NCERT Textbook: Money & Credit | Indian Economy for UPSC CSE PDF Download

 Page 1


NOTES FOR THE TEACHER
CHAPTER 3 : MONEY AND CREDIT
Money is a fascinating subject and full of
curiosities. It is important to capture this
element for the students. The history of
money and how various forms were used at
different times is an interesting story. At this
stage the purpose is to allow students to
realise the social situation in which these
forms were used. Modern forms of money are
linked to the banking system. This is the
central idea of the first part of the chapter.
The present situation in India, where
newer forms of money are slowly spreading
with computerisation of the banking system,
offers many opportunities to students to
explore on their own. We need not get into a
formal discussion of the ‘functions of money’
but let it come up as questions. There are
certain areas that are not covered, such as
‘creation of money’ (money multiplier) or the
backing of the modern system that may be
discussed if you desire.
As you would see in the chapter, the stock
of money consists of currency held by the
public and the demand deposits that they hold
with the banks. This is the money that people
can use as they wish and the government has
to ensure that the system works smoothy.
What would happen when the government
declares that some of the currency notes used
by people would be made invalid and would be
replaced by new currency? In India, during
November 2016, currency notes in the
denomination of Rs. 500 and Rs. 1,000 were
declared invalid. People were asked to
surrender these notes to the bank by a specific
period and receive new Rs. 500, Rs. 2,000 or
other currency notes. This is known as
‘demonetisation’. Since then, people were also
encouraged to use their bank deposits rather
than cash for transactions. Hence, digital
transactions started by using bank-to-bank
transfer through the internet or mobile
phones, cheques, ATM cards, credit cards,
and Point of Sale (POS) swipe machines at
shops. This is promoted to reduce the
requirement of cash for transactions and also
control corruption. Students could be asked
to debate on the process and the impact of
demonetisation. They can be guided to make
a collage of the major areas where people use
digital and cash transactions which are
legitimate and legal. They can also discuss the
transactions which are legal and why. It is also
important to intimate students that different
types of plastic cards are used in place of cash
transactions but not all of them money per se.
Credit is a crucial element in economic
life and it is, therefore, important to first
understand this in a conceptual manner.
What are the aspects that one looks at in
any credit arrangement and how this affects
people is the main focus of the second part
of the chapter. The world around us offers a
tremendous variety of such arrangements
and it would be ideal to explain these
aspects of credit from situations that are
familiar to your students. The other crucial
issue of credit is its availability to all,
especially the poor, and on reasonable
terms. We need to emphasise that this is a
right of the people and without which a large
section of them would be kept out of the
development process. There are many
innovative interventions, such as that of
Grameen Bank, of which students may be
made familiar with but it is important to
realise that we don’t have answers to all
questions. We need to find new ways and
this is one of the social challenges that
developing countries face.
Sources for Information
The data on formal and informal sector credit
used in this chapter is drawn from the
survey on rural debt by the National Sample
Survey Organisation (All India Debt and
Investment Survey, 70
th
 Round 2013,
conducted by NSSO) now known as National
Statistical Office (NSO). The information and
data on Grameen Bank is taken from
newspaper reports and websites. In order
to get the details of bank-related statistics
or a particular detail of a bank, you can log
on to the websites of the Reserve Bank of
India (www.rbi.org) and the concerned
banks. Data on self-help groups is provided
on the website of the National Bank for
Agriculture and Rural Development
(NABARD) (www.nabard.org).
38 38 38 38 38 U U U U UNDERST NDERST NDERST NDERST NDERSTANDING ANDING ANDING ANDING ANDING E E E E ECONOMIC CONOMIC CONOMIC CONOMIC CONOMIC D D D D DEVEL EVEL EVEL EVEL EVELOPMENT OPMENT OPMENT OPMENT OPMENT
2024-25
Page 2


NOTES FOR THE TEACHER
CHAPTER 3 : MONEY AND CREDIT
Money is a fascinating subject and full of
curiosities. It is important to capture this
element for the students. The history of
money and how various forms were used at
different times is an interesting story. At this
stage the purpose is to allow students to
realise the social situation in which these
forms were used. Modern forms of money are
linked to the banking system. This is the
central idea of the first part of the chapter.
