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When we turn the pages of history we will find that money was used in various forms at various times. The different materials that were used as currencies, the different goods that were exchanged in trade make a very interesting story.

Today in this modern world newer forms of money are slowly spreading with computerisation of the banking system.

Money and credit go hand in hand. Credit is a crucial element in economic Life. The other crucial issue of credit is its availability to all, especially the poor, and on reasonable terms. Without credit a large section of people would be kept out of the development process.

Money as a Medium of Exchange

The use of money spans a very large part of our everyday life. Several transactions involving money are made in any single day.

1) Goods are being bought and sold with the use of money.
2) Services are being exchanged with money.
3) Goods are also bought with a promise to pay money later.
4) Money is sometimes paid as advance with the promise of delivery of goods later.

In the olden days, when modern currency was not in vogue, people had to sell and buy each others commodities. This was called the barter system. For instance if a shoe manufacturer wants to buy wheat, he has to find a farmer who wants to buy his shoes in exchange for the wheat. That is, both parties have to agree to sell and buy each others commodities. This is known as double coincidence of wants. In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature.

The barter system proved very inconvenient and the need for some form of payment in exchange for ones goods became a necessity. Everyone prefers to receive payments in money ( in some form or the other ) and then exchange the money for things that they want. For instance , shoe manufacturer will now first exchange shoes that he has produced for money, and then exchange the money for wheat or any other product he wants , instead of going in search of a trader who wants to sell what he wants to buy.


Since money acts as an intermediate in the exchange process, it is called a medium of exchange.

Modern forms of Money

As the need for a medium of exchange became a necessity different materials were used as a medium of exchange. Initially Indians used grains and cattle as money. Before the introduction of coins, a variety of objects was used as money. Thereafter came the use of metallic coins — gold, silver, copper coins — a phase which continued well into the last century.



As time progressed, trade increased and a global market was created. With the global market came the need for a more convenient medium of exchange. Thus was born the modern forms of money - paper notes (currency) and coins.

 Modern currency is not made of precious metal such as gold, silver and copper. And unlike grain and cattle, they are neither of every day use.

The modern currency is without any use of its own. Still, it is accepted as a medium of exchange because the currency is authorised by the government of the country.

In India, the Reserve Bank of India issues currency notes on behalf of the central government. As per Indian law, no other individual or organisation is allowed to issue currency. As also no individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange.

Currencies of Different Countries

In different countries different currencies are used:

i) USA - dollar
ii) Britain – Pound Sterling
iii) Canada – Canadian dollar
iv) Singapore – Singapore dollar
v) China – Chinese Yuan renminbi
vi) Japan – Japanese yen
vii) Australia – Australian dollar
viii) Sri Lanka - Sri Lankan rupee.

Deposits with Banks

At a point of time, people need only some currency for their day-to-day needs.
So people deposit the extra money with the banks by opening a bank account in their name. 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.


A deposit in a Bank offers the customer the facility of issuing cheques. A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been made. The recipient of the cheque can deposit it in his own account in his bank. The money is transferred from one bank account to another bank account in a couple of days. The transaction is complete without any payment of cash. This is a safe mode of transferring money avoiding the possibility of any theft.

Without Banks there are no demand-deposits.
Without demand-deposits there is no modern banking.


Loan Activities of Banks
Let us see what the banks do with the deposits they receive.

 1) Banks keep a small proportion of their deposits as cash with themselves to pay the depositors who might come to withdraw money from the bank on any given day.

 2) Banks use the major portion of the deposits to extend loans. In this way, banks mediate between those who have surplus funds (the depositors) 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.

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