided to foreign consumers by domestic producers. Export is the legitimate transportation of domestic or nationalized goods and services from a country intended for use or consumption rendered abroad. Exports can be any good that is shipped out of a government's border for commercial purposes. Exports are usually carried out under specific conditions.

Financial capital

Financial capital, or economic capital, is any liquid medium or mechanism that represents wealth, or other styles of capital. A contract regarding any combination of capital asset is called a financial instrument, and may serve as a
- medium of exchange,
- standard of deferred payment,
- unit of account, or
- store of value Liquidity requirements of these vary significantly - leading to a diversity of contracts and financial markets to trade them on. When all four functions are served by one instrument, this is called money, which does not need to be traded on financial markets since the risk of loss of value of money is uniform across the whole society. Where no one form of money is agreed to have reliable value, and barter is undesirable, less liquid or more diverse instruments have served the four functions. This article focuses mostly on financial instruments which are not uniformly affected by native currency inflation and which are not guaranteed by a state. Like money, financial instruments may be "backed" by state military fiat, credit (i.e. social capital held by banks and their depositors), or commodity resources. Governments generally closely control the supply of it and usually require some "reserve" be held by institutions granting credit. Trading between various national currency instruments is conducted on a money market. Such trading reveals differences in probability of debt collection or store of value function of that currency, as assigned by traders. When in forms other than money, financial capital may be traded on bond markets or reinsurance markets with varying degrees of trust in the social capital (not just credits) of bond-issuers, insurers, and others who issue and trade in financial instruments. When payment is deferred on any such instrument, typically an interest rate is higher than the standard interest rates paid by banks, or charged by the central bank on its money. Often such instruments are called fixed-income instruments if they have reliable payment schedules associated with the uniform rate of interest. A variable-rate instrument, such as many consumer mortgages, will reflect the standard rate for deferred payment set by the central bank prime rate, increasing it by some fixed percentage. Other instruments, such as citizen entitlements, e.g. "U.S. Social Security", or other pensions, may be indexed to the rate of inflation, to provide a reliable value stream. Trading in stock markets or commodity markets is actually trade in underlying assets which are not wholly financial in themselves, although they often move up and down in value in direct response to the trading in more purely financial derivatives. Typically commodity markets depend on politics that affect international trade, e.g. boycotts and embargoes, or factors that influence natural capital, e.g. weather that affects food crops. Meanwhile, stock markets are more influenced by trust in corporate leaders, i.e. individual capital, by consumers, i.e. social capital or "brand capital" (in some analyses), and internal organizational efficiency, i.e. instructional capital and infrastructural capital. Some enterprises issue instruments to specifically track one limited division or brand. "Financial futures", "Short selling" and "financial options" apply to these markets, and are typically pure financial bets on outcomes, rather than being a direct representation of any underlying asset. The relationship between financial capital, money, and all other styles of capital, especially human capital or labor, is assumed in central bank policy and regulations regarding instruments as above. Such relationships and policies are characterized by a political economy - feudalist, socialist, capitalist, green, anarchist or otherwise. In effect, the means of money supply and other regulations on financial capital represent the economic sense of the value system of the society itself, as they determine the allocation of labor in that society. So, for instance, rules for increasing or reducing the money supply based on perceived inflation, or on measuring well-being, reflect some such values, reflect the importance of using (all forms of) financial capital as a stable store of value. If this is very important, inflation control is key - any amount of money inflation reduces the value of financial capital with respect to all other types. If, however, the medium of exchange function is more critical, new money may be more freely issued regardless of impact on either inflation or well-being. Unit of account functions may come into question if valuations of complex financial instruments vary drastically based on timing. The "book value", "mark-to-market" and "mark-to-future" conventions are three different approaches to reconciling financial capital value units of account. Socialism, capitalism, feudalism, anarchism, other civic theories take markedly different views of the role of financial capital in social life, and propose various political restrictions to deal with that. Finance capitalism is the production of profit from the manipulation of financial capital. It is held in contrast to industrial capitalism, where profit is made from the manufacture of goods.

Money

Money is any marketable good or token used by a society as a store of value, a medium of exchange, and a unit of account. Since the needs arise naturally, societies organically create a money object when none exists. In other cases, a central authority creates a money object; this is more frequently the case in modern societies with paper money. The value of money emerges in no small part from its utility as a medium of exchange, however its utility as a medium of exchange depends on it having recognised market value. Hence these two aspects of money are interdependent. Commodity money was the first form of money to emerge. Under a commodity money system, the object used as money has inherent value. It is usually adopted to simplify transactions in a barter economy; thus it functions first as a medium of exchange. It quickly begins functioning as a store of value, since holders of perishable goods can easily convert them into durable money. In modern economies, commodity money has also been used as a unit of account. Gold-backed currency notes are a common form of commodity money. Fiat money is a relatively modern invention. A central authority (government) creates a new money object that has minimal inherent value. The widespread acceptance of the fiat money is most frequently enhanced by the central authority mandating the money's acceptance under penalty of law and demands this money in payment of taxes or tribute. At various times in history government issued promisory notes have later become fiat currencies (US dollar) and fiat currencies have gone on to become a form of commodity currency (Swiss Dinar).

Essential characteristics of money

Money has all of the following three characteristics: 1. It must be a medium of exchange When an object is in demand primarily for its use in exchange -- for its ability to be used in trade to exchange for other things -- then it has this property. This characteristic allows money to be a standard of deferred payment, i.e., a tool for the payment of debt. 2. It must be a unit of account When the value of a good is frequently used to measure or compare the value of other goods or where its value is used to denominate debts then it is functioning as a unit of account. A debt or an IOU can not serve as a unit of account because its value is specified by comparison to some external reference value, some actual unit of account that may be used for settlement. For example, if in some culture people are inclined to measure the worth of things with reference to goats then we would regard goats as the dominant unit of account in that culture. For instance we may say that today a horse is worth 10 goats and a good hut is worth 45 goats. We would also say that an IOU denominated in goats would change value at much the same rate as real goats. 3. It must be a store of value When an object is purchased primarily to store value for future trade then it is being used as a store of value. For example, a sawmill might maintain an inventory of lumber that has market value. Likewise it might keep a cash box that has some currency that holds market value. Both would represent a store of value because through trade they can be reliably converted to other goods at some future date. Most non-perishable goods have this quality. Many goods or tokens have some of the characteristics outlined above. However no good or token is money unless it can satisfy all three criteria.

Credit as money

Credit is often loosely referred to as money. However credit only satisfies items one and three of the above "Essential Characteristics of Money" criteria. Credit completely fails criterion number two. Hence to be strictly accurate credit is a money substitute and not money proper. This distinction between money and credit causes much confusion in discussions of monetary theory. In lay terms, and when convenient in academic discussion, credit and money are frequently used interchangeably. For example bank deposits are generally included in summations of the national broad money supply. However any detailed study of monetary theory needs to recognize the proper distinction between money and credit. The rest of this article frequently uses the term money in the looser sense of the word.

Desirable features of money

To function as money in a modern economy, money should possess a number of features:
- It must have a stable value; a value intrinsic in itself.
- It must be difficult to counterfeit, and the genuine must be easily recognizable.
- It must be easily divisible and transportable; precious metals are divisible & a high value to weight ratio.
- It must be fungible. That is, one unit or piece must be equivalent to another.
- It must be liquid, easily tradable, with a low spread between the prices to buy and sell.

Modern forms of money

When using money anonymously, the most common methods are cash (either coin or banknotes) and stored-value cards. When using money substitutes in such a way as to leave a financial record of the transaction, the most common methods are cheques, debit cards, credit cards, and digital cash.