The present situation in India, where
newer forms of money are slowly spreading
with computerisation of the banking system,
offers many opportunities to students to
explore on their own. We need not get into a
formal discussion of the ‘functions of money’
but let it come up as questions. There are
certain areas that are not covered, such as
‘creation of money’ (money multiplier) or the
backing of the modern system that may be
discussed if you desire.
As you would see in the chapter, the stock
of money consists of currency held by the
public and the demand deposits that they hold
with the banks. This is the money that people
can use as they wish and the government has
to ensure that the system works smoothy.
What would happen when the government
declares that some of the currency notes used
by people would be made invalid and would be
replaced by new currency? In India, during
November 2016, currency notes in the
denomination of Rs. 500 and Rs. 1,000 were
declared invalid. People were asked to
surrender these notes to the bank by a specific
period and receive new Rs. 500, Rs. 2,000 or
other currency notes. This is known as
‘demonetisation’. Since then, people were also
encouraged to use their bank deposits rather
than cash for transactions. Hence, digital
transactions started by using bank-to-bank
transfer through the internet or mobile
phones, cheques, ATM cards, credit cards,
and Point of Sale (POS) swipe machines at
shops. This is promoted to reduce the
requirement of cash for transactions and also
control corruption. Students could be asked
to debate on the process and the impact of
demonetisation. They can be guided to make
a collage of the major areas where people use
digital and cash transactions which are
legitimate and legal. They can also discuss the
transactions which are legal and why. It is also
important to intimate students that different
types of plastic cards are used in place of cash
transactions but not all of them money per se.
Credit is a crucial element in economic
life and it is, therefore, important to first
understand this in a conceptual manner.
What are the aspects that one looks at in
any credit arrangement and how this affects
people is the main focus of the second part
of the chapter. The world around us offers a
tremendous variety of such arrangements
and it would be ideal to explain these
aspects of credit from situations that are
familiar to your students. The other crucial
issue of credit is its availability to all,
especially the poor, and on reasonable
terms. We need to emphasise that this is a
right of the people and without which a large
section of them would be kept out of the
development process. There are many
innovative interventions, such as that of
Grameen Bank, of which students may be
made familiar with but it is important to
realise that we don’t have answers to all
questions. We need to find new ways and
this is one of the social challenges that
developing countries face.
Sources for Information
The data on formal and informal sector credit
used in this chapter is drawn from the
survey on rural debt by the National Sample
Survey Organisation (All India Debt and
Investment Survey, 70
th
 Round 2013,
conducted by NSSO) now known as National
Statistical Office (NSO). The information and
data on Grameen Bank is taken from
newspaper reports and websites. In order
to get the details of bank-related statistics
or a particular detail of a bank, you can log
on to the websites of the Reserve Bank of
India (www.rbi.org) and the concerned
banks. Data on self-help groups is provided
on the website of the National Bank for
Agriculture and Rural Development
(NABARD) (www.nabard.org).
38 38 38 38 38 U U U U UNDERST NDERST NDERST NDERST NDERSTANDING ANDING ANDING ANDING ANDING E E E E ECONOMIC CONOMIC CONOMIC CONOMIC CONOMIC D D D D DEVEL EVEL EVEL EVEL EVELOPMENT OPMENT OPMENT OPMENT OPMENT
2024-25
M M M M MONEY ONEY ONEY ONEY ONEY     AND AND AND AND AND C C C C CREDIT REDIT REDIT REDIT REDIT 39 39 39 39 39
The use of money spans a very large
part of our everyday life. Look around
you and you would easily be able to
identify several transactions involving
money in any single day. Can you
make a list of these? In many of these
transactions, goods are being bought
and sold with the use of money. In
some of these transactions, services
are being exchanged with money.  For
some, there might not be any actual
transfer of money taking place now
but a promise to pay money later.
Have you ever wondered why
transactions are made in
money? The reason is simple.
A person holding money can easily
exchange it for any commodity or
service that he or she might want.
Thus everyone  prefers to receive
payments in money and then
exchange the money for things that
they want.  Take the case of a shoe
manufacturer. He wants to sell shoes
in the market and buy wheat.  The
shoe manufacturer will first exchange
shoes that he has produced for
money, and then exchange the money
for wheat. Imagine how much more
difficult it would be if the shoe
manufacturer had to directly
exchange shoes for wheat without the
use of money. He would have to look
for a wheat growing farmer who not
only wants to sell wheat
but also wants to buy the
shoes in exchange.
