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| Banking Law Additional Course Materials |
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| Sunday, 03 December 2006 | |
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BACKGROUND REFERENCE MATERIALS FOR BANKING LAW SEMINAR Banking Law Seminar Professor Fred Galves UNIVERSITY OF THE PACIFIC McGEORGE SCHOOL PF LAW Summer Session, 2000 Copyright © 2000 by Fred Galves. All Rights Reserved. Banking, Money and Economic Glossary Banking Law and Regulation is a challenging subject not only because the Law and regulatory framework are complex and fast-moving, but also because much foundational information is assumed. The following glossary of terms is designed to give you a good foundation of basic Banking law-related terms and concepts. If you have a financial, accounting, or an economics background, then you will probably not find this basic material helpful. However, if you do not have such a background, these materials should prove helpful to you in your study of banking law. Of course you do not have to memorize them, but a good, passing familiarity with them would be helpful during the course. Note that CAPITALIZED terms used in a definition are themselves defined int he glossary for cross-reference purposes. ACTUARY - A mathematician who uses statistics to calculate insurance premiums. AMERICAN STOCK EXCHANGE - The second largest STOCK EXCHANGE in the United States, after the NEW YORK STOCK EXCHANGE. The American Stock Exchange is located in New York City. AMORTIZATION - A term that refers either to the gradual paying off of a DEBT in regular installments over a period of time or to the DEPRECIATION of the "book value" (that is, the standard assessed value) of an ASSET over a period of time. ANNUITY - A sum of money payable yearly (annually) or at regular time intervals. Many people's retirement funds as well as certain BONDS are set up to be paid in annuities. APPRAISAL - A formal evaluation of property by an expert, used to establish its current market value. ASSESSMENT - The APPRAISAL of property for the purposes of TAXATION. ASSET - A possession that can be turned into cash to cover LIABILITIES. CAPITAL is such things as land, buildings, savings accounts, ownership of a business, cash, etc. AUDIT - The examination by an outside party of the accounts of an individual or CORPORATION. Accountants often perform audits. BALANCE SHEET - An orderly account of the ASSETS of a company or individual and of the financial claims on those assets by others. BANK RUN - The concerted action of depositors who try to withdraw their money from a bank because they fear that the bank will fail. It refers to the panic that sets in when either the bank or whole banking system is in fear of failing. BANKRUPTCY - Legally declared insolvency, or inability to pay CREDITORS. If an individual or a corporation declares bankruptcy, a court will appoint an official to make an inventory of the individual's corporation's ASSETS and to establish a schedule by which creditors can be partially repaid what is owed them. When a bank goes bankrupt, or "fails," the government usually appoints the FDIC as RECEIVER (to make an inventory of the bank's remaining assets). BARTER - The exchange of goods or services for other goods or services, rather than for money or currency. BEAR MARKET - A market, especially a STOCK MARKET, characterized by falling prices; the opposite of a BULL MARKET. If an investor bought high and then sells during a Bear market she is losing money. BENEFICIARY - The recipient of funds, property, or other benefits from an insurance policy, will, or other settlement. BIG BOARDS - The huge electronic board at the NEW YORK STOCK EXCHANGE that reports the changing values of STOCKS traded on the exchange. The term is used sometimes to mean the New York Stock Exchange itself. BLACK MARKET - The illegal buying and selling of goods above (or below) the price fixed by a government. Black markets develop when, because of war, disaster, or public policy, a government tries to set prices for COMMODITIES instead of allowing the normal operations of supply and demand to set prices. BLUE CHIP STOCK - A term used to describe STOCKS of high-quality, financially sound CORPORATIONS. "Blue Chip" suggests a safe INVESTMENT-as opposed to a "risky" investment. BOND - A SECURITY issued by a CORPORATION or public body and carrying a fixed rate of INTEREST. Like a STOCK, a bond is a type of INVESTMENT, but unlike a stock, a bond has a definite YIELD (see MUNICIPAL BONDS, and TREASURY BILLS). The holder of the bond has in effect loaned money to the corporation of public body and has a right to be paid the principal and interest on the bond. BOTTOM LINE - The last line in an AUDIT, which shows profit or loss. By extension, "bottom line" refers to the final, determining consideration in a decision. "Bottom line" also has a derogatory implication when it refers to those people whose attention to the bottom line prevents them from recognizing the value of anything else. BROKER - A financial