Banks and banking

When it comes to dealing with money, the banks provide a variety of services essential to trade and to the eco­nomy of a country. There are two main types of bank:

1. Central banks

These are the institutions which control the banking of the entire country; they work together with the government to control the country's economy. The central bank of the United Kingdom is the Bank of England, |n the USA it is the Federal Reserve Sys­tem, in single-currency " Europe the European Cent­ral Bank, etc.

The central bank has a number of different functions:

a) To issue banknotes and coins, the country's cur­rency. These notes and coins are legal tender in the country where they are produced; this means that traders in that country may not refuse them when they are offered as payment.

b) To look after the country's gold reserves.

c) To make sure that the country's currency keeps its value.

d) To act as bankers for the government and the other banks.

e) To keep inflation under control. Inflation hap­pens when there is a lot more money (in the form of banknotes and credit) available than there are goods for sale (in other words, when demand for the goods exceeds supply). When this happens, prices increase sharply and often. To stop it, the central bank needs to take money out of circula­tion, for example by increasing interest rates (this makes borrowing more expensive and means that fewer people will apply for credit), and by in­creasing the amount of money which all banks have to deposit with the central bank.

2. Commercial banks

These are the public or private banks which people use for their everyday money matters. If you have a bank account for example, it will be at a commercial bank.

There are three basic types of bank account:

Current account. This type of account is used for everyday transactions such as paying bills, trans­ferring money and drawing cheques. You can have an overdraft on this type of account (that means you can withdraw more money than you have in the ac­count, although you will have to pay interest for this service), but you don't usually receive interest on the money you pay in.

Deposit account. This type of account may be used for short-term, small savings; the money paid in earns a small amount of interest. It is not possible to draw cheques or have an overdraft on this type of account, but it is possible to transfer money to it from a current account.

Investment account. Money paid into this type of account earns more interest, but the customer has to inform the bank in advance when he wants to with­draw his money. If it is a fixed-term account, he may not be able to withdraw the money for certain, period agreed with the bank (for example, five years). This type of account may be used for larger, long-term savings.

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