That is, both parties
have to agree to
sell and buy each
others commodities.
This is known as
double coincidence
of wants. What a person
desires to sell is exactly what the
other wishes to buy. In a barter
system where goods are directly
exchanged without the use of money,
double coincidence of wants is an
essential feature.
In contrast, in an economy where
money is in use, money by providing
the crucial intermediate step
eliminates the need for double
coincidence of wants. It is no longer
necessary for the shoe manufacturer
to look for a farmer who will buy his
shoes and at the same time sell him
MONEY MONEY
MONEY MONEY MONEY
AND AND AND AND AND
CREDIT CREDIT
CREDIT CREDIT CREDIT
CHAPTER 3
MONEY AS A MEDIUM OF EXCHANGE
I’LL GIVE
YOU SHOES
FOR YOUR
WHEAT.
I DON’T NEED
SHOES. I NEED
CLOTHES.
I WANT SHOES.
BUT I DON’T HAVE
WHEAT.
2024-25
Page 3


NOTES FOR THE TEACHER
CHAPTER 3 : MONEY AND CREDIT
Money is a fascinating subject and full of
curiosities. It is important to capture this
element for the students. The history of
money and how various forms were used at
different times is an interesting story. At this
stage the purpose is to allow students to
realise the social situation in which these
forms were used. Modern forms of money are
linked to the banking system. This is the
central idea of the first part of the chapter.
The present situation in India, where
newer forms of money are slowly spreading
with computerisation of the banking system,
offers many opportunities to students to
explore on their own. We need not get into a
formal discussion of the ‘functions of money’
but let it come up as questions. There are
certain areas that are not covered, such as
‘creation of money’ (money multiplier) or the
backing of the modern system that may be
discussed if you desire.
As you would see in the chapter, the stock
of money consists of currency held by the
public and the demand deposits that they hold
with the banks. This is the money that people
can use as they wish and the government has
to ensure that the system works smoothy.
What would happen when the government
declares that some of the currency notes used
by people would be made invalid and would be
replaced by new currency? In India, during
November 2016, currency notes in the
denomination of Rs. 500 and Rs. 1,000 were
declared invalid. People were asked to
surrender these notes to the bank by a specific
period and receive new Rs. 500, Rs. 2,000 or
other currency notes. This is known as
‘demonetisation’. Since then, people were also
encouraged to use their bank deposits rather
than cash for transactions. Hence, digital
transactions started by using bank-to-bank
transfer through the internet or mobile
phones, cheques, ATM cards, credit cards,
and Point of Sale (POS) swipe machines at
shops. This is promoted to reduce the
requirement of cash for transactions and also
control corruption. Students could be asked
to debate on the process and the impact of
demonetisation. They can be guided to make
a collage of the major areas where people use
digital and cash transactions which are
legitimate and legal. They can also discuss the
transactions which are legal and why. It is also
important to intimate students that different
types of plastic cards are used in place of cash
transactions but not all of them money per se.
Credit is a crucial element in economic
life and it is, therefore, important to first
understand this in a conceptual manner.
What are the aspects that one looks at in
any credit arrangement and how this affects
people is the main focus of the second part
of the chapter. The world around us offers a
tremendous variety of such arrangements
and it would be ideal to explain these
aspects of credit from situations that are
familiar to your students. The other crucial
issue of credit is its availability to all,
especially the poor, and on reasonable
terms. We need to emphasise that this is a
right of the people and without which a large
section of them would be kept out of the
development process. There are many
innovative interventions, such as that of
Grameen Bank, of which students may be
made familiar with but it is important to
realise that we don’t have answers to all
questions. We need to find new ways and
this is one of the social challenges that
developing countries face.
Sources for Information
The data on formal and informal sector credit
used in this chapter is drawn from the
survey on rural debt by the National Sample
Survey Organisation (All India Debt and
Investment Survey, 70
th
 Round 2013,
conducted by NSSO) now known as National
Statistical Office (NSO). The information and
data on Grameen Bank is taken from
newspaper reports and websites. In order
to get the details of bank-related statistics
or a particular detail of a bank, you can log
on to the websites of the Reserve Bank of
India (www.rbi.org) and the concerned
banks. Data on self-help groups is provided
on the website of the National Bank for
Agriculture and Rural Development
(NABARD) (www.nabard.org).
