Barter is the direct exchange of goods and services without the use of money.
Money is anything that is generally accepted as a medium of exchange for goods and services.
One important function of money is to serve as a medium of exchange.
Cheques and credit cards are examples of non-legal tender money.
Representative paper money is paper currency that is fully backed by and convertible into precious metals.
A bank is a financial institution that accepts deposits and lends money to borrowers.
The Reserve Bank of India was set up in the year 1935.
Current deposit is a bank account that allows unlimited withdrawals and deposits without interest.
The lack of double coincidence of wants means that for a barter exchange to occur, both parties must have what the other wants at the same time and in the right quantity. This creates significant problems as it makes trading difficult and time-consuming. People have to spend considerable time and effort searching for suitable trading partners. This inefficiency limits the scope and scale of economic transactions in a barter system.
Store of value refers to the ability of money to hold its purchasing power over time. Money can be saved and used for future transactions without significant loss of value. This function allows people to defer consumption and plan for the future. However, during inflation, money's function as a store of value diminishes as its purchasing power decreases.
General acceptability is the most important characteristic of money because without it, money cannot perform its basic functions. For money to serve as a medium of exchange, store of value, and standard of deferred payment, it must be widely accepted by all members of society. Other characteristics like durability, portability, and divisibility support general acceptability but are secondary to it.
Liquidity of money refers to how easily and quickly money can be converted into goods and services without loss of value. Money is considered the most liquid asset because it can be immediately used for transactions. High liquidity means an asset can be readily converted to cash or used for payments. This characteristic makes money highly desirable for transactions and emergency needs.
Money serves as a common measure of value by providing a standard unit in which the values of different goods and services can be expressed and compared. This function eliminates the need for multiple exchange rates between various commodities. It simplifies price determination and facilitates accounting and economic calculations. Without this function, economic transactions would be much more complex and inefficient.
Unlimited legal tender must be accepted for payment of any amount, while limited legal tender can only be used for payments up to a specified maximum amount. For example, in India, rupee coins are limited legal tender for small amounts, while currency notes are unlimited legal tender. This distinction helps manage small transactions and prevents inconvenience in daily economic activities.
Regional Rural Banks (RRBs) provide banking facilities in rural areas, mobilize rural savings, provide credit to agricultural and rural sectors, and implement government schemes for rural development. They aim to bridge the credit gap in rural areas and promote financial inclusion. RRBs offer basic banking services at affordable costs to the rural population and support agricultural activities and small-scale industries.
Non-Banking Financial Institutions (NBFIs) cannot accept demand deposits like banks, are not part of the payment system, have different regulatory frameworks, and focus on specific financial services rather than comprehensive banking. While banks provide a full range of banking services including current accounts, NBFIs specialize in activities like hire-purchase, leasing, or investment services. They complement banks but operate under different rules and restrictions.
The barter system suffers from several significant demerits that limit economic efficiency. First, it requires double coincidence of wants, meaning both parties must want what the other has to offer. Second, there is no common measure of value, making it difficult to compare the worth of different goods and services. Third, the system lacks a store of value as many goods are perishable and cannot be saved for future use. Fourth, barter makes deferred payments impossible since goods cannot be standardized for future transactions. These limitations restrict economic growth and complicate trade relationships.
Money possesses several essential characteristics that make it effective as a medium of exchange. General acceptability is crucial as money must be widely accepted by all economic participants. Durability ensures that money can withstand repeated use without deteriorating. Portability allows money to be easily carried and transferred between parties. Divisibility enables money to be divided into smaller units to facilitate transactions of varying sizes. These characteristics collectively make money efficient for conducting economic transactions and supporting complex economic systems.
Money performs several vital functions in modern economies. As a medium of exchange, it eliminates the need for barter by providing a common means for transactions. As a measure of value, it serves as a standard unit for pricing goods and services. As a store of value, it allows wealth to be saved for future use. As a standard of deferred payment, it facilitates credit transactions and future contracts. These functions make money indispensable for economic activities, enabling specialization, trade, and economic growth while providing stability to the financial system.
Cheques are not considered money in the strict economic sense, but rather near-money or money substitutes. While cheques function as a medium of exchange and are widely accepted for payments, they lack general acceptability as not all parties are obliged to accept them. Cheques are essentially instructions to banks to transfer money from one account to another. They derive their value from the money deposited in bank accounts. Unlike legal tender money, cheques can be dishonored or refused, making them less reliable than currency for transactions.
Despite its benefits, money creates several problems in modern economies. Inflation erodes the purchasing power of money, reducing its value over time. Deflation can lead to economic stagnation as people delay purchases expecting lower prices. Black money and corruption often involve the misuse of money for illegal activities. Economic inequalities are exacerbated as money tends to concentrate in fewer hands. Additionally, money can promote materialism and consumerism, potentially undermining social values and relationships while creating psychological stress related to financial matters.
The Central Bank performs several crucial functions in a country's financial system. As the sole issuer of currency, it has monopoly over note issue, ensuring uniformity and control over money supply. It acts as banker to the government, managing its accounts and facilitating borrowing through securities. As banker's bank, it maintains reserves of commercial banks and provides them with credit facilities. It regulates credit in the economy through various monetary policy instruments like bank rate, open market operations, and reserve requirements. These functions help maintain monetary stability and support economic growth.
Commercial banks perform two fundamental functions that are crucial for the economy. First, they accept deposits from the public through various accounts like savings, current, and fixed deposits, providing safety and liquidity to depositors while paying interest on certain deposits. Second, they provide loans and advances to individuals, businesses, and industries, thereby creating credit in the economy. This credit creation process significantly expands the money supply and facilitates economic activities. Through these functions, commercial banks mobilize savings and channel them into productive investments, supporting economic growth and development.
(i) IDBI: Industrial Development Bank of India provides long-term finance to industrial projects and coordinates working of institutions engaged in industrial finance. It also promotes industrial development through technical assistance and consultancy services.
(ii) RRBs: Regional Rural Banks provide credit facilities to small farmers and agricultural laborers and mobilize rural savings through various deposit schemes. They also implement government-sponsored poverty alleviation programs in rural areas.
(iii) NABARD: National Bank for Agriculture and Rural Development provides refinance facilities to banks for agricultural and rural development and coordinates rural financing activities of all institutions. It also promotes research in agriculture and rural development.
(iv) SIDBI: Small Industries Development Bank of India provides direct and indirect assistance to small-scale industries and coordinates functions of institutions engaged in similar activities. It also promotes modern technology and marketing support for small enterprises.