Welcome dear students! Today we are going to learn about Money and Credit from Class 9 Social_Science. We will explore the importance, evolution, and functions of money. We will study indigenous bankers and types of credit, the evolution of banks and their types, the introduction of different types of bank deposits, and the establishment and functions of the Central Bank of India. Note this for your exams, as money is a fundamental discovery. It has eased day-to-day transactions, valuing goods and services, and has allowed us to store wealth and trade in the future. Money buys goods and services. It is generally accepted as a means of payment, measure, and store of value. According to Robertson, money is anything which is widely accepted in payment for goods or in discharge of other business obligations. The word money is derived from the Roman word Moneta Juno. The Indian rupee is derived from the Sanskrit word Rupya, which means silver coin.
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Let us now discuss the evolution of money. Today we use paper notes and coins, but reaching this stage took thousands of years. The earliest and most primitive stage is the Barter system. In this stage, humans exchanged goods for goods without using money. Barter was an extremely difficult method of trade involving lots of time and energy. For example, if person A had a cow and wanted sheep in exchange, person A had to search for an individual who not only had a sheep, but also needed a cow in exchange. If person A finally finds such an individual, the question arises: how many sheep are equivalent to one cow? Hence, the Barter system had many deficiencies, including lack of double coincidence of wants, lack of a common measure of value, indivisibility of commodities, and difficulties of storing wealth. The next stage of evolution was commodity money.
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In commodity money, a commodity with a prescribed size and weight was adopted as money, and everything else was measured in terms of that standard commodity. Different commodities served as commodity money in different economies. For example, cattle were used in Greece, sheep in Rome, and teeth in China. The introduction of money as a unit of account did not solve all the difficulties of barter. The next stage is metallic money. Precious metals, especially gold, silver, and bronze, were used for metallic money. The standard weight and fineness of metal, especially gold and silver, with a seal on it, became a medium of exchange. They were of different denominations, easily divisible, portable, and convenient in making payments. The next stage of development is paper money.
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Metallic money was unsafe to carry from one place to another. Hence, traders began to carry written documents issued by known financiers as evidence of the quantity of money at their command. These written documents were not actual money, but were accepted because they were readily exchanged for money on demand. People gradually became accustomed to bank notes, and they were used not merely as substitutes, but as actual money. This happened because the respective governments gave the monopoly of note issue to their central banks, making it legal tender. No individual can refuse legal tender in transactions in the respective country. In India it is the rupee, in the United States of America it is the dollar, in the United Kingdom it is the pound, in Germany it is the mark, in Japan it is the yen, and in China it is the yuan renminbi.
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As trade and commerce flourished, bank money came into existence. Cheques, drafts, debit cards, and credit cards are examples. Money can be transferred from deposit to deposit or from deposit to cash with the help of cheques. Cheques are used for transactions of goods and services and are also called near money assets. A credit card enables the holder to buy goods and services on credit at specified suppliers. The credit card is swiped on an electronic machine, and payment is made to the seller account from the buyer credit account. A debit card works similarly, but the money is deducted directly from the buyer savings account. Now let us learn about the functions of money.
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Functions of money are classified into primary functions, secondary functions, and contingent functions. The primary functions are medium of exchange or means of payment, and measure of value. Money is used to buy goods and services. It is obtained by selling commodities in the market, and goods and services are purchased using money. As a measure of value, all values are expressed in terms of money, making it easier to determine the rate of exchange between various types of goods and services. The secondary functions are standard of deferred payments, store of value or store of purchasing power, and transfer of value or transfer of purchasing power. Money helps with future payments. A borrower borrowing today places himself under an obligation to pay a specified sum of money on a specified future date. Similarly, a person buying on time agrees to pay a stated amount on a specified future date.
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The introduction of money has helped save it for the future as it is not perishable. It has also made the exchange of goods to distant places and abroad possible, transferring purchasing power from one place to another. Borrowing and lending take place in terms of money, allowing people to use surplus money for production, lending loans, and earning interest. In addition to primary and secondary functions, money performs contingent functions. These are basis of credit and increase productivity of capital. Money forms the basis of credit, and the cheque system has further allowed credit creation by banks. Money in the form of capital is put to several uses. The liquidity feature of money has helped capital transfer from less productive to more productive uses.
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Now, let us discuss types of credit. Credit refers to an agreement in which the lender supplies the borrower with money, goods, or services in return for the promise of future payment. In India, we have two forms of credit: the formal credit sector and the informal credit sector. The informal credit sector includes indigenous bankers called Shroffs, Mahajans, Shets, Sahukars, and Chettis. They are basically money lenders. Until the middle of the nineteenth century, indigenous banks were the central part of India financial system. The advent of European bankers disturbed their monopoly due to government patronage, but money lenders still played a major role. Post independence, the Government of India took initiatives to free the credit system from money lenders.
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The government nationalized 14 commercial banks in 1969, 6 in 1980, and established Regional Rural Banks for rural credit needs. Unfortunately, money lenders still cater to a sizeable share of rural credit. The formal credit sector is distributed by banks and cooperatives. They do not charge exorbitant interest rates. Their intention is not just earning profits, but also fulfilling social responsibility, regulated and supervised by the Reserve Bank of India. Banks play a vital role in economic development. The English term bank is believed by some to be derived from the Italian word Banco, meaning a bench. Others believe it comes from the German word Banck, meaning a joint stock fund or common fund.
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The Banking Regulation Act of 1949 defined a Banking Company as any company which transacts the business of banking in India, and banking as accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise withdrawable by cheque, draft, order or otherwise. Banks mobilize public savings by offering attractive interest rates, aiding capital formation. They provide convenient payment via cheques, give higher interest on fixed deposits, lend at market rates, help develop agriculture, industries, and services, discount bills of exchange, offer demand drafts and cards, invest in securities, and play a major role in credit creation. Types of banks include Industrial Banks, Exchange Banks, Savings Banks, Co-operative Banks, and Land Mortgage Banks.
