Safeguarding deposits. Deposits in a bank are relatively safe. Banks keep cash and other liquid assets available to meet withdrawals. Liquid assets include securities that can be readily converted to cash. Banks are also insured against losses from robberies. But the most important safeguard is the fact that in most countries, governments have established deposit insurance programs. The insurance protects people from losing their deposits if a bank fails.
A bank not only keeps savings safe but also helps them grow. Funds deposited in a savings account earn interest at a specified annual rate. Many banks also offer a special account for which they issue a document called a certificate of deposit (CD). Most CD accounts pay a higher rate of interest than regular savings accounts. However, the money must remain in the account for a certain period, such as one or two years, to earn the higher rate of interest. Banks also offer money market accounts. These accounts pay an interest rate based on the prevailing rates for short-term corporate and government securities.
Providing a means of payment. People who have funds in a bank checking account can pay bills by simply writing a check and mailing it. A check is a safe method of settling debts, and the canceled check provides proof of payment. Customers may also ask a bank to automatically pay recurring bills, such as telephone and mortgage payments, by a process called direct deposit deduction. Many banks allow people to pay bills electronically by telephone or through the Internet computer network.
Many banks offer credit cards. People can use the cards to pay for their purchases at stores and other businesses. The bank then pays the businesses directly and sends the customer a monthly bill for the amount charged. The cardholder can usually choose to pay only part of the bill immediately. If so, he or she must pay a finance charge on the unpaid balance.
Banks may also issue debit cards, which resemble credit cards. When a cardholder uses a debit card, the amount of the purchase is deducted directly from the cardholder's checking account. Some cards can be used as either credit or debit cards.
Making loans. Banks receive funds from people who do not need them at the moment and lend them to those who do. For example, a couple may want to buy a house but have only part of the purchase price saved. If one or both of them have a good job and seem likely to repay a loan, a bank may lend them the additional money they need. To make the loan, the bank uses funds other people have deposited.
A major obligation of a bank is to permit depositors to withdraw their funds upon demand. But no bank has enough cash readily available to satisfy its depositors if all were to demand their funds at the same time. Banks know from experience, however, that such a demand--called a run--rarely occurs. If people are confident they can withdraw their funds at any time, they will leave them on deposit at the bank until needed. As a result, banks can loan and invest a large percentage of the funds deposited with them. In most countries, the government limits the percentage of a bank's funds that can be used for loans and investment. The government simultaneously sets a minimum percentage that must be kept on reserve for meeting withdrawals.
TRADE
Trade is buying and selling goods and services. Trade occurs because people need and want things that others produce or services others perform.
People must have such necessities as food, clothing, and shelter. They also want many other things that make life convenient and pleasant. They want such goods as cars, books, and television sets. They want such services as haircuts, motion pictures, and bus rides. As individuals, people cannot produce all the goods and services they want. Instead, they receive money for the goods and services they produce for others. They use the money to buy the things they want but do not produce.
Trade that takes place within a single country is called domestic trade. International trade is the exchange of goods and services between nations. It is also called world trade or foreign trade. For detailed information on international trade. Trade has contributed greatly to the advance of civilization. As merchants traveled from region to region, they helped spread civilized ways of life. These traders carried the ideas and inventions of various cultures over the routes of commerce. The mixing of civilized cultures was an important development in world history.
The development of trade
Early trade. For thousands of years, families produced most of the things they needed themselves. They grew or hunted their own food, made their own simple tools and utensils, built their own houses, and made their own clothes. Later, people learned that they could have more and better goods and services by specializing and trading with others. As civilization advanced, exchanges became so common that some individuals did nothing but conduct trade. This class became known as merchants. The most famous early land merchants were the Babylonians and, later, the Arabs. These traders traveled on foot or rode donkeys or camels. The Phoenicians were the chief sea traders of ancient times.
Trade was very important during the hundreds of years the Roman Empire ruled much of the world. Roman ships brought tin from Britain, and slaves, cloth, and gems from the Orient. For more than 500 years after the fall of the Roman Empire in A.D. 476, little international trade took place.
The expansion of trade began in the 1100's and 1200's, largely because of increased contacts between people. The crusades encouraged European trade with the Middle East. Marco Polo and other European merchants made the long trip to the Far East to trade for Chinese goods. Italians in Genoa, Pisa, and Venice built great fleets of ships to carry goods from country to country.
A great period of overseas exploration began in the 1400's. Trade routes between Europe and Africa, India, and Southeast Asia were established as a result of the explorations. In the 1500's and 1600's, private groups formed companies, usually with governmental approval, to trade in new areas.
Trade between Europe and America was carried on by the chartered companies that established the earliest American colonies. The colonists sent sugar, molasses, furs, rice, rum, potatoes, tobacco, timber, and cocoa to Europe. In return, they received manufactured articles, luxuries, and slaves. Trade also pushed American frontiers westward. Trading posts sprang up in the wilderness. Many of these posts later grew into cities.
Trade today affects the lives of most people. Improved transportation permits trade between all parts of the world. Through specialization, more and better goods and services are produced. Increased production has led to higher incomes, enabling people to buy more of these goods and services.