MONEY AND CREDIT
Medium of Exchange:
Barter System: Before the advent of money, people used to follow the barter system of exchange. Suppose somebody has surplus vegetables and he needs wheat in lieu of that then he could find a person who has surplus wheat and needs vegetables.
Double Coincidence of wants:- The major feature or rather drawback of the barter system was the coincidence of wants. It used to be difficult to find a person who can fulfill the coincidence of wants. Moreover, it was impractical and difficult to carry heavy goods for barter. This restricted the economic activity.
In the historical period coins of precious metals started getting used as medium of exchange and this was the birth of money. As precious metals were difficult to procure so slowly paper money or currency notes began to replace them. Now the government or government authorized body in a country issues currency notes for circulation.
In India, the Reserve Bank of India issues currency notes. On the currency note you can observe the statement promising a particular amount to be paid to the bearer of the currency note.
Money removed the coincidence of wants factor and smoothened exchange facilitating economic activity.
Other Forms of Money
Deposits with Banks:- The other form in which people hold money is as deposits with banks. At a point of time, people need only some currency for their day-to-day needs. Banks accept the deposits and also pay an interest rate on the deposits. In this way people’s money is safe with the banks and it earns an interest. People also have the provision to withdraw the money as and when they require. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.
The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash. Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.
Credit:- Banks keep only a small proportion of their deposits as cash with themselves. For example, banks in India these days hold about 15 per cent of their deposits as cash. This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day. Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash. Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities.
Banks make use of the deposits to meet the loan requirements of the people. In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.Show more
Barter System : Goods are exchanged without use of money. Double Coincidence of wants : In exchange of goods both parties have to agree to sell and buy each others commodities. In a barter system double coincidence of wants is an essential feature.
Medium of Exchange : Money act as an intermediate in the exchange process. Currency is authorised by the government as medium of exchange.
- People deposit extra cash with the banks by opening the bank account in their name.
- The deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.
- A check is a paper instructing the bank to pay a specific amount from the persons account to the person in whose name the cheque has been made.
Loan Activities of Banks
- Banks in India these days bold about 15% of their deposits as cash.
- Kept as provision to pay the depositors who might come to withdraw money from the bank on any given day.
- Bank use the major portion of the deposits to extend loans.
- Difference between the interest rates is the main source of income for banks.
Terms of Credit
- Interest rate
- Documentation requirement.
- The mode of repayment. the varying terms of credit in different credit arrangements.
Formal Sector Credit in India
Loans from banks and co-operatives Functions of Reserve banks.
- Issues currency notes on behalf of the central government.
- RBI monitors the banks are actually maintaining cash balance.
- RBI collect information from banks, how much they are lending to whom, at what interest rate etc.
Informal Sector Loans
The informal lenders, traders, employers, relatives and friends etc.
- There is no organisation which supervise the credit activities of lenders.
- They can lend at what ever interest rate they choose.
- Their is no one to stop then from using unfair means to get their money back.
1. How does money solve the problem of double coincidence of wants? Explain with an example.
2. What is check? How payments made with cheques? Explain with example.
3. How does RBI control the functioning of other banks? Why it is important
4. Why people take more loan from Informal Sector.
5. Compare the employment conditions prevailing in the organised and unorganised sectors.
6. Explain the objective of implementing the NREGA 2005
Class X Social Science All Topics Notes
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