CBSE Class 12 Economics Evolution of Money

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Money is anything which can serve as a medium of exchange. Historically, all sorts of things like animals, agricultural produce, metals have been used as a medium of exchange. Today, it is prominently paper money, i.e. the currency notes. Although today paper money is prominent, yet instances of agricultural produce, metals, etc. can be found here and there, particularly in villages. In many Indian villages ‘food for work’ is still a practice. This shows that many mediums of exchange existed side by side but only one medium or the other found a prominent place.

Since many mediums of exchange existed simultaneously we can talk of evolution of money in terms of the prominence of the mediums. Upto first half of the 18th century, the mediums of exchange were goods with increasing use of metals, particularly gold and silver. The paper money was introducad in the organised manner for the first time around 1750’s. So from around 1750’s till 1930’s gold and silver were prominently used but at the same time there was increasing use of paper money. Why did gold and silver found prominence during this phase?

There were many reasons. First, gold and silver were widely accepted in monetary transactions, like buying and selling, borrowing and lending, for storing wealth, etc. Second they  were in limited supply. Third, they are durable nearly non-perishable. Fourth, gold and silver caneasily be divided into monetary units.

From 1930’s onwards most countries are now using paper currency as a prominent, and nearly exclusive, medium of exchange. Why so? It is mainly because of phenomenal rise in the volume of transactions needing more and more of money. But why gold and silver were found wanting? The main reason was their limited supply.

The world’s production of gold and silver was not enough to match the requirements of increasing volume of internal and external trade. Even if supply was sufficient, inconvenience in handling large transactions, lack of safety during transportation of metals, etc. came in the way of using gold and silver as a prominent medium. Note that today paper currency is in prominence as a medium of exchange, people still prefer to hold gold and silver. They hold not because it can be used as a medium of exchange, but because it is durable and easily convertible into paper currency for use as a medium of exchange.


Commercial Banks

Banking is defined as the accepting, for the purpose of lending or investment of deposits, money from the public, repayable on demand or otherwise and withdrawable by cheque, draft,order or otherwise. Thus the two essential functions of banks are to accept chequable deposits from the public and lending.

 Acceptance of chequable deposits is a necessary, but not sufficient condition for Financial Institution (FI) to be a bank. For example, post office savings banks are not banks in this sense of the term even though they accept deposits from the public. This is because they do not perform the other essential function of lending.

Similarly, lending alone does not make FI a bank. For example, many FIs like LIC, UTI, and IFC, etc, lend to others but they are not banks in this sense of the term, as they do not accept chequable deposits.

The main functions that commercial banks perfom are :

1. Acceptance of Deposits 

The bank accepts three types of deposits from the public.  Current Account Deposits : Deposits in current accounts are payable on demand. They can be drawn upon by cheque without any restriction. These accounts are usually maintained by businesses and are used for making business payments. No interest is paid on these deposits. However, the banks offer various services to the account holders for a nominal charge, the most important being the cheque facility. Banks keep regular accounts of all transactions made in a particular account and submit statements of the same to the account-holder at regular intervals.


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