Economy Class 10 : Concept of Money

Concept of Money 

• Cash is known as a mode of trade as it goes about as a transitional in the trade cycle. An individual holding cash can without much of a difficulty, can trade it anywhere or with administration that the person may need.       
• Money acts as an intermediate in the exchange process and is called a medium of exchange.
• Due to its role as an intermediate in transactions, forms and essence of money have changed over time, earlier grain and cattle were used for transactions in ancient periods to which became coins, later on, to further modern forms of money today. 
• The main function of Money is to eliminate the need for double coincidence of wants.
• Take the case of a cloth manufacturer. He wants to sell clothes in the market and buy rice.
• The cloth manufacturer will first exchange cloth that he has produced for money, and then exchange the money for rice.        
• Also imagine a case where the cloth manufacturer had to directly exchange cloth for rice without the use of money. He would have to look for a wheat growing farmer who not only wants to sell rice but also wants to buy the cloth in exchange. Both the parties have to agree to sell and buy each other’s commodities.

Functions of Money

• The first and foremost role of money is that it acts as a common medium of exchange.
• Money also acts as a convenient unit of account.

Demand for Money

Money is required for any transaction and the value of transactions will determine the money people will want to keep. The larger is the quantum, larger is the quantity of money demanded.

Supply of Money

In a modern economy, money comprises cash and bank deposits. The money is supplied mainly through two types of institutions, i.e. the central bank and the commercial banks.

Central bank

The Reserve Bank of India acts as a Central Bank and has the power to issue currency and control money supply. It acts as a banker to the government and custodian of the foreign exchange reserves of the economy. It also acts as a bank to the banking system. The Reserve Bank regulates supply of money and controls the stock, the bank rate and reserve requirements of the commercial banks.

Commercial Banks

Commercial banks accept deposits from the public and lend out to those who are in need. They act as a mediator between individuals or firms with excess funds and lend to those who need funds. People with excess funds keep their funds in the form of deposits in these banks and those who need funds borrow funds from them.

Modern forms of Money

Currency        

• Present-Day types of cash incorporate money-paper notes and coins.
• Today, the currency is not made of precious metals but is still accepted as a medium of exchange, as it is authorised by the government. 
• In India, only the Reserve Bank of India issues currency notes on behalf of the central government.
• No person in India can legitimately deny an installment made in rupees.        

Deposits with Banks

• The other structure in which individuals hold cash is with banks.
• Excess money after fulfilling day to day needs is deposited with the banks by opening a bank account.        
• Stores in the ledger which can be removed on request are called request stores.  

Loan Activities of Banks      

• Banks use a significant portion of the deposits to expand credits for different monetary exercises.        
• Thus, banks mediate between the individuals who have excess assets (the investors) and the people who are needing these assets (the borrowers). 
• Banks charge a higher financing cost on advances than what they offer in stores.
• The distinction between what is charged from borrowers and what is paid to investors is the fundamental kind of revenue for banks.

Credit Situations 

Credit (loan) refers to an understanding wherein the lender supplies the borrower with cash, labour and products as a trade-off for the guarantee of a future payment. 

Reasons for Credit

• To meet the functioning capital necessities of creation. 
• To meet the continuous costs of creation, complete creation on schedule, and in this way increment his income. 
• To satisfy the interest in credit in country regions for crop creation which includes extensive expenses on seeds, composts, pesticides, water, power, fix of hardware, and so forth.
• On one hand, credit assists with expanding the profit while on other hand it might drive the individual into an obligation trap (e.g., during crop disappointment).

Conclusion

Money facilitates exchanges by acting as a commonly acceptable medium of exchange. Some countries have made an attempt to move towards a cashless economy. In India, the government is consistently investing in various reforms for greater financial inclusion. During the last few years’ initiatives such as Jan Dhan accounts, Aadhar enabled payment systems, e –Wallets, National financial Switch have strengthened this objective. In India, the supply of money is regulated by the Reserve Bank of India which acts as the monetary authority of the country.