Money and economics

Money is one of the most central topics studied in economics and forms its most cogent link to finance. The amount of money in an economy affects inflation and interest rates and hence has profound effects. The monetary policy of government aims to manage money, inflation and interest to affect output and employment. A monetary crisis can have very significant economic effects, particularly if it leads to monetary failure and the adoption of a much less efficient barter economy. This happened in Russia (for instance) during the 1990s. Modern economics also faces a difficulty in deciding what exactly 'is' money. See money supply. There have been many historical arguments regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. These arguments are covered in financial capital which is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender.

History of money

See main article History of money Money has developed over the years from conch shells to sophisticated international banking systems. The history of money has generally seen commodity money replaced by more formal systems, as money has been progressively brought under the control of governments.

Private currencies

In many countries, the issue of private paper currencies has been severely restricted by law. commodity money In the United States, the Free Banking Era lasted between 1837 and 1866, during which almost anyone could issue their own paper money. States, municipalities, private banks, railroad and construction companies, stores, restaurants, churches and individuals printed an estimated 8,000 different monies by 1860. If the issuer went bankrupt, closed, left town, or otherwise went out of business the note would be worthless. Such organizations earned the nickname of "wildcat banks" for a reputation of unreliability and that they were often situated in far-off, unpopulated locales that were said to be more apt to wildcats than people. On the other hand, according to Lawrence H. White's article in [http://www.fee.org/vnews.php?nid=2794 FEE] "it turns out that “wildcat” banking is largely a myth. Although stories about crooked banking practices are entertaining—and for that reason have been repeated endlessly by textbooks—modern economic historians have found that there were in fact very few banks that fit any reasonable definition of wildcat bank." The National Bank Act of 1863 ended the "wildcat bank" period. In Australia, the Bank Notes Tax Act of 1910 basically shut down the circulation of private currencies by imposing a prohibitive tax on the practice. Many other nations have similar such policies that eliminate private sector competition. In Scotland and Northern Ireland private sector banks are licensed to print their own paper money by the government. Today there are several privately issued digital currencies in circulation that function as money. Transactions in these currencies represent an annual turnover value in billions of US dollars. Many of these private currencies are backed by older forms of money such as gold (digital gold currencies). Of course, because money is the fruit of power and can be used for wielding or gaining more power, the one who accepts gold as legitimate money gives power to the people who own gold's stocks. It is possible for privately issued money to be backed by any other material, although some people argue about perishable materials. After all, gold, or platinum, or silver, have in some regards less utility than previously (their electrical properties notwithstanding), while currency backed by energy (measured in joules) or by transport (measured in kilogramme
- kilometre/hour) or by food [http://www.economist.com/markets/bigmac/displayStory.cfm?story_id=3503641] is also possible and may be accepted by the people, if legalised. It is important to understand though that, as long as money is above all an agreement to use something as a medium of exchange, its up to the community (or to the minority which holds the power) to decide whether money should be backed by whatever material or should be totally virtual. Though these private, especially digital, monies has had some modest success, governments have established a coercive monopoly on what currency may be used in lending by enacting legal tender laws. One may borrow a private currency but repay the loan with a legal tender that has subsequently devalued against the private alternative, with the lender being required by law to accept it. This large and apparently insurmountable risk to lenders severely limits the proliferation of private money, as the interest rate would have to be exhorbitant to compensate for this tremendous risk premium.

Money supply

Main article: Money supply The money supply is the amount of money available within a specific economy available for purchasing goods or services. The supply is usually considered as four escalating categories M0, M1, M2 and M3. The categories grow in size with M3 representing all forms of money (including credit) and M0 being just base money (coins, bills, and central bank deposits). M0 is also money that can satisfy private banks' reserve requirements. In the United States, the Federal Reserve is responsible for controlling the money supply (monetary policy).

Growing the money supply

Historically money was a metal (gold, silver, etc,) or other object that was difficult to duplicate, but easy to transport and divide. Later it consisted of paper notes, now issued by all modern governments. With the rise of modern industrial capitalism it has gone through several phases including but not limited to: #Bank notes - paper issued by banks as an interest-bearing loan. (These were common in the 19th century but not seen anymore.) #Paper notes, coins with varying amounts of precious metal (usually called legal tender) issued by various governments. There is also a near-money in the form of interest bearing bonds issued by governments with solid credit ratings. #Bank credit through the creation of chequable deposits in the granting of various loans to business, government and individuals. (It is critical that we understand that when a bank makes a loan, that is new money and when a loan is paid off that money is destroyed. Only the interest paid on it remains.) Thus, all debt denominated in dollars -- mortgages, money markets, credit card debt, travelers cheques -- is money. However, the creation of dollar-denominated debt (or any generic obligation) only creates money when a bank (as opposed to a credit card company) is granting the debt. "High powered" money (M0) is created when the elected government spends money into the economy. The money created in the bank loan process is bank money and these two forms of money trade at par one with the other. Banks are limited in the amount of loans they can grant and thus in the amount of bank money (credit) they can create by both the net assets of the bank and by reserve requirements (M0). For most intents and purposes the aggregate of M0 multiplied by the reserve requirement will be an indicator of (but this is somewhat greater than) the aggregate of loans. If additional money is needed in the banking system to allow more loans the Federal Reserve will create money by purchasing Bonds or T-bills with money created from the ether. No matter who sells the bonds the money will end up in the banking system as M0. The Fed could purchase lolly pops if that would accomplish the purpose of expansion better than a purchase of Bonds.

Shrinking the money supply (M3)

Perhaps the most obvious way money can be destroyed is if paper bills are burned or taken out of circulation by the central bank. But, it should be remembered that legal tender usually constitutes less than 4% of the broad money supply. Another way money can be destroyed is when any bank loan is paid off or any government bond or T-Bill is purchased by the private sector. The money value of the contract or bond is destroyed — taken out of circulation. If a bank loan is defaulted upon then the "interest" paid by other borrowers will be employed to cover the default. A very large part of the "interest" paid on bank loans is actually a finance charge employed to cover bad loans. The group of good borrowers pay the loan instead of the original borrower. In cases where the default is huge such as loans to foreign governments Fed intervention has, in the past, rescued the banks. In this instance it would seem that the taxpayers and/or money holders (savers) will pay the debt. The effects on the money supply will be controlled, again, by the level of bond purchase or redemption or the level of T-Bill sales or purchases by the Treasury. Money can be destroyed if savers withdraw funds from a bank, in which case that money can no longer be used for lending. Bank savings are actually a kind of loans — savers loan their money to a bank at a low interest rate or merely in exchange for the benefit of convenience or its security (accepting that they lose a small amount of value to inflation). The bank may use this loan to manage its liabilities (its deposit liabilities created by loans). It must be recalled that the federal reserve banking system is mostly a closed system. A check written on bank A gets deposited in Bank B and a check written on bank B gets deposited in Bank C and a check on bank C gets deposited in bank A. At the end of the day the bankers go have a beer and see who needs to borrow from whom:) On a good day very little borrowing needs to be done because a bank gets as much in new deposits as it does in paid out funds. Even if a bank is short of reserves it can borrow the reserves from another bank at the discount rate. In extreme forms, a bank run or panic may drive a bank into insolvency and, if uninsured, the savings of all its depositors are lost. Such bank failures were a major cause of the tremendous contraction in the money supply that occurred during the Great Depression, particularly in the United States. In that country many banking reforms were subsequently enacted during the New Deal, including the creation of the Federal Deposit Insurance Corporation to guarantee private bank deposits.

