THE MONETARY SYSTEM
It is not our intention to teach basic banking principles in this chapter. It is presumed that the student of national income and flow-of-funds accounts is already acquainted with such fundamentals as the expansion and contraction of money. The purpose of this chapter is to demonstrate the manner in which banking processes are expressed in the flow-of-funds accounts, so that these accounts may be useful tools for the theoretical considerations and policy guides treated in subsequent chapters.
Many years ago Nolandia was a primitive society, closed from the outside world. There were no banks, and gold nuggets were the only medium of exchange. Business enterprise nevertheless thrived, and people were employed producing goods and services for sale to others. In a given year, businesses paid 100 ounces of gold to labor for the production of consumer goods selling for 90 ounces, at a loss of 10 ounces, which is reported as negative business saving.
|Entry 12-1, National Product System (in ounces of gold)|
|1.||Payments to factors of production||100||100|
Following the pattern used in Chapter 11, part 1 consists of intersectoral transactions (e.g., goods and services), while part 2 records saving and investment.
As the Academy of Scholars prepared the flow-of-funds entry for these transactions, they debated at first whether the gold nuggets were a financial or a real asset. Some scholars argued that they were tangible