38 38 38 38 38 U U U U UNDERST NDERST NDERST NDERST NDERSTANDING ANDING ANDING ANDING ANDING E E E E ECONOMIC CONOMIC CONOMIC CONOMIC CONOMIC D D D D DEVEL EVEL EVEL EVEL EVELOPMENT OPMENT OPMENT OPMENT OPMENT
2024-25
M M M M MONEY ONEY ONEY ONEY ONEY     AND AND AND AND AND C C C C CREDIT REDIT REDIT REDIT REDIT 39 39 39 39 39
The use of money spans a very large
part of our everyday life. Look around
you and you would easily be able to
identify several transactions involving
money in any single day. Can you
make a list of these? In many of these
transactions, goods are being bought
and sold with the use of money. In
some of these transactions, services
are being exchanged with money.  For
some, there might not be any actual
transfer of money taking place now
but a promise to pay money later.
Have you ever wondered why
transactions are made in
money? The reason is simple.
A person holding money can easily
exchange it for any commodity or
service that he or she might want.
Thus everyone  prefers to receive
payments in money and then
exchange the money for things that
they want.  Take the case of a shoe
manufacturer. He wants to sell shoes
in the market and buy wheat.  The
shoe manufacturer will first exchange
shoes that he has produced for
money, and then exchange the money
for wheat. Imagine how much more
difficult it would be if the shoe
manufacturer had to directly
exchange shoes for wheat without the
use of money. He would have to look
for a wheat growing farmer who not
only wants to sell wheat
but also wants to buy the
shoes in exchange.
That is, both parties
have to agree to
sell and buy each
others commodities.
This is known as
double coincidence
of wants. What a person
desires to sell is exactly what the
other wishes to buy. In a barter
system where goods are directly
exchanged without the use of money,
double coincidence of wants is an
essential feature.
In contrast, in an economy where
money is in use, money by providing
the crucial intermediate step
eliminates the need for double
coincidence of wants. It is no longer
necessary for the shoe manufacturer
to look for a farmer who will buy his
shoes and at the same time sell him
MONEY MONEY
MONEY MONEY MONEY
AND AND AND AND AND
CREDIT CREDIT
CREDIT CREDIT CREDIT
CHAPTER 3
MONEY AS A MEDIUM OF EXCHANGE
I’LL GIVE
YOU SHOES
FOR YOUR
WHEAT.
I DON’T NEED
SHOES. I NEED
CLOTHES.
I WANT SHOES.
BUT I DON’T HAVE
WHEAT.
2024-25
40 40 40 40 40 U U U U UNDERST NDERST NDERST NDERST NDERSTANDING ANDING ANDING ANDING ANDING E E E E ECONOMIC CONOMIC CONOMIC CONOMIC CONOMIC D D D D DEVEL EVEL EVEL EVEL EVELOPMENT OPMENT OPMENT OPMENT OPMENT
We have seen that money is
something that can act as a medium
of exchange in transactions.  Before
the introduction of coins, a variety of
objects was used as money. For
example, since the very early ages,
Indians used  grains and cattle as
money. Thereafter came the use of
metallic coins — gold, silver, copper
coins — a phase which continued well
into the last century.
Currency
Modern forms of money include
currency — paper notes and coins.
Unlike the things that were used as
money earlier, modern currency is not
made of precious metal such as gold,
silver and copper.  And unlike grain
and cattle, they are neither of
everyday use. The modern currency
is without any use of its own.
Then, why is it accepted as a
medium of exchange?  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. Moreover, the law legalises
the use of rupee as a medium of
payment that cannot be refused in
settling transactions in India. No
individual in India can legally refuse
a payment made in rupees. Hence,
the rupee is widely accepted as a
medium of exchange.
Deposits with Banks
The other form in which people hold
money is as deposits with banks. At
a point of time, people need only some
currency  for their day-to-day needs.
For instance, workers who receive
their salaries at the end of each month
have extra cash at the beginning of
the month. What do people do with
this extra cash? They deposit it with
the banks by opening a bank
account in their name. Banks accept
the deposits and also pay an amount
as interest on the deposits. In this way
people’s money is safe with the
banks and it earns an amount as
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.
1. How does the use of money make it easier to exchange things?
2. Can you think of some examples of goods / services being exchanged or wages being
paid through barter?