External links

- [http://www.bu.edu/wcp/Papers/Econ/EconShep.htm Philosophy of Money] by Alla Sheptun
- [http://www.eh.net/ehresources/howmuch/poundq.php How much is that worth today?] - Comparing the purchasing power of money in Britain from 1600 to any other year up to 2002.
- [http://www.metrum.org/measures/heraion.htm The Heraion Standard. The first attempt to create money.]
- [http://www.nsf.gov/news/news_summ.jsp?cntn_id=100362&org=NSF Shell Beads from South African Cave Show Modern Human Behavior 75,000 Years Ago]
- [http://www.chabad.org/article.asp?AID=69943 Jewish view of money] ko:돈 ja:貨幣 simple:Money

Capital account

The capital account is one of two primary components of the balance of payments. It tracks the movement of funds for investments and loans into and out of a country. The capital account is the net result of public and private international investment flowing in and out of a country. This includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies. The capital account only keeps track of the money being transferred (i.e., the worth of stocks is not taken into account as money when calculating figures for the capital account). Hence, a surplus in the capital account amounts to debtor status. Along with transactions pertaining to non-financial and non-produced assets, the capital account may also include debt forgiveness, the transfer of goods and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets, the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, patents, copyrights, royalties, and uninsured damage to fixed assets. Category:Macroeconomics

Surplus

Surplus means the quantity "left over", after conducting an activity; the quantity which has not been "used up", and can refer to:
- budget surplus, the opposite of a budget deficit
- economic surplus
- Surplus product or surplus value in Marxian economics
- physical surplus in the economic theory of Piero Sraffa
- Operating surplus in national accounts
- anything that's no longer considered of use, such as army surplus
- something in excess of requirements
- consumer surplus in economics
- producer surplus in economics
- capital surplus in economics
- surplus, supply and demand in economics
- surplus in Agriculture as stimulus to development of the Civilization in Socio-cultural_anthropology

Current account

The term current account usually refers to the current account of the balance of payments (BOP) and contains the import and export items of goods and services as well as transfer payments including net investment income. The current account is often presented alongside the capital account and financial account of the BOP which contains data about short and long-term capital flows. Long-term capital flows are also known as foreign direct investment (FDI). Often, the capital account and the financial account are both referred to as the capital account. The BOP balances by means of a balancing account which allows for changes in official reserve assets. When it is talked about most, the current account will be either in large surplus (export receipts exceeding import payments) or substantial deficit (import payments exceeding export receipts). Generally it is a significant current account deficit (rather than a surplus) that is perceived to be a problem requiring action, but the current (trading) and capital (largely financial) accounts are inter-related and a persistent capital surplus can (by raising the exchange rate above the level it would otherwise reach) cause a current account deficit. If action to address a substantial current account deficit is taken, then the more obvious measures to consider include:
- encouraging depreciation of the exchange rate (e.g. by cutting interest rates or by currency intervention of one kind or another)
- import restrictions, quotas or duties (though the reduction in imports caused by these measures, by appreciating the domestic currency, may be offset by a reduction in exports, with the net result being little or no change in the current account balance).
- measures to promote exports e.g. encouraging arms sales abroad (though these measures may also result in an increase in imports due to an appreciated domestic currency). Less obvious but more effective methods to reduce a current account deficit include measures that increase domestic savings (or reduced domestic borrowing), including a reduction in borrowing by the national government. It should be noted that a Current Account deficit is not always a problem. The "Pitchford Thesis" states that a current account deficit does not matter if it is driven by the private sector. This theory has held true particularly for the Australian economy which is always in deficit, yet has experienced economic growth for the past 14 years (91-05).

Key drivers of the current account

The items in the current account (e.g. perhaps especially imports and exports of goods) are sensitive to international price differentials (the differences between the prices of goods in different countries), to the rise and decline of industries (e.g the emergence of the Japanese automobile industry 20 years ago, and the decline of the US steel industry at the same time), and to differential economic growth rates (e.g. with a country being likely to experience a deteriorating current account balance if its economy is growing more rapidly than other countries). The theory of purchasing power parity deals with the relationships between price levels (and changes of price levels) in competing countries, and is relevant in any discussion of the stability and likely trajectory of a current account balance, because the price pressures that may be operating will find their expression primarily (though not exclusively) in the traded goods area (within the current account).

Structural influences on the BOP and the current account

Countries can experience structural features or trends in their BOP's that will influence the current account. For example, the USA in recent years has enjoyed large capital account surpluses that may, depending on your beliefs about the key drivers of the US BOP, have caused their large current account deficits. Again the rise of China as a global competitor has caused a large bi-lateral deficit between the USA and China (i.e. China selling to the USA more than it buys from it) and this is likely a structural feature of trade between the two countries that will persist for years to come. Finally, some countries (e.g Malaysia and at times much of South East Asia) have been perceived as attractive locations for direct investment; they have had corresponding capital account surpluses, and resultant tendencies to experience trade and current account deficits or increase in foreign exchange reserves.

Other Usages

In the United Kingdom a personal current account is a type of deposit bank account which permits the user to make withdrawals on demand by cheque, direct debit or other means. The equivalent type of account is referred to as a checking account in North America. Category:Macroeconomics

Borrow

Borrow could refer to the verb "to borrow" (see Debt). There is also a bird artist, Nik Borrow.

Bank

A bank is an institution that provides financial service, particularly taking deposits and extending credit. Currently the term bank is generally understood as an institution that holds a banking license. Banking licenses are granted by bank regulatory authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provide certain banking services without meeting the legal definition of a bank, a so called non-banking financial company. Banks have a long history, and have influenced economies and politics for centuries. The word bank is derived from the Italian banca, which is derived from German language and means bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out of business bank, having its bench physically broken. Money lenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table. Typically, a bank generates profits from transaction fees on financial services and on the interest it charges for lending.

Services typically offered by banks

Although the type of services offered by a bank depends upon the type of bank and the country, services provided usually include:
- Taking deposits from the general public and issuing checking and savings accounts
- Making loans to indivudals and businesses
- Cashing cheques
- Facilitating money transactions such as wire transfers and cashiers checks
- Issuing credit cards, ATM, and debit cards
- Storing valuables, particularly in a safe deposit box

Types of banks

Banks' activities can be characterised as retail banking, dealing direct with individuals and small businesses, and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit making. In some jurisdictions retail and investment activities are, or have been, separated by law. Central banks are non-commercial bodies or government agencies tasked with responsibility for controlling interest rates and money supply across the whole economy. They act as Lender of last resort in event of a crisis.

Types of retail bank

- Commercial bank, is the term used for a normal bank to distinguish it from an investment bank. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with corporations or large businesses.
- Community development bank are regulated banks that provide financial services and credit to underserved markets or populations.
- Postal savings banks are savings banks associated with national postal systems. Japan and Germany are examples of countries with prominent postal savings banks.
- Private banks manage the assets of high net worth individuals.
- Offshore banks are banks located in jurisdictions with low taxation and regulation, such as Switzerland or the Channel Islands. Many offshore banks are essentially private banks.
- Savings banks traditionally accepted savings deposits and issued mortgages. Today, some countries have broadened the permitted activities of savings banks.
- Building societies and Landesbanks both conduct retail banking

Types of Investment Banks

- Investment banks "underwrite" (guarantee the sale of) stock and bond issues and advise on mergers. Examples of investment banks are Goldman Sachs of the USA or Nomura Group of Japan.
- Merchant banks were traditionally banks which engaged in trade financing. The modern definition, however, refers to banks which provides capital to firms in the form of shares rather than loans. Unlike Venture capital firms, they tend not to invest in new companies.