agent or intermediary; a middle-man. BUBBLE - A period of wild speculation in which the price of a COMMODITY or STOCK is inflated far beyond its real value. Bubbles are said to "burst" when there emerges a general awareness of the folly, and the price drops. BULL MARKET - A market, especially a STOCK MARKET, characterized by rising prices; the opposite of a BEAR MARKET. If an investor bought low and then sells in a BULL MARKET, then he has made money. BUSINESS CYCLE - A period in which business activity rises and falls. BUYER'S MARKET - A market in which supply exceeds demand. As a result, suppliers usually have to lower their prices, thus favoring the buyer. (Compare SELLER'S MARKET). CAPITAL - Money used to finance purchase of the means of production, such as machines, or the machines themselves. CAPITAL EXPENDITURE - The purchase of an ASSET by a firm. CAPITAL FLIGHT - The rapid movement of INVESTMENTS out of a market or country that is seen by investors as unstable. CAPITAL FORMATION - The creation of CAPITAL. For example, capital is created when banks lend the money they hold in savings accounts to firms that use the money to purchase machinery. CAPITAL GAIN - Personal income earned by the sale of ASSETS such as STOCKS or real property. The gain is the difference between the price paid for the asset and the selling price. In the past, capital gains were taxed at a lower rate than ordinary income, but this is no longer true. Former President Bush was a strong advocate of lowering the capital gains tax. CAPITAL GOODS - goods used in the production of COMMODITIES; producers' goods. (Compare CONSUMER GOODS.) CAPITAL RESOURCES - Tools, machines, and factories used to produce goods. CAPITAL-INTENSIVE - A term describing industries that employ relatively few laborers but that use expensive equipment. (Compare LABOR-INTENSIVE.) bEMPTOR - LATIN (contract term) for "Let the buyer beware." It means that a customer should be cautious and alert to the possibility of being cheated: "Caveat emptor is the first rule of buying a used car." CERTIFICATES OF DEPOSIT (CDs) - BONDS issued by banks and SAVINGS AND LOAN ASSOCIATIONS to individual investors. CDs have terms ranging from a few months to several years; in general, the longer the term, the higher the INTEREST RATE that they bear. At the expiration of the term, investors may withdraw both the PRINCIPAL and the accrued INTEREST. Penalties are imposed for early withdrawal. CLOSING - Usually applied to real estate transactions, it refers to delivery of the deed of ownership from the ownership from the owner to the buyer in return for full payment. COLLATERAL - Property or its equivalent that a debtor deposits with a CREDITOR to guarantee repayment of a DEBT. Lending institutions must obtain collateral in order to extend a loan; it is imprudent to make an "unsecured loan." COMMISSION - A fee paid to a BROKER or other financial agent for negotiating a sale. The fee is based on a percentage of the sale price. COMMODITY - Any product manufactured or grown. COMPOUND INTEREST - INTEREST that is added not only to the PRINCIPAL of a loan or savings account but also to the interest already added to the loan or account; interest paid on interest. CONGLOMERATE - A CORPORATION with diversified holdings that are acquired through MERGERS and acquisitions but that are not necessarily related. CONSUMER GOODS - goods, such as food and clothing, that satisfy human wants through their consumption or use. (Compare CAPITAL GOODS.) CONSUMER PRICE INDEX - An index of prices for a representative sample of goods and services published by the government each month. The consumer price index was formerly known as the cost-of-living index. CORPORATION - A business organization owned by a group of STOCKHOLDERS, each of whom enjoys LIMITED LIABILITY (that is, each can be held responsible for losses only up to the limit of his or her INVESTMENT). A corporation has the ability to raise CAPITAL by selling STOCK to the public. A corporation can also sell BONDS or can obtain a commercial loan from a bank to obtain capital. COUNTERFEIT - Fraudulent, especially money. CREDIT - The ability to obtain goods, money, or services in return for a promise to pay at some later date. Such payment includes interest, or payment for the cost of using the money. CREDIT RATING - An evaluation of the financial trustworthiness of an individual, firm, or government. Credit ratings are reported by Credit Reporting Agencies such as TRW. Prudent lenders obtain a credit report before extending a loan. CREDIT UNION - An organization formed by employees of a company, social group, or institution to make personal loans at low INTEREST RATES to all employees of that company, social group, or institution. CREDITOR - One to whom a DEBT is owed. CURRENCY - Any form of money in actual use as a medium of exchange. DEBT - Money, goods, or services owed by an individual, firm, or government. DEDUCTION - A cost or expense subtracted from REVENUE, usually for tax purposes. DEFAULT - Failure to pay a DEBT when it is due. A loan goes into default