LET’S WORK THESE OUT
MODERN FORMS OF  MONEY
Early punch-
marked coins
(may be 2500
years old)
Gupta
coins
Gold
Mohar
from
Akbar’s
reign
wheat. All he has to do is find a buyer
for his shoes. Once he has exchanged
his shoes for money, he can purchase
wheat or any other commodity in the
market. Since money acts as an
intermediate in the exchange process,
it is called a medium of exchange.
Tughlaq
coin
Modern coin
2024-25
Page 4


NOTES FOR THE TEACHER
CHAPTER 3 : MONEY AND CREDIT
Money is a fascinating subject and full of
curiosities. It is important to capture this
element for the students. The history of
money and how various forms were used at
different times is an interesting story. At this
stage the purpose is to allow students to
realise the social situation in which these
forms were used. Modern forms of money are
linked to the banking system. This is the
central idea of the first part of the chapter.
The present situation in India, where
newer forms of money are slowly spreading
with computerisation of the banking system,
offers many opportunities to students to
explore on their own. We need not get into a
formal discussion of the ‘functions of money’
but let it come up as questions. There are
certain areas that are not covered, such as
‘creation of money’ (money multiplier) or the
backing of the modern system that may be
discussed if you desire.
As you would see in the chapter, the stock
of money consists of currency held by the
public and the demand deposits that they hold
with the banks. This is the money that people
can use as they wish and the government has
to ensure that the system works smoothy.
What would happen when the government
declares that some of the currency notes used
by people would be made invalid and would be
replaced by new currency? In India, during
November 2016, currency notes in the
denomination of Rs. 500 and Rs. 1,000 were
declared invalid. People were asked to
surrender these notes to the bank by a specific
period and receive new Rs. 500, Rs. 2,000 or
other currency notes. This is known as
‘demonetisation’. Since then, people were also
encouraged to use their bank deposits rather
than cash for transactions. Hence, digital
transactions started by using bank-to-bank
transfer through the internet or mobile
phones, cheques, ATM cards, credit cards,
and Point of Sale (POS) swipe machines at
shops. This is promoted to reduce the
requirement of cash for transactions and also
control corruption. Students could be asked
to debate on the process and the impact of
demonetisation. They can be guided to make
a collage of the major areas where people use
digital and cash transactions which are
legitimate and legal. They can also discuss the
transactions which are legal and why. It is also
important to intimate students that different
types of plastic cards are used in place of cash
transactions but not all of them money per se.
Credit is a crucial element in economic
life and it is, therefore, important to first
understand this in a conceptual manner.
What are the aspects that one looks at in
any credit arrangement and how this affects
people is the main focus of the second part
of the chapter. The world around us offers a
tremendous variety of such arrangements
and it would be ideal to explain these
aspects of credit from situations that are
familiar to your students. The other crucial
issue of credit is its availability to all,
especially the poor, and on reasonable
terms. We need to emphasise that this is a
right of the people and without which a large
section of them would be kept out of the
development process. There are many
innovative interventions, such as that of
Grameen Bank, of which students may be
made familiar with but it is important to
realise that we don’t have answers to all
questions. We need to find new ways and
this is one of the social challenges that
developing countries face.
Sources for Information
The data on formal and informal sector credit
used in this chapter is drawn from the
survey on rural debt by the National Sample
Survey Organisation (All India Debt and
Investment Survey, 70
th
 Round 2013,
conducted by NSSO) now known as National
Statistical Office (NSO). The information and
data on Grameen Bank is taken from
newspaper reports and websites. In order
to get the details of bank-related statistics
or a particular detail of a bank, you can log
on to the websites of the Reserve Bank of
India (www.rbi.org) and the concerned
banks. Data on self-help groups is provided
on the website of the National Bank for
Agriculture and Rural Development
(NABARD) (www.nabard.org).
38 38 38 38 38 U U U U UNDERST NDERST NDERST NDERST NDERSTANDING ANDING ANDING ANDING ANDING E E E E ECONOMIC CONOMIC CONOMIC CONOMIC CONOMIC D D D D DEVEL EVEL EVEL EVEL EVELOPMENT OPMENT OPMENT OPMENT OPMENT
2024-25
M M M M MONEY ONEY ONEY ONEY ONEY     AND AND AND AND AND C C C C CREDIT REDIT REDIT REDIT REDIT 39 39 39 39 39
The use of money spans a very large
part of our everyday life. Look around
you and you would easily be able to
identify several transactions involving
money in any single day. Can you
make a list of these? In many of these
transactions, goods are being bought
and sold with the use of money. In
some of these transactions, services
are being exchanged with money.  For
some, there might not be any actual
transfer of money taking place now
but a promise to pay money later.