Both combined

- Universal banks, more commonly known as a financial services company, engage in several of these activities. For example, Citigroup, a very large American bank, is involved in commercial and retail lending; it owns a merchant bank (Citicorp Merchant Bank Limited) and an investment bank (Salomon Smith Barney); it operates a private bank (Citigroup Private Bank); finally, its subsidiaries in tax-havens offer offshore banking services to customers in other countries. Almost all large financial institutions are diversified and engage in multiple activities. In Europe, big banks are very diversified groups that, among other services, distribute also insurance, whence the bancassurance term.

Other types of bank

- Islamic Banks, Islamic banking revolves around several well established concepts which are based on Islamic canons. Since the concept of Interest is forbidden in Islam, all banking activities must avoid interest. Instead of interest, the Bank earns profit (mark-up) and fees on financing facilities that it extends to the customers. Also, deposit makers earn a share of the Bank’s profit as opposed to a predetermined interest.

Banks in the economy

Role in the money supply

A bank raises funds by attracting deposits, borrowing money in the inter-bank market, or issuing financial instruments in the money market or a capital market. The bank then lends out most of these funds to borrowers. However, it would not be prudent for a bank to lend out all of its balance sheet. It must keep a certain proportion of its funds in reserve so that it can repay depositors who withdraw their deposits. Bank reserves are typically kept in the form of a deposit with a central bank. This behaviour is called fractional-reserve banking and it is a central issue of monetary policy. Some governments (or their central banks) restrict the proportion of a bank's balance sheet that can be lent out, and use this as a tool for controlling the money supply. Even where the reserve ratio is not controlled by the government, a minimum figure will still be set by regulatory authorities as part of bank regulation.

Bank crises

Banks are susceptible to many forms of risk which have triggered occasional systemic crises. Risks include liquidity risk (the risk that many depositors will request withdrawls beyond available funds), credit risk (the risk that those that owe money to the bank will not repay), and interest rate risk (the risk that the bank will become unprofitable if rising interest rates force it to pay relatively more on its deposits than it receives on its loans), among others. Banking crises have developed many times throughout history when one or more risks materialize for a banking sector as a whole. Prominent examples include the U.S. Savings and Loan crisis in 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the bank run that occurred during the Great Depression.

Regulation

The combination of the instability of banks as well as their important facilitating role in the economy led to banking being thoroughly regulated. The amount of capital a bank is required to hold is a function of the amount and quality of its assets. Major banks are subject to the Basel Capital Accord promulgated by the Bank for International Settlements. In addition, banks are usually required to purchase deposit insurance to make sure smaller investors are not wiped out in the event of a bank failure. Another reason banks are thoroughly regulated is that ultimately, no government can allow the banking system to fail. There is almost always a lender of last resort—in the event of a liquidity crisis (where short term obligations exceed short term assets) some element of government will step in to lend banks enough money to avoid bankruptcy.

Public perceptions of banks

In United States history, the National Bank was a major political issue during the presidency of Andrew Jackson. Jackson fought against the bank as a symbol of greed and profit-mongering, antithetical to the democratic ideals of the United States.

Profitability

Large banks in the United States are some of the most profitable corporations, especially relative to the small market shares they have. This amount is even higher if one counts the credit divisions of companies like Ford, which are responsible for a large proportion of those company's profits. For example, the largest bank, Citigroup, which for the past 3 years has made more profit than any other company in the world, has only a 5 percent market share. Now if Citigroup were to be as dominant in its industry as a Home Depot, Starbucks, or Wal Mart in their respective industries, with a 30 percent market share , it would make more money than the top ten non-banking U.S. industries combined. In the past 10 years in the United States, banks have taken many measures to ensure that they remain profitable while responding to ever-changing market conditions. First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one stop shopping" by enabling the crossing selling of products (which, the banks hope, will also increase profitability). Second, they have moved toward risk based pricing on loans, which means charging higher interest rates for those people who they deem more risky to default on loans. This dramatically helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and extends credit products to high risk customers who would have been denied credit under the previous system. Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, pre-paid cards, smart-cards, and credit cards. These products make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with under-developed financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home). However, with convenience there is also increased risk that consumers will mis-manage their financial resources and accumulate excessive debt. Banks make money from card products through interest payments and fees charged to consumers and companies that accept the cards. The banks' main obstacles to increasing profits are existing regulatory burdens, new government regulation, and increasing competition from non-traditional financial institutions.

Bank Size Information

Top ten banking groups in the world ranked by tier-one capital in 2004 (In U.S. Dollars)

#Citigroup — 73 billion #JP Morgan Chase — 69 billion #HSBC — 67 billion #Bank of America — 64 billion #Credit Agricole Group — 63 billion #Royal Bank of Scotland — 43 billion #Mitsubishi Tokyo Financial Group — 40 billion #Mizuho Financial Group — 39 billion #HBOS — 36 billion #BNP Paribas — 35 billion

Top ten banking groups in the world ranked by assets in 2003 (In U.S. Dollars)

#Mizuho Financial Group — 1,265 billion #Citigroup — 1,097 billion #Allianz — 1,002 billion #UBS — 907 billion #Sumitomo Mitsui Financial Group — 903 billion #Deutsche Bank — 892 billion #Fannie Mae — 888 billion #ING Group — 843 billion #BNP Paribas — 835 billion #Mitsubishi Tokyo Financial Group — 832 billion

Top ten bank holding companies in the world ranked by profit in 2003 (In U.S. Dollars)

#Citigroup — 20 billion #Bank of America — 15 billion #HSBC — 10 billion #Royal Bank of Scotland — 8 billion #Wells Fargo — 7 billion #JP Morgan Chase — 7 billion #UBS AG — 6 billion #Wachovia — 5 billion #Morgan Stanley — 5 billion #Merrill Lynch — 4 billion

Top ten bank holding companies in the U.S. ranked by deposits (In U.S. Dollars)

As of June 30, 2004. These are U.S. deposits only. This is not a ranking of the largest U.S. based global banks. #Bank of America Corp. — 526 billion #Wells Fargo & Co. — 256 billion #Wachovia Corp. — 238 billion #J.P. Morgan Chase & Co. — 227 billion (1) #Citigroup Inc. — 193 billion #Bank One Corp. — 150 billion (1) #U.S. Bancorp — 112 billion #SunTrust Banks, Inc. — 78 billion #BB&T Corporation — 67 billion #National City Corp. — 64 billion (1) Since this report, J.P. Morgan Chase & Co. has acquired Bank One Corp., making the combined 6/30/04 deposit total for the merged company $377 billion, vaulting it to second place on the list.