when it is past due. DEFICIT - A shortage, especially the amount by which a sum of money falls short of what is required; a DEBT. When the government spends more money than it raises in revenues, then it is running a deficit. DEFICIT FINANCING - A government policy of financing large public EXPENDITURES by borrowing money rather than by raising taxes. Also called deficit spending. The federal government is very good at this. DEFLATION - A decrease in prices, often stated as an increase in the value of money, related to a decline in spending by consumers. (Compare INFLATION.) DEPLETION ALLOWANCE - A DEDUCTION from taxable income based on the eventual exhaustion or waste of a natural ASSET such as an oil field. DEPOSIT - A credit to an individual account, such as a checking or savings account. DEPRECIATION - A decline over time in the value of a tangible ASSET such as a house or car-("wear and tear" and loss of the value of "newness"). DEPRESSION - A period of drastic decline n the national economy, characterized by decreasing business activity, falling prices, and unemployment. The best known of such periods is the GREAT DEPRESSION, which occurred in the 1930's. It is much more serious than a RECESSION. DEVALUATION - A policy undertaken by a nation to reduce the value of its national CURRENCY either in relation to gold or in relation to the currencies of other nations. DIMINISHING RETURNS, LAW OF - An economic law propounded by David Ricardo, also called the law of diminishing marginal returns. It expresses a relationship between input and output, stating that adding units of any one input (labor, CAPITAL, etc.) to fixed amounts of the others will yield successively smaller increments of output. In common usage, the "point of diminishing returns" is a supposed point at which additional effort or investment in a given endeavor will not yield correspondingly increasing results. DISCOUNT RATE - The rate of INTEREST charged by the FEDERAL RESERVE SYSTEM on loans it makes to the banking system. Because the Federal Reserve System lends money to the banking industry, one mechanism it has for regulating INTEREST RATES is to vary the discount rate - that is, to make the money that banks borrow relatively more or less expensive. DIVESTITURE - The act of a CORPORATION or CONGLOMERATE in getting rid of a subsidiary company or division. DIVIDEND - A payment to the STOCKHOLDERS of a CORPORATION from the corporation's earnings. Stockholders are not entitled to dividends the same way bondholders are entitled to a steady stream of payments. Corporations pay dividends so taht future investors will buy the stock when the corporation works to raise CAPITAL by selling stock. DOUBLE INDEMNITY - A feature of life insurance policies stating that the insurer will pay twice the fact value of the policy if the insured dies accidentally. DOW-JONES AVERAGE - An average of the selling price of major STOCKS on the NEW YORK STOCK EXCHANGE. It gives BROKERS and investors a picture of the state of the market. The average focuses more on industrial businesses. DOWN PAYMENT - A payment in part at the time of purchase of good, with the promise to make full payment later. DUMMY - In a CORPORATION, one who stands in for a real director or who serves as a nominal director during the organization of the CORPORATION until the STOCKHOLDERS can elect directors. DUMPING - The sale of goods of one nation in the markets of a second nation at less than the price charged within the first nation. Dumping can eliminate competitors by undercutting their prices. DURABLE GOODS - Manufactured products capable of long utility (more than one year), such as refrigerators and automobiles. DUTY - A tax charged by a government, especially on an IMPORT. EASY-MONEY POLICY - A policy by which a central monetary authority, such as the FEDERAL RESERVE SYSTEM in the U.S., seeks to make money plentiful and available at low INTEREST RATES. (Compare TIGHT-MONEY POLICY.) An easy-money policy is often pursued to encourage INVESTMENT and economic growth. It can lead to INFLATION, however. ECONOMIC INDICATORS - Series of statistical figures, such as the CONSUMER PRICE INDEX or the GROSS NATIONAL PRODUCT, used by economists to predict future economic activity. EMBEZZLEMENT - The stealing of money entrusted to one's care: "The treasurer of the company embezzled a million dollars." EMINENT DOMAIN - The right and power of a government (federal/state) to take private property for a public purpose, usually with just compensation (5th Amendment of the owner. ENTREPRENEUR - One who starts a business or other venture that promises economic gain but that also entails risks. EQUITY - In real property, the financial value of someone's property over and above the amount the person owes on MORTGAGES. For example, if you buy a house for $100,000, paying $20,000 down and borrowing $80,000, your equity in the house is $20,000. As you pay off the PRINCIPAL of the loan, your equity (the "slice" you own) will rise. ESCROW - The condition of being ineffective until certain conditions are met. For