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Industrial banks cater to short-term and long-term loans for industries, lending for long periods to provide fixed capital. Examples include Industrial Finance Corporation, Industrial Credit and Investment Corporation, Industrial Development Bank of India, and various State Finance Corporations. Exchange banks finance foreign trade, deal in foreign currency, and mainly discount, accept, and collect foreign bills of exchange. Savings banks encourage saving habits among low-income groups and mobilize small savings. In India, this is done by post offices and commercial banks. Co-operative banks run on cooperation, registered under the Co-operative Societies Act, serving only members. Land Mortgage Banks are co-operative banks giving long-term loans to agriculturists for permanent land improvements like drainage, irrigation, and farm buildings. They are also called Land Development Banks.
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Commercial banks collect current account deposits, savings account deposits, and fixed or term deposits. Current accounts are opened by business firms, traders, and public authorities for convenient cheque payments rather than earning interest. They are repayable on demand. Savings deposits are for customers saving part of their income, withdrawable when required, earning a small interest. Fixed deposits are for investors wanting safe principal and fixed yields, fixed for a specified period, also called term deposits. Now, let us study the Reserve Bank of India. It is the central bank of India, established on 1 April 1935, initially as a shareholder bank. It was nationalized on 1 January 1949, and since then is owned and controlled by the Government of India.
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The preamble of the Reserve Bank of India describes its basic functions as to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. Functions of the central bank include monopoly of note issue. The Reserve Bank of India has the monopoly of issuing currency notes of 2 rupees and above, namely 5, 10, 100, 200, and 500 rupees. One rupee is issued and circulated by the Reserve Bank of India on behalf of the Government, though the right of issue of one rupee notes or coins is with the Central Government. It acts as banker to the government. It accepts deposits of Central and State Governments, collects taxes and charges, makes payments on instruction, issues government bonds and treasury bills, acts as financial adviser, and extends ways and means advances.
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Ways and means advances are not commercial bank credit. This facility meets temporary mismatches between revenue collections and expenditures, governed by agreements between the Reserve Bank of India and the concerned government. It acts as bankers bank, controlling all banks, requiring them to keep reserves in the Reserve Bank of India, providing credit when needed, and guiding monetary management. It acts as a national clearing house for economical settlement of banking transactions, helping banks settle inter-bank claims easily. It acts as controller of credit, controlling or expanding commercial bank credit creation using quantitative and qualitative methods. It is custodian of foreign exchange reserves, maintaining exchange rates by buying and selling foreign currencies to minimize fluctuations.
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It publishes economic statistics and other information, collecting and publishing data on economics, finance, currency, financial conditions, annual reports, monetary policy committee reports, state finances, and the handbook of statistics on the Indian economy. It promotes banking habits by institutionalizing savings and expanding banking in unbanked areas. It provides facilities for agriculture, extending indirect financial facilities regularly. Through the National Bank for Agriculture and Rural Development, it provides short-term and long-term financial facilities to agriculture and allied activities. The Reserve Bank plays an important role in India development strategy, with a rich tradition of data collection, economic research, and knowledge sharing, helping the nation overcome financial crises. Before we proceed to exercises, here is an interesting fact you should know.
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The oldest existing central bank is Sweden Riks Bank, established in 1668. Britain Central Bank, the Bank of England, was established in 1694. The United States of America Central Bank, the Federal Reserve System, was established in 1913. Now, let us solve the exercises to prepare for your exams. First, fill in the blanks with suitable words. Question one: Indian rupee is derived from Rupya. Question two: Cheque is an instrument from bank money. Question three: The banks which deal with foreign currency are called exchange banks. Question four: The Reserve Bank of India was established in the year 1935. Question five: The money of Japan is yen. Question six: Government of India nationalized 14 commercial banks in 1969.
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Now, answer the following questions. Question seven asks what is the Barter exchange system. The Barter exchange system is the primitive stage where humans exchanged goods for goods without the use of money. It was extremely difficult, requiring double coincidence of wants and facing issues like lack of common measure of value, indivisibility of commodities, and difficulty storing wealth. Question eight asks to state the means of money. The means of money refers to its primary function as a medium of exchange or means of payment, where money is used to buy goods and services obtained by selling commodities in the market. Question nine asks which is the central bank of India. The Reserve Bank of India is the central bank of India.
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Question ten asks to explain the functions of money. The functions of money are classified into primary, secondary, and contingent functions. Primary functions are medium of exchange and measure of value. Secondary functions are standard of deferred payments, store of value, and transfer of value. Contingent functions are basis of credit and increase productivity of capital. Each function facilitates trade, savings, future payments, and capital allocation in the economy. Question eleven asks to mention the different types of banks. The different types of banks are Industrial Banks, Exchange Banks, Savings Banks, Co-operative Banks, and Land Mortgage Banks. Question twelve asks to explain the functions of the Reserve Bank of India.
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The functions of the Reserve Bank of India are monopoly of note issue, acting as banker to the government, acting as bankers bank, acting as national clearing house, acting as controller of credit, custodian of foreign exchange reserves, publishing economic statistics and other information, promotion of banking habits, and providing facilities for agriculture through the National Bank for Agriculture and Rural Development. For activities, you are asked to give a report on the functions of commercial banks with real observation, and visit your nearest bank to observe their functions. For your project, explain the evolution of money with pictorial information, starting from the barter system, moving through commodity money, metallic money, paper money, and finally bank money like cheques and cards, illustrating each stage clearly. Thank you for listening! Keep revising and practicing. Goodbye! [CHAPTER_COMPLETE]