History of banking

Main article: History of banking
- Florentine banking — The Medicis and Pittis among others
- Banknotes — Introduction of paper money
- Bank of Amsterdam
- Bank of Sweden — The rise of the national banks
- Bank of England — The evolution of modern central banking policies
- Bank of America — The invention of centralized check and payment processing technology
- Swiss bank
- United States Banking
- Imperial Bank of Persia — History of banking in the Middle-East

External links

- [http://www.economist.com/markets/displayStory.cfm?story_id=4174345] List of the world's ten largest banks at the end of 2004 by tier 1 capital from The Economist.
- [http://www2.fdic.gov/sod/ FDIC bank market share data]
- [http://www.eh.net/encyclopedia/index.php#B EH.Net Encyclopedia]
- [http://www.ibtalk.com IBtalk] Banking forum for practitioners and those interested in banking. Mainly centered on the wholesale (investment) functions of banking.
- [http://www.seek2know.net/money.html Presidential and other quotes on banking]
- [http://bwnt.businessweek.com/global_1000/2003/index.asp?sortCol=assets&sortOrder=DESC&pageNum=1&resultNum=10 List of largest banks by assets]
- [http://www.gbanking.com gbanking.com - Global banking directory] Category:Banking terms and equipment Category:Legal entities Banker ko:은행 ms:Bank ja:銀行 simple:Bank th:ธนาคาร

Mercantilism

Mercantilism is the economic theory holding that the prosperity of a nation depends upon its supply of capital, and that the global volume of trade is "unchangeable." The amount of capital, represented by bullion (amount of precious metal) held by the state, is best increased through a balance of trade with other nations, with large exports and low imports. Mercantilism suggests that the government should advance these goals by playing an active, protectionist role in the economy, by encouraging exports and discouraging imports, especially through the use of tariffs. The economic policy based upon these ideas is often called the mercantile system. Mercantilism was the dominant school of economics throughout the "early modern period" (from the 16th to the 18th century, which roughly corresponded to the emergence of the nation-state). Domestically, this led to some of the first instances of significant government intervention and control over the economy, and it was during this period that much of the modern "capitalist" system was established. Internationally, mercantilism encouraged the many European wars of the period, and fueled European imperialism, as the European powers fought over "available markets". Belief in mercantilism began to fade in the late 18th century, as the arguments of Adam Smith, and the other classical economists won out. Today, mercantilism as a whole is rejected by all serious economists, though some elements are looked upon favorably.

Theory

classical economists and silver were the measure of a nation's wealth. Later mercantilists developed a somewhat more sophisticated view.]] European economists between 1500 and 1750 are today generally considered mercantilists; however, these economists did not see themselves as contributing to a single economic ideology. The term was coined by the Marquis de Mirabeau in 1763, and was popularized by Adam Smith in 1776. The word comes from the Latin word mercari, which means "to run a trade," from merx, meaning "commodity." It was initially used solely by critics, such as Mirabeau and Smith, but was quickly adopted by historians. Originally, the standard English term was mercantile system. The word mercantilism was introduced into English from German in the early 20th century. Mercantilism as a whole cannot be considered a unified theory of economics. There were no mercantilist writers presenting an overarching scheme for the ideal economy, as Adam Smith would later do for classical economics. Rather, each mercantilist writer tended to focus on a single area of the economy. Only later did non-mercantilist scholars integrate these "diverse" ideas into what they called mercantilism. Some scholars thus reject the idea of mercantilism completely, arguing that it gives "a false unity to disparate events". To a certain extent, mercantilist doctrine itself made a general theory of economics impossible. Mercantilists viewed the economic system as a zero-sum game; where a gain by one party was a loss by another. Thus, any system of policies that benefited one group would by definition "harm the other", and there was no possibility of economics being used to maximize the commonwealth, or "common good". Mercantilist writings were also generally created to 'justify' particular practices, rather than as investigations into the best policies. Early mercantilism, which was developed beginning around 1500, was most marked by its 'bullionism'. This period saw a vast inflow of gold and silver from the Spanish colonies in the New World, and an overriding concern was "how the other states of Europe could be able to compete". The bullionists, such as Jean Bodin, Thomas Gresham and John Hales, felt that the wealth and power of a state was measured by the amount of bullion it possessed; and that to grow in power, meant increasing the amount of bullion at the expense of the other powers. The prosperity of a state was measured by the accumulated wealth of its government, with no concept of national income. In part, this focus on reserves of gold and silver was because of their importance during times of war. Armies, which often included mercenaries, were paid in bullion, and navies were funded by gold and silver. The complicated system of international alliances of the period also often required large payments from one state to another. Only a few European states controlled gold or silver mines; for the others, the primary method of increasing bullion supplies was through the balance of trade, or through piracy and the "black market". If a state exported more than it imported, then this imbalance would have to be 'made up' by inflows of money. Thus, mercantilists firmly believed that each nation should seek to export more goods and services than it imported. This led to strict bans on the export of bullion. Bullionists also favored high interest rates, to encourage investors to move their money into their own nation. In the 17th century, a more complex version of mercantilism developed, which rejected 'simple' bullionism. These writers, such as Thomas Mun, felt that overall national wealth was the primary goal; and saw bullion as the most important sign of wealth, but not its totality, as "goods and resources" were also valuable or essential. The support for the balance of trade was preserved; but in a less rigid form. Mun, who worked for the British East India Company, argued that the exports of bullion to Asia were good for Britain, as the goods imported would then be resold to the rest of Europe at a substantial profit. This new view rejected the export of raw materials, as it acknowledged that the transformation of these materials into finished goods was an important "generator" of wealth. Thus, while the bullionists had supported the mass export of wool from Britain, the later mercantilists supported total bans on the export of raw materials, and supported the development of domestic manufacturing industries. Since creating domestic industries required an available supply of capital, the seventeenth century also saw governments dramatically tighten usury limits. This artificially lowered prevailing interest rates, and encouraged the wealthy to invest their money in manufacturing instead. Later mercantilists also placed a greater focus on "service industries". One result of this was the Navigation Acts of 1651, that expelled the Dutch from English shipping. Mercantilist domestic policy was more fragmented than its trade policy. While Adam Smith presented mercantilism as supporting strict controls over the economy, many mercantilists disagreed. The early modern era was one of letters patent and government-imposed monopolies. Some mercantilists supported these; but others acknowledged the "corruption" and "inefficiency" of such systems. Many mercantilists also realized the 'inevitable' result of quotas and price ceilings were black markets. One element mercantilists agreed upon was the economic oppression of the working population. Laborers and farmers were to live at the "margins of subsistence". The goal was to maximize production, with no concern for consumption. Extra money, free time, or education for the "lower classes" was seen to inevitably lead to 'vice' and 'laziness', and would result in 'harm' to the economy.

Causes

Scholars are divided on why mercantilism was the dominant economic ideology for two and a half centuries. One group, represented by Jacob Viner, argues that mercantilism was simply a straightforward, commonsense system that the people of the time simply did not have the analytical tools to discover was actually deeply fallacious. The second school, supported by scholars such as Robert B. Ekelund, contends that mercantilism was not a mistake, but rather the best possible system for those who developed it. This school argues that mercantilist policies were developed and enforced by rent-seeking merchants and governments. Merchants benefited greatly from the enforced monopolies, bans on foreign competition, and poverty of the workers. Governments benefited from the high tariffs and payments from the merchants. Whereas later economic ideas were often developed by academics and philosophers, almost all mercantilist writers were merchants or government officials. Mercantilism developed at a time when the European economy was in transition. Isolated feudal estates were being replaced by centralized nation-states as the locus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade. Mercantilism focused on how this trade could best aid the states. Another important change was the introduction of double-entry bookkeeping and modern accounting. This accounting made extremely clear the inflow and outflow of trade, contributing to the close scrutiny given to the balance of trade. Prior to mercantilism, the most important economic work done in Europe was by the medieval scholastic theorists. The goal of these thinkers was to find an economic system that was compatible with Christian doctrines of piety and justice. They focused mainly on microeconomics and local exchanges between individuals. Mercantilism was closely aligned with the other theories and ideas that were replacing the medieval worldview. This period saw the adoption of Niccolò Machiavelli's realpolitik and the primacy of the raison d'état in international relations. The mercantilist idea that all trade was a zero sum game, in which each side was trying to best the other in a ruthless competition, was integrated into the works of Thomas Hobbes. This dark view of human nature also fit well with the Puritan view of the world, and some of the most stridently mercantilist legislation, such as the Navigation Acts, was introduced by the government of Oliver Cromwell.