Have you ever wondered why
transactions are made in
money? The reason is simple.
A person holding money can easily
exchange it for any commodity or
service that he or she might want.
Thus everyone  prefers to receive
payments in money and then
exchange the money for things that
they want.  Take the case of a shoe
manufacturer. He wants to sell shoes
in the market and buy wheat.  The
shoe manufacturer will first exchange
shoes that he has produced for
money, and then exchange the money
for wheat. Imagine how much more
difficult it would be if the shoe
manufacturer had to directly
exchange shoes for wheat without the
use of money. He would have to look
for a wheat growing farmer who not
only wants to sell wheat
but also wants to buy the
shoes in exchange.
That is, both parties
have to agree to
sell and buy each
others commodities.
This is known as
double coincidence
of wants. What a person
desires to sell is exactly what the
other wishes to buy. In a barter
system where goods are directly
exchanged without the use of money,
double coincidence of wants is an
essential feature.
In contrast, in an economy where
money is in use, money by providing
the crucial intermediate step
eliminates the need for double
coincidence of wants. It is no longer
necessary for the shoe manufacturer
to look for a farmer who will buy his
shoes and at the same time sell him
MONEY MONEY
MONEY MONEY MONEY
AND AND AND AND AND
CREDIT CREDIT
CREDIT CREDIT CREDIT
CHAPTER 3
MONEY AS A MEDIUM OF EXCHANGE
I’LL GIVE
YOU SHOES
FOR YOUR
WHEAT.
I DON’T NEED
SHOES. I NEED
CLOTHES.
I WANT SHOES.
BUT I DON’T HAVE
WHEAT.
2024-25
40 40 40 40 40 U U U U UNDERST NDERST NDERST NDERST NDERSTANDING ANDING ANDING ANDING ANDING E E E E ECONOMIC CONOMIC CONOMIC CONOMIC CONOMIC D D D D DEVEL EVEL EVEL EVEL EVELOPMENT OPMENT OPMENT OPMENT OPMENT
We have seen that money is
something that can act as a medium
of exchange in transactions.  Before
the introduction of coins, a variety of
objects was used as money. For
example, since the very early ages,
Indians used  grains and cattle as
money. Thereafter came the use of
metallic coins — gold, silver, copper
coins — a phase which continued well
into the last century.
Currency
Modern forms of money include
currency — paper notes and coins.
Unlike the things that were used as
money earlier, modern currency is not
made of precious metal such as gold,
silver and copper.  And unlike grain
and cattle, they are neither of
everyday use. The modern currency
is without any use of its own.
Then, why is it accepted as a
medium of exchange?  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. Moreover, the law legalises
the use of rupee as a medium of
payment that cannot be refused in
settling transactions in India. No
individual in India can legally refuse
a payment made in rupees. Hence,
the rupee is widely accepted as a
medium of exchange.
Deposits with Banks
The other form in which people hold
money is as deposits with banks. At
a point of time, people need only some
currency  for their day-to-day needs.
For instance, workers who receive
their salaries at the end of each month
have extra cash at the beginning of
the month. What do people do with
this extra cash? They deposit it with
the banks by opening a bank
account in their name. Banks accept
the deposits and also pay an amount
as interest on the deposits. In this way
people’s money is safe with the
banks and it earns an amount as
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.
1. How does the use of money make it easier to exchange things?
2. Can you think of some examples of goods / services being exchanged or wages being
paid through barter?
LET’S WORK THESE OUT
MODERN FORMS OF  MONEY
Early punch-
marked coins
(may be 2500
years old)
Gupta
coins
Gold
Mohar
from
Akbar’s
reign
wheat. All he has to do is find a buyer
for his shoes. Once he has exchanged
his shoes for money, he can purchase
wheat or any other commodity in the
market. Since money acts as an
intermediate in the exchange process,
it is called a medium of exchange.
Tughlaq
coin
Modern coin
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M M M M MONEY ONEY ONEY ONEY ONEY     AND AND AND AND AND C C C C CREDIT REDIT REDIT REDIT REDIT 41 41 41 41 41
Cheque Payments Cheque Payments Cheque