example, money inherited by a minor might be held in escrow until the heir reaches a certain age. Homeowners with MORTGAGES frequently pay money for insurance and property taxes on their home into an escrow account each month. The holder of the mortgage then pays the insurance and tax bills out of the escrow account when the bills are due. EXCHANGE RATE - The price at which one CURRENCY can be purchased with another currency or gold. At any time, for example, one American dollar can purchase a certain number of German marks, or French francs, or Mexican pesos, or Japanese yen. EXCISE TAX - A tax, similar to a sales tax, imposed on some GOODS, especially luxuries and cars. EXPENDITURE - An expense; an amount spent. EXPENSE ACCOUNT - An account or list of expenses incurred in doing business outside the office, part of which is a TAX DEDUCTION. The term often applies to lunches or dinners at which business deals are made and clients entertained. One popular image for the misuse of expense accounts is the expensive, fancy meal known as the three-martini lunch (finally written out of the tax code in 1986). EXPROPRIATION - The taking over of private property by a government, often without full compensation but usually with a legal assertion that the government has a right to do so. FDIC - An ABBREVIATION for FEDERAL DEPOSIT INSURANCE CORPORATION. FED, THE - See FEDERAL RESERVE SYSTEM. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) - A federal agency that insures DEPOSITS in savings accounts of qualifying banks. Created in 1933 in response to the over 10,000 bank failures from 1929-1932, the FDIC sought to provide the public that their bank deposits would be safe, even if the bank failed because the deposits would be insured up to a certain amount. FEDERAL RESERVE SYSTEM (THE FED) - The central monetary authority of the United States. The Board of Governors supervises the twelve Federal Reserve banks, which deal with other banks rather than with the public. The system has many functions, including regulating INTEREST RATES. FEDERAL TRADE COMMISSION (FTC) - A federal agency charged with enforcing ANTITRUST LEGISLATION and preventing false advertising, among other duties. FICA - An ACRONYM for Federal Insurance Contributions Act. FICA taxes are deducted from the pay of most American workers to support social security programs. FISCAL POLICY - The policy of a government in controlling its own EXPENDITURES and TAXES, which together make up the budget. A function of fiscal policy, along with MONETARY POLICY, is to regulate the national level of economic activity, the price level, and the BALANCE OF PAYMENTS. Fiscal policy also determines the DISTRIBUTION of resources between the PUBLIC SECTOR and the PRIVATE SECTOR and influences the distribution of wealth. FISCAL YEAR - A twelve-month period for which an organization such as a government or CORPORATION plans the use of its funds. Commonly, fiscal years run from July 1 to June 30, or, in the case of the United States government, from October 1 to September 30. FIXED CHANGED RATE - A RATE OF EXCHANGE that is determined by the market conditions rather than being officially set. FORECLOSURE - A proceeding in which the financier of a MORTGAGE seeks to regain property because the borrower has defaulted on payments. The bank kicks out the home buyer and sells the collateral for the loan, the house, to pay off the remaining amount left on the mortgage (plus costs of sale). FOREIGN EXCHANGE - The ways in which DEBTS between two nations that use different CURRENCIES are paid. Foreign exchange rates can have an important effect on a nation's economy because the value of its currency in other countries affects the cost of both imported and exported goods and services. FORTUNE FIVE-HUNDRED - A listing of the five hundred largest industrial companies published each year in Fortune magazine. FRANCHISE - In business, a relationship between a manufacturer and a retailer in which the manufacturer provides the product, sales techniques, and other kinds of managerial assistance, while the retailer promises to market the manufacturer's product rather than that of a competitors. For example, most automobile dealerships are franchises. The vast majority of fast food chains are also run on the franchise principle, with the retailer paying to use the brand name. FREE ENTERPRISE - The freedom of private businesses to operate competitively for profit with minimal governmental regulation. Because the banking industry is so highly regulated by federal and state agencies, most bankers complain of the lack of free enterprise. Opponents point to the bank failures and scandals of the 1930s and recently to the 1980s to refute that charge. FREE MARKET - The production and exchange of goods and services without interference from the government or from MONOPOLIES. FREE TRADE - Unrestricted trade among nations without government TARIFFS or customs DUTIES on IMPORTS. FRIEDMAN, MILTON - An American economist of the twentieth century. Friedman has defended FREE ENTERPRISE and attacked government regulation