Policies

Oliver Cromwell Mercantilist ideas were the dominant economic ideology of all of Europe in the early modern period, and most states embraced it to a certain degree. Mercantilism was centred in England and France, and it was in these states that mercantilist polices were most often enacted. Mercantilism arose in France in the early 16th century, soon after the monarchy had become the dominant force in French politics. In 1539, an important decree banned the importation of woolen goods from Spain and some parts of Flanders. The next year, a number of restrictions were imposed on the export of bullion. Over the rest of the sixteenth century further protectionist measures were introduced. The height of French mercantilism is closely associated with Jean-Baptiste Colbert, finance minister for 22 years in the 17th century, to the extent that French mercantilism is sometimes called Colbertism. Under Colbert, the French government became deeply involved in the economy in order to increase exports. Protectionist policies were enacted that limited imports and favored exports. Industries were organized into guilds and monopolies, and production was regulated by the state through a series of over a thousands directives outlining how different products should be produced. To encourage industry foreign artisans and craftsmen were imported. Colbert also worked to decrease internal barriers to trade, reducing internal tariffs and building an extensive network of roads and canals. Colbert's policies were quite successful, and France's industrial output and economy grew considerably during this period, as France became the dominant European power. He was less successful in turning France into a major trading power, and Britain and the Netherlands remained supreme in this field. In England, mercantilism reached its peak during the Long Parliament government (1640-1660). Mercantilist policies were also embraced throughout much of the Tudor and Stuart periods, with Robert Walpole being another major proponent. In Britain, government control over the domestic economy was far less extensive than on the Continent, limited by the common law tradition and the steadily increasing power of Parliament. Government-controlled monopolies were common, especially before the English Civil War, but were often controversial. British mercantilist writers were themselves divided on whether domestic controls were necessary. British mercantilism thus mainly took the form of efforts to control trade. A wide array of regulations was put in place to encourage exports and discourage imports. Tariffs were placed on imports and bounties given for exports, and the export of some raw materials was banned completely. The Navigation Acts expelled foreign merchants from England's domestic trade. The nation aggressively sought colonies and once under British control, regulations were imposed that allowed the colony to only produce raw materials and to only trade with Britain. This led to friction with the inhabitants of these colonies, and mercantilist policies were one of the major causes of the American Revolution. Over all, however, mercantilist policies had an important effect on Britain helping turn it into the world's dominant trader, and an international superpower. One domestic policy that had a lasting impact was the conversion of "waste lands" to agricultural use. Mercantilists felt that to maximize a nation's power all land and resources had to be used to their utmost, and this era thus saw projects like the draining of The Fens. The Fens The other nations of Europe also embraced mercantilism to varying degrees. The Netherlands, which had become the financial centre of Europe by being its most efficient trader, had little interest in seeing trade restricted and adopted few mercantilist policies. Mercantilism became prominent in Central Europe and Scandinavia after the Thirty Years' War (1618-1648), with Christina of Sweden and Christian IV of Denmark being notable proponents. The Habsburg Holy Roman Emperors had long been interested in mercantilist policies, but the vast and decentralized nature of their empire made implementing such notions difficult. Some constituent states of the empire did embrace Mercantilism, most notably Prussia, which under Frederick the Great had perhaps the most rigidly controlled economy in Europe. During the economic collapse of the seventeenth century Spain had little coherent economic policy, but French mercantilist policies were imported by Philip V with some success. Russia under Peter I (Peter the Great) attempted to pursue mercantilism, but had little success because of Russia's lack of a large merchant class or an industrial base. Mercantilism also fueled the intense violence of the 17th and 18th centuries in Europe. Since the level of world trade was viewed as fixed, it followed that the only way to increase a nation's trade was to take it from another. A number of wars, most notably the Anglo-Dutch Wars and the Franco-Dutch Wars, can be linked directly to mercantilist theories. The unending warfare of this period also reinforced mercantilism as it was seen as an essential component to military success. It also fueled the imperialism of this era, as each nation that was able attempted to seize colonies that would be sources of raw materials and exclusive markets. During the mercantilist period, European power spread around the globe. As with the domestic economy this expansion was often conducted under the aegis of companies with government-guaranteed monopolies in a certain part of the world, such as the Dutch East India Company or the Hudson's Bay Company (operating in present-day Canada).

Criticisms

Hudson's Bay Company is an attack on mercantilism]] A number of scholars found important flaws with mercantilism long before Adam Smith developed an ideology that could fully replace it. Critics like Dudley North, John Locke, and David Hume undermined much of mercantilism, and it steadily lost favor during the eighteenth century. Mercantilists failed to understand the notions of comparative advantage (although this idea was only fully fleshed out in 1817 by David Ricardo) and the benefits of trade. For instance, Portugal was a far more efficient producer of wine than England, while in England it was relatively cheaper to produce cloth. Thus if Portugal specialized in wine and England in cloth, both states would end up better off if they traded. In modern economic theory, trade is not a zero-sum game of cutthroat competition, as both sides could benefit. By imposing mercantilist import restrictions and tariffs instead, both nations ended up poorer. David Hume famously noted the impossibility of the mercantilists' goal of a constant positive balance of trade. As bullion flowed into one country, the supply would increase and the value of bullion in that state would steadily decline relative to other goods. Conversely, in the state exporting bullion, its value would slowly rise. Eventually it would no longer be cost-effective to export goods from the high-price country to the low-price country, and the balance of trade would reverse itself. Mercantilists fundamentally misunderstood this, long arguing that an increase in the money supply simply meant that everyone gets richer. The importance placed on bullion was also a central target, even if many mercantilists had themselves begun to de-emphasize the importance of gold and silver. Adam Smith noted that bullion was just the same as any other commodity, and there was no reason to give it special treatment. Gold was nothing more than a yellow metal that was valuable only because there was not much of it. The first school to completely reject mercantilism were the Physiocrats of France. Their theories also had several important problems, and the replacement of mercantilism did not come until Adam Smith published The Wealth of Nations in 1776. This book outlines the basics of what is today known as classical economics. Smith spends a considerable portion of the book rebutting the arguments of the mercantilists, though often these are simplified or exaggerated versions of mercantilist thought. Scholars are also divided over the cause of mercantilism's end. Those who believe the theory was simply an error hold that its replacement was inevitable as soon as Smith's ideas that are more accurate were unveiled. Those who feel that mercantilism was rent-seeking hold that it ended only when major power shifts occurred. In Britain mercantilism faded as the Parliament gained the monarch's power to grant monopolies. While the wealthy capitalists who controlled the House of Commons benefited from these monopolies, Parliament found it difficult to implement them due to the high cost of group decision making. Mercantilist regulations were steadily removed over the course of the eighteenth century in Britain, and during the 19th century the British government fully embraced free trade and Smith's laissez-faire economics. On the continent, the process was somewhat different. In France economic control remained in the hands of the royal family and mercantilism continued until the French Revolution. In Germany mercantilism remained an important ideology in the nineteenth and early twentieth centuries, when the historical school of economics was paramount.

