Money and Banking Class 12 Notes

What is Money?

Money is the habitually accepted mode of exchange. In an economy that comprises only one individual, there cannot be any exchange of goods and therefore, there is no part for money. Money is anything that is generally accepted as a means of exchange and at the same time acts as a measure and as a store of value.

Economic exchanges without the conciliation of money are known as barter exchanges or barter systems. However, they presume a rather unlikely double coincidence of wants. 

For instance, an individual who has an excess amount of rice that he or she wishes to trade for clothing. If he or she is not fortunate enough, he or she may be unable to find another person who has the absolute opposite demand for rice with an excess of clothing to offer in exchange. 

The search costs may become restrictive as the number of individuals goes high. Hence, to smoothen the transaction, an intermediate commodity is necessary that is suitable and acceptable to both the parties. Such a commodity is known as money. 

The individuals can then sell their products for money and use this money to buy the goods they need. Though the help of exchanges is contemplated to be the primary role of money, it serves other causes as well.

Also, read: What is Supply of Money?

What is Banking?

Banking is a trade of accepting deposits and lending money. It is functioned by financial intermediaries that executes the functions of shielding deposits and furnishing loans to the public.

To put it in other words, banking means accepting for the cause of lending or investment of deposits of money from public outstanding on-demand and can be withdrawn by cheque, draft order.

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