of the economy. He has condemned socialism as an economic failure and celebrated capitalism for combining prosperity with personal liberty. However, even he recognizes that the banking industry is different and special and some regulation is necessary. GROSS - Exclusive of DEDUCTIONS, prior to TAXATION, as in gross income. (Compare NET.) Total, aggregate, as in GROSS NATIONAL PRODUCT. HIGH-TECH - Short for "high technology;" the term describes industries and firms that use or produce advanced technology, especially in electronics. Alvin Toffler's, "The Third Wave," describes high tech as the 3rd major advance in economic development, the first two being agrarian societies, then the move to industrial societies until the "information age." HOLDING COMPANY - A company that controls other companies. Most U.S. banks are in a holding company structure where one corporation owns other companies. IMPORT - A COMMODITY purchased from another country. INFLATION - A general increase in price. INSIDER TRADING - The unlawful practice of using information that comes from a source "inside" the business, but is not available to the general public, to trade on the STOCK MARKET. This activity is prohibited by law and is policed by the SECURITIES AND EXCHANGE COMMISSION. In the middle 1980's, several revelations of insider trading rocked WALL STREET. INSTALLMENT BUYING - Purchasing a COMMODITY over a period of time. The buyer gains the use of the commodity immediately and then pays for it in periodic payments called installments. For smaller, retail items known as "lay-away" plans. INSTITUTIONAL INVESTOR - An organization such as a government, labor union, or business that makes investments, especially in STOCK and BOND markets. Institutional investors account for a majority of investments made in the United States. INTEREST - The charge for borrowing money (XXX money the borrower pays to the lender) or the return for lending it (what the lender recieves for lending it). INTEREST RATE - The usual way of calculating INTEREST - as a percentage of the sum borrowed. INTERNATIONAL MONETARY FUND (IMF) - An agency, dominated by wealthy nations, that lends money to DEVELOPING NATIONS. INVESTMENT - The purchase of property (stocks, land, rare coins, etc.) with the expectation that its value will increase over time. INVESTMENT TAX CREDIT - An amount that businesses are allowed by law to deduct from their taxes, reflecting an amount they reinvest in themselves. Investment tax credits are structured to reward and encourage economic growth. IOU - Letters standing for "I owe you." An IOU is a written statement of a borrower's obligation to pay a DEBT. ITEMIZED DEDUCTION - A legal deduction from one's personal taxable income for money spend on specific goods and services, such as property taxes and charitable contributions. These deductions must be itemized - that is, individually listed and documented - on one's tax return. KEYNES, JOHN MAYNARD - A British economist of the early twentieth century who rejected traditional theories of the FREE MARKET and advocated vast government spending in times of RECESSION, even at the risk of unbalancing the budget. His themes are largely credited for "spending our way out of the Greate Depression." KEYNESIAN ECONOMICS - Economic THEORIES that advocate using government policies and programs to increase employment (not leaving it up to the free market). They are based on the thinking of John Maynard Keynes. LABOR-INTENSIVE - A term describing industries that require a great deal of labor relative to CAPITAL (compare CAPITAL-INTENSIVE). Examples of labor-intensive industries are forms of agriculture that cannot make use of machinery and service industries such as restaurants. LEASE - A contract that grants possession of property for a specified period of time in return for some kind of compensation. A contract to rent over a period of time. LEGAL TENDER - Any form of money that a government decrees must be accepted in payment of DEBTS. LIABILITY - An obligation or DEBT. For business accounting purposes, liabilities just equal ASSETS on a BALANCE SHEET. LIEN - A claim or right given to a CREDITOR to secure payment of a DEBT, usually by sale of the debtor's property. LIMITED LIABILITY - A fundamental feature of CORPORATIONS, whereby investors are liable only up to the amount of their INVESTMENT. This principle is important for failing corporations because it holds that only the ASSETS of the corporation, not the personal assets of its owners, can be liquidated (see LIQUIDATION) to cover the corporation's debts (unless one can "pierce the corporate vale" and recover personal assets of individuals who are the "alter egos" of the corporation). LIQUIDATION - The conversion of the ASSETS of a firm into cash, often just before the firm goes out of business. LIST PRICE - The stated price of a COMMODITY before any DISCOUNT or other reduction. MANAGEMENT - The body of individuals who run major businesses, usually without owning them. MARGINAL COST - The change in total cost of production when an output is varied by