Legacy

In the English-speaking world, Adam Smith's utter repudiation of mercantilism was accepted without question, but in the 20th century, most economists have come to accept that in some areas mercantilism had been correct. Most prominently, the economist John Maynard Keynes explicitly supported some of the tenets of mercantilism. Adam Smith had rejected focusing on the money supply, arguing that goods, population, and institutions were the real causes of prosperity. Keynes argued that the money supply, balance of trade, and interest rates were of great importance to an economy. These views later became the basis of monetarism, one of the most important modern schools of economics. Adam Smith rejected the mercantilist focus on production, arguing that consumption was the only way to grow an economy. Keynes argued that encouraging production was just as important as consumption. Keynes also noted that in the early modern period the focus on the bullion supplies was reasonable. In an era before paper money, an increase for bullion was one of the only ways to increase the money supply. Keynes and other economists of the period also realized that the balance of payments is an important concern, and since the 1930s, all nations have closely monitored the inflow and outflow of capital, and most economists agree that a favorable balance of trade is desirable. Keynes also adopted the essential idea of mercantilism that government intervention in the economy is a necessity. While Keynes' economic theories have had a major impact, few have accepted his effort to rehabilitate the word mercantilism. Today the word remains a pejorative term, often used to attack various forms of protectionism. The similarities between Keynesianism, and its successor ideas, with mercantilism have sometimes led critics to call them neo-mercantilism. Some other systems that do copy several mercantilist policies, such as Japan's economic system, are also sometimes called neo-mercantilist. One area Smith was reversed on well before Keynes was on the importance of data. Mercantilists, who were generally merchants or government officials, gathered vast amounts of trade data and used it considerably in their research and writing. William Petty, a strong mercantilist, is generally credited with being the first to use empirical analysis to study the economy. Smith rejected this, arguing that deductive reasoning from base principles was the proper method to discover economic truths. Today economists accept that both methods are important. In specific instances, protectionist mercantilist policies also had an important and positive impact on the state that enacted them. Adam Smith, himself, for instance praised the Navigation Acts as they greatly expanded the British merchant fleet, and played a central role in turning Britain into the naval and economic superpower that it was for several centuries. Some economists thus feel that protecting infant industries, while causing short term harm, can be beneficial in the long term.

Notes

# Jürg Niehans. A History of Economic Theory pg. 6 # Harry Landreth and David C. Colander History of Economic Thought. pg. 44 # Robert B. Ekelund and Robert D. Tollison. Mercantilism as a Rent-Seeking Society. pg. 9 # Landreth and Colander. pg. 48 # David S. Landes The Unbound Prometheus. pg. 31 # Landreth and Colander. pg. 43 # Charles Wilson. Mercantilism. pg. 10 # Robert B. Ekelund and Robert F. Hébert. A History of Economic Theory and Method. pg. 46 # Ekelund and Hébert. pg. 61 # Niehans. pg. 19 # Landreth and Colander. pg. 53 # Hermann Kellenbenz. The Rise of the European Economy. pg. 29 # E.N. Williams. The Ancien Regime in Europe. pg. 177-83 # E. Damsgaard Hansen. European Economic History. pg. 65 # Christopher Hill. The Century of Revolution. pg. 32 # Wilson pg. 15 # Ekelund and Hébert. pg. 43 # Niehans. pg. 19 # Ekelund and Tollison # Wilson pg. 6 # Wilson pg. 3 # Robert S. Walters and David H. Blake. The Politics of Global Economic Relations. # Hansen pg. 64

References

- Ekelund, Robert B. and Robert D. Tollison. Mercantilism as a Rent-Seeking Society: Economic Regulation in Historical Perspective. College Station: Texas A&M University Press, 1981.
- Ekelund, Robert B and Robert F. Hébert. A History of Economic Theory and Method. New York: McGraw-Hill, 1997.
- Heckscher, Eli F. Mercantilism. translation by Mendel Shapiro. London: Allen & Unwin. 1935.
- Keynes, John Maynard. "[http://etext.library.adelaide.edu.au/k/keynes/john_maynard/k44g/chapter23.html Notes on Mercantilism, the Usury Laws, Stamped Money and the Theories of Under-Consumption]." General Theory of Employment, Interest and Money.
- Landreth, Harry and David C. Colander. History of Economic Thought. Boston: Houghton Mifflin, 2002.
- Niehans, Jürg. A History of Economic Theory: Classic Contributions, 1720-1980. Baltimore: Johns Hopkins University Press, 1990.
- Vaggi, Gianni and Peter Groenewegen.. A Concise History of Economic Thought: From Mercantilism to Monetarism. New York: Palgrave Macmillan, 2003.
- Wilson, Charles. Mercantilism. London: Historical Association, 1966
Further reading

- Rothbard, Murray N. [http://www.mises.org/story/1897 Economic Thought Before Adam Smith.] An Austrian Perspective on the History of Economic Thought. Volume I
- Rothbard, Murray N. [http://www.mises.org/story/1897 Classical Economics.] An Austrian Perspective on the History of Economic Thought. Volume II
External links

- [http://www.ecn.bris.ac.uk/het/mun/treasure.txt Thomas Mun's Englands Treasure by Forraign Trade]
- [http://www.econlib.org/library/Smith/smWN.html Book IV of The Wealth of Nations, Adam Smith's attack on the Mercantile System] Category:Economic theories Category:Economic ideologies Category:History of economic thought Category:International trade ja:重商主義

Gold

Gold is a chemical element in the periodic table that has the symbol Au (L. aurum) and atomic number 79. A soft, shiny, yellow, dense, malleable, ductile (trivalent and univalent) transition metal, gold does not react with most chemicals but is attacked by chlorine, fluorine and aqua regia. The metal occurs as nuggets or grains in rocks and in alluvial deposits and is one of the coinage metals. For millennia, gold has served as money and is also used in jewelry, dentistry, and in electronics. Gold forms the basis for a monetary standard used by the International Monetary Fund (IMF) and the Bank for International Settlements (BIS). Its ISO currency code is XAU.

Notable characteristics

Gold is a metallic element with a characteristic yellow color, but can also be black or ruby when finely divided, while colloidal solutions are intensely colored and often purple. These colors are the result of gold's plasmon frequency lying in the visible range (due to a relativistic effect), which causes red and yellow light to be reflected, and blue light to be absorbed. It is one of only three metals which have an actual easily-identifiable color; the other two are copper, which is red, and caesium, which has a pale golden color. It is the most malleable and ductile metal known; a single gram can be beaten into a sheet of one square meter, or an ounce into 300 square feet. A soft metal, gold will readily form alloys with many other metals. This can be done to increase its strength, or create several exotic colors, sold for instance in the western United States to the tourist trade as "Black Hills" gold. Adding copper yields a redder metal, iron blue, Silver produces green, aluminium purple, platinum metals white, and natural bismuth together with silver alloys produce black. Native gold contains usually eight to ten per cent silver, but often much more — alloys with a silver content over 20% are called electrum. As the amount of silver increases, the color becomes whiter and the specific gravity lower. Gold is a good conductor of heat and electricity, and is not affected by air and most reagents. Heat, moisture, oxygen, and most corrosive agents have very little chemical effect on gold, making it well-suited for use in coins and jewelry; conversely, halogens will chemically alter gold, and aqua regia dissolves it. Common oxidation states of gold include +1 (gold(I) or aurous compounds) and +3 (gold(III) or auric compounds). Gold ions in solution are readily reduced and precipitated out as gold metal by the addition of virtually any other metal as the reducing agent. The added metal is oxidized and dissolves allowing the gold to be displaced from solution and be recovered as a solid precipitate. Recent research undertaken by Frank Reith of the Australian National University shows that microbes play an important role in the formation of gold deposits, transporting and precipitating gold to form grains and nuggets that collect in alluvial deposits. [http://www.abc.net.au/science/news/enviro/EnviroRepublish_1032376.htm]

Applications

Pure gold is too soft for ordinary use and is hardened by alloying with silver, copper, and other metals. Gold and its many alloys are most often used in jewelry, coinage and as a standard for monetary exchange in many countries. Because of its high electrical conductivity and resistance to corrosion and other desirable combinations of physical and chemical properties, gold also emerged in the late 20th century as an essential industrial metal.
- Gold can be made into thread and used in embroidery.
- Gold performs critical functions in computers, communications equipment, spacecraft, jet aircraft engines, and a host of other products.
- The resistance to oxidation of gold has led to its widespread use as thin layers electroplated on the surface of electrical connectors to ensure a good connection.
- Gold is used in restorative dentistry especially in tooth restorations such as crowns and bridges.
- Colloidal gold (a gold nanoparticle) is an intensely colored solution that is currently studied in many labs for medical, biological and other applications. It is also the form used as gold paint on ceramics prior to firing.
- Chlorauric acid is used in photography for toning the silver image.
- Gold(III) chloride is used as a catalyst in organic chemistry. It is also the usual starting point for making other gold compounds.
- Disodium aurothiomalate is a treatment for rheumatoid arthritis (administered intramuscularly). It inhibits lymphocyte proliferation, lysosomal enzyme release, the release of reactive oxygen species from macrophages, and IL-1 production. However, it can also cause photosensitive rashes, gastrointestinal disturbance, and kidney damage.
- The gold isotope Au-198, (half-life: 2.7 days) is used in some cancer treatments and for treating other diseases.
- Gold is used as a coating enabling biological material to be viewed under a scanning electron microscope.
- Many competitions and honors, such as the Olympics and the Nobel Prize, award a gold medal to the winner (with silver to the second-place finisher, and bronze to the third.)
- Since it is a good reflector of both infrared and visible light, it is used for the protective coatings on many artificial satellites.
- Gold flake is used on and in some gourmet sweets and drinks. Having no reactivity it adds no taste but is taken as a delicacy.
- White gold (an alloy of gold with platinum, palladium, nickel, and/or zinc) serves as a substitute for platinum.
- Green gold (a gold/silver alloy) is used in specialized jewelry while gold alloys with copper (reddish color) are more widely used for that purpose (rose gold).

History

rose gold Gold (Sanskrit jval, Greek χρυσος [khrusos], Latin aurum for "shining dawn", Anglo-Saxon gold, Chinese 金 [jīn]) has been known and highly valued since prehistoric times. It may have been the first metal used by humans and was valued for ornamentation and rituals. Egyptian hieroglyphs from as early as 2600 BC describe gold, which king Tushratta of the Mitanni claimed was as "common as dust" in Egypt. Egypt and Nubia had the resources to make them major gold-producing areas for much of history. Gold is also mentioned several times in the Old Testament. The south-east corner of the Black Sea was famed for its gold. Exploitation is said to date from the time of Midas, and this gold was important in the establishment of what is probably the world's earliest coinage in Lydia between 643 and 630 BC. The European exploration of the Americas was fueled in no small part by reports of the gold ornaments displayed in great profusion by Native American peoples, especially in Central America, Peru, and Colombia. Gold has long been considered one of the most precious metals, and its value has been used as the standard for many currencies (known as the gold standard) in history. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these properties (see gold album). Gold in antiquity was relatively easy to obtain geologically; however, 75% of all gold ever produced has been extracted since 1910.[http://www.goldsheetlinks.com/production2.htm] It has been estimated that all the gold in the world that has ever been refined would form a single cube 20 m (66 ft) a side. The primary goal of the alchemists was to produce gold from other substances, such as lead — presumably by the interaction with a mythical substance called the philosopher's stone. Although they never succeeded in this attempt, the alchemists promoted an interest in what can be done with substances, and this laid a foundation for today's chemistry. Their symbol for gold was the circle with a point at its center (☉), which was also the astrological symbol, the Egyptian hieroglyph and the ancient Chinese character for the Sun (now 日). For modern attempts to produce artificial gold, see gold synthesis. During the 19th century gold rushes occurred whenever large gold deposits were discovered, including the California, Colorado, Otago, Australia, Witwatersrand, Black Hills, and Klondike gold rushes. Because of its historically high value, much of the gold mined throughout history is still in circulation in one form or another.

Value

Klondike] Klondike Like other precious metals, gold is measured by troy weight and by grams. When it is alloyed with other metals the term carat or karat is used to indicate the amount of gold present, with 24 carats being pure gold and lower ratings proportionally less. The purity of a gold bar can also be expressed as a decimal figure ranging from 0 to 1, known as the millesimal fineness, such as 0.995. The price of gold is determined on the open market, but a procedure known as the Gold Fixing in London, originating in 1919, provides a twice-daily benchmark figure to the industry. Historically gold was used to back currency in an economic system known as the gold standard in which one unit of currency was equivalent to a certain weight of gold. As part of this system, governments and central banks attempted to control the price of gold by setting values at which they would exchange it for currency. For a long period the United States government set the price of gold at $20.67 per troy ounce ($664.56/kg) but in 1934 the price of gold was set at $35.00 per troy ounce ($1125.27/kg). By 1961 it was becoming hard to maintain this price, and a pool of US and European banks began to act together to defend the price against market forces. On March 17 1968, economic circumstances caused the collapse of the gold pool, and a two-tiered pricing scheme was established whereby gold was still used to settle international accounts at the old $35.00 per troy ounce ($1.13/g) but the price of gold on the private market was allowed to fluctuate; this two-tiered pricing system was abandoned in 1975 when the price of gold was left to find its free-market level. Central banks still hold historical gold reserves as a reserve asset although the level has generally been declining. The largest gold depository in the world is that of the U.S. Federal Reserve Bank, held at Fort Knox. Since 1968 the price of gold on the open market has ranged widely, with a record high of $850/oz ($27,300/kg) on 21 January 1980, to a low of $252.90/oz ($8,131/kg) on 21 June 1999 (London Fixing). Prices have risen to the $500/oz mark in late 2005, due to a depreciation of the US dollar and inflation due to rising energy costs.

Gold and the money supply

In January 1959 US M3 money supply was $288.8 billion, and the Official Gold Holdings of the United States was then 17,335.1 Tonnes, or about 557 million ounces (there are 32,150.7 Troy Ounces in a Tonne). That means that in 1959, there were $518 in circulation for every ounce of gold reserves held by the USA. Although the theoretical price should then have been $518 per ounce, the actual price, as fixed under the gold standard was only $35 an ounce. By August 2005, the US M3 money supply had risen to $9,873.9 billion, whilst at the same time the Official Gold Holdings of the United States had fallen to just 8,133.5 Tonnes, or about 261 million Troy Ounces. This means that today, in 2005, there are $37,831 in circulation for every ounce of gold held by the United States. The above numbers show the falling influence of gold in the monetary system of the world today. Goldbugs believe, or even hope, that one day gold's importance will return as the printing of paper money gets out of control and we end in a hyper-inflationary fiat money collapse.

Restrictions on gold ownership

Because of its use as a reserve store of value, the possession of gold is sometimes restricted or banned. Within the United States, the private possession of gold except as jewelry and coin collecting was banned between 1933 and 1975. Preside

Balance of payments

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United States balance

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Data

Exports

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Financial capital

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Money

Essential characteristics of money

Credit as money

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Modern forms of money

Money and economics

History of money

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Money supply

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Structural influences on the BOP and the current account

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Mercantilism

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Gold

Notable characteristics

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History

Value

Gold and the money supply

Restrictions on gold ownership