one unit. MERGER - A union of two or more independent CORPORATIONS under a single ownership. In the early 1990's bank mergers and consolidations were very common. MONETARISM - The economic doctrine that the supply of money has a major impact on a nation's economic growth. For example, monetarists prefer to control INFLATION by restricting the growth of a nation's money supply rather than by raising taxes. The doctrine is associated with Milton FRIEDMAN. MONETARY POLICY - An attempt to achieve broad economic goals by the regulation of the supply of money. (Compare FISCAL POLICY.) MONEY MARKET - A collective term for the many markets in which there occurs the buying and selling of funds that are loaned for short periods to businesses or to governments. MONEY SUPPLY - The amount of money in circulation at a given time, usually controlled by some central banking authority. MONOPOLY - The exclusive control by one company of a SERVICE or product. MORTGAGE - A legal document that transfers the ownership of a piece of REAL ESTATE to an individual in return that individual's assuming an obligation to pay for the property over a period of time. MULTINATIONAL CORPORATION - A CORPORATION with operations in two or more countries. The rise of multinationals, a relatively recent occurrence, has resulted in a great deal of legal ambiguity because they can operate in so many jurisdictions. MULTIPLIER EFFECT - An effect in ECONOMICS in which an increase in spending produces an increase in national INCOME and consumption greater than the initial amount spent. MUNICIPAL BONDS - BONDS issued by nonprofit bodies such as cities, public hospitals, and school boards. They bear relatively low INTEREST RATES, but accrued interest is exempt from federal INCOME tax. MUTUAL FUND - A company organized for the purpose of making INVESTMENTS. A mutual fund gets its CAPITAL stock from private individual investors, who, in effect, allow the mutual fund to decide where to invest their money. MUTUAL INSURANCE COMPANY - A type of insurance company in which policyholders share in the profits. NATIONAL DEBT - The DEBT of the government; the amount by which government spending exceeds tax REVENUES and must be borrowed. A large national debt can inhibit growth and drive up INTEREST RATES. NATIONALIZATION - A government takeover of a private business. NEGATIVE INCOME TAX - A plan to raise the INCOME of the poor by direct cash SUBSIDIES. Instead of paying an income tax, the poor would receive a cash payment from the government. NET - Remaining after all DEDUCTIONS have been made. (Compare GROSS.) NEW YORK STOCK EXCHANGE - The largest STOCK EXCHANGE in the United States, located on WALL STREET in NEW YORK CITY. OLIGOPOLY - Control over production and sale of a product or SERVICE by a few companies. The United States automobile industry, with only three major producers, has sometimes been cited as an example of an oligopoly. OVERDRAFT - The amount by which a check exceeds the funds on DEPOSIT to cover it. OVERHEAD - All costs of running a business other than WAGES paid to production workers or payments for raw material to be used in production. Overhead includes the cost of renting or leasing a store in which business is transacted, the cost of heating a factory, and similar expenses. PARTNERSHIP - An association of two or more persons to conduct a business. In contrast to a CORPORATION, those who engage in a partnership are liable for DEBTS incurred by the company to the full extent of their private fortunes rather than merely to the extent of their INVESTMENT. PENSION - An extremely poor person. PER CAPITAL - A Latin PHRASE literally meaning "by heads," and translated as "for each person." It is a common unit for expressing DATA in STATISTICS. A country's per capita personal INCOME, for example, is the average personal income per person. PRICE CONTROLS - Measures, usually temporary, taken by governments to limit price rises in times of rapid INFLATION. PRICE FIXING - Any usually unlawful practice by which producers of a COMMODITY act together to obtain an artificially high price. PRIME RATE - The INTEREST RATE that banks charge to CORPORATIONS that are considered excellent risks. The prime rate is usually the lowest prevailing interest rate; if it rises, rates available to CONSUMERS will soon rise. PRINCIPAL - The original amount of money lent, not including profits and INTERESTS. PRIVATE ENTERPRISE - Business carried on for profit and not owned by the government; also, the system that discourages public ownership of business; the same as FREE ENTERPRISE. (See PRIVATE SECTOR.) PRIVATE SECTOR - That part of an economy in which GOODS and SERVICES are produced by individuals and companies as opposed to the government, which controls the PUBLIC SECTOR. PROFIT SHARING - Distributing the profits, or part of the profits, of a business to its employees. PROGRESSIVE TAX - A tax that takes a higher proportion of large INCOMES than of small ones. (Compare REGRESSIVE TAX.) PRORATE - To divide or distribute a sum of money proportionately. For example, if one owned an automobile for only three months, an insurance company would prorate the annual premium by charging only one-quarter of it. PROXY - A person authorized to act for another, or the written authorization to act for another. Shareholders in CORPORATIONS may designate proxies to represent them at STOCKHOLDERS' meetings and vote their SHARES. PUBLIC SECTOR - That part of the economy controlled by the government. (Compare PRIVATE SECTOR.) RATE OF EXCHANGE - The price of one nation's CURRENCY in terms of the currencies of other nations. Rates of exchange fluctuate. For example, a dollar might equal three French francs at the start of a year and four French francs by the end of the year. RATIONING - A regulated allocation of resources among possible users. The United States government has engaged in rationing usually only under conditions of extremely shortage or economic hardship; resource were rationed, for example, during WORLD WAR II. REAL COST - The cost of producing a GOOD or SERVICE, including the cost of all resources used and the cost of not employing those resources in alternative uses. (See OPPORTUNITY COST.) REAL INCOME - INCOME measured in terms of the GOODS and SERVICES it can buy. REAL WAGES - WAGES adjusted for the prevailing level of consumer prices. (See also CONSTANT DOLLARS.) REBATE - The return of part of a payment for a GOOD. Unlike a DISCOUNT, which is deducted from the price before purchase, a rebate is returned after purchase. RECESSION - A general business slump, less severe than a DEPRESSION. REDISTRIBUTION - Any process, such as INFLATION or TAXATION or the provision of social services, that reallocates household INCOME. REGRESSIVE TAX - A tax that takes a higher percentage of low INCOMES than high ones. (Compare PROGRESSIVE TAX.) REGULATION - Laws through which governments can control privately owned businesses. RETAIL - A term describing businesses that sell GOODS directly to individuals. (Compare WHOLESALE.) REVENUE - The INCOME of local, state, or national governments. REVENUE SHARING - A transfer of TAX REVENUE from one unit of government, such as the federal government, to other units, such as state government. RISK CAPITAL (VENTURE CAPITAL) - Money invested in high-risk enterprises. ROBBER BARONS - A term applied to certain leading American businessmen of the late nineteenth and early twentieth centuries, including Cornelius VANDERBILT and John D. ROCKEFELLER. The term suggests that they acquired their wealth by means more often foul than fair. ROYALTY - A payment made for some right or privilege, as when a publisher pays a royalty to an author for the author's granting the publisher the right to sell the author's book. SAVINGS BOND - A BOND issued by the United States government and sold in relatively small denominations, mainly to individuals. SAVINGS AND LOAN ASSOCIATION - A financial institution that resembles a bank but may not offer as many services as a bank (for example, personal checking accounts). Savings and loans, historically, have invested their CAPITAL mainly in home MORTGAGES. In recent years, the differences between banks and savings and loan associations have been diminishing. SECURITIES - Written evidence of ownership or creditorship, such as BONDS and STOCK certificates. SECURITIES AND EXCHANGE COMMISSION (SEC) - A federal agency that supervises the exchange of SECURITIES so as to protect investors against malpractice such as INSIDER TRADING. SELLER'S MARKET - A market in which DEMAND exceeds SUPPLY. As a result, CONSUMERS have to pay more for GOODS. (Compare BUYER'S MARKET.) SHARES - The units of STOCK that represent ownership in a CORPORATION. SINKING FUND - A fund into which companies or governments place money to redeem their BONDS and other forms of indebtedness. SLIDING SCALE - A set of rates that change according to a mathematical formula. The INCOME tax, for example, is levied on a sliding scale, with the rich paying a higher percentage than the poor. SMITH, ADAM - A Scottish scholar of the eighteenth century whose ideas about ECONOMICS led to the growth of modern CAPITALISM. His best-known work is The Wealth of Nations. SPECIE - Gold, silver, sea shells, jewley, etc., usually precious metals once thought to be the "true store of value" for money while bank notes or currency merely represented specie. STOCK - A SHARE in the ownership of a CORPORATION. STOCK EXCHANGE - A place where STOCKS, BONDS, and other SECURITIES are bought and sold. In the United States, the two largest stock exchanges are the NEW YORK STOCK EXCHANGE and the AMERICAN STOCK EXCHANGE. Activity on these two exchanges is usually considered an indication of the state of the economy as a whole. STOCK MARKET - A market in which STOCKS are bought and sold (see STOCK EXCHANGE). Also, the general condition of the sale of SECURITIES in a CORPORATION. STOCKHOLDERS - The persons or CORPORATIONS holding STOCK in a corporation. SUBSIDY - A grant made by a government to some individual or business in order to maintain an acceptable STANDARD OF LIVING or to stimulate economic growth. TARIFF - A government tax on IMPORTS, designed either to raise REVENUE or to protect domestic industry from foreign competition. TAX BREAK - A special tax benefit given to promote specific economic or social objectives. For example, the United States government, having decided that individual home ownership is a boon to the economy, allows a certain percentage of INCOME that is used to pay a home MORTGAGE to be TAX-DEDUCTIBLE. The resulting lower rate of TAXATION for homeowners constitutes a tax break. TAX DEDUCTION - An expense, such as a charitable contribution, that can be deducted from one's taxable INCOME. Unlike a TAX SHELTER, a tax deduction does not necessarily take the form of an INVESTMENT. TAX HAVEN - A place that levies very low taxes or none at all on foreigners. MONACO is famous as a tax haven. TAX LOOPHOLE - A provision in the laws governing TAXATION that allows people to reduce their taxes. The term has the connotation of an unintentional omission or obscurity in the law that allows the reduction of tax LIABILITY to a point below that intended by the framers of the law. TAX SHELTER - A type of INVESTMENT that allows a reduction in one's taxable INCOME. Examples include investments in PENSION plans and REAL ESTATE. TAXATION - A government's practice of collecting money from citizens and business within its domain to support its operation. TAX-DEDUCTIBLE - See TAX DEDUCTION. TECHNOCRACY - The control of government and society by people with technical skills, especially engineers. TECHNOLOGICAL UNEMPLOYMENT - Unemployment caused by the displacement of workers by machines. TIGHT-MONEY POLICY - A policy in which a central monetary authority, for example the FEDERAL RESERVE SYSTEM, seeks to restrict CREDIT and raise INTEREST RATES. (Compare EASY-MONEY POLICY.) A tight-money policy might be pursued to limit INFLATION. TRADE - Business or commerce; economic activity. TRADE BARRIERS - TARIFFS, IMPORT QUOTAS, customs regulations, and other disincentives meant to discourage international trade. Trade barriers are usually protectionist; that is, they are erected to protect domestic producers who would not be able to compete successfully with foreign producers in a FREE MARKET or in FREE TRADE. TRADE DEFICIT - The condition that exists when the value of what a country IMPORTS exceeds the value of what is EXPORTS; also called an unfavorable BALANCE OF TRADE. Trade deficits, because they imply that CAPITAL is leaving a country, can cause higher INTEREST RATES. TRADEOFF - What must be given up, and what is gained, when an economic decision is made. (See OPPORTUNITY COST.) TREASURY BILLS (T-BILLS) - BONDS issued by the United States government. T-Bills normally have fixed terms; that is, the purchaser cannot take possession of the accrued INTEREST for a fixed period of time after purchase. T-bills are auctioned by the Treasury each week; the auction determines the six-month INTEREST RATE. TRUST - A combination of firms or CORPORATIONS for the purpose of reducing competition and controlling prices throughout a business or industry. Trusts are generally prohibited or restricted by ANTITRUST LEGISLATION. (Compare MONOPOLY.) TRUST BUSTING - Government activities aimed at breaking up MONOPOLIES and TRUSTS. (See ANTI-TRUST LEGISLATION.) USURY - The practice of charging more than the legal INTEREST RATE. VESTED INTEREST - One who holds a vested interest has a deep personal (and possibly financial) interest in some political or economic proposal: "As a major STOCKHOLDER of the Ford Motor Company, Senator Bilge had a vested interest in legislation restricting the IMPORT of Japanese autos." The plural, vested interests, often refers to powerful holders: "His RADICAL policies enraged vested interests." VOUCHER - A CREDIT of a certain monetary value that can be used only for a specified purpose, such as to pay for housing or for food. Food stamps are a kind of voucher. Some economists believe that GOODS and SERVICES supplied by the government would be provided more efficiently if vouchers that could be spent only on such goods and services were given to citizens and private businesses competed to provide those goods and services. WALL STREET - A street in NEW YORK CITY on which the NEW YORK STOCK EXCHANGE and many INVESTMENT firms are located. The street's name is of the used in reference to the activities conducted on it: "STOCK prices fell on Wall Street." WARRANTY - A guarantee of the quality of a product or SERVICE made by the seller to the buyer. WATERED STOCK - STOCK issued at an inflated price - that is, a price not warranted by the ASSETS of the issuing company. WHOLESALE - The sale of merchandise to RETAILERS rather than directly to the public. WINDFALL - An unexpected profit from a business or other source. The term connotes gaining huge profits without working for them - for example, when oil companies profit from a temporary scarcity of oil. WITHHOLDING TAX - The tax withheld (or deducted) directly from one's paycheck. YIELD - The profit obtained from an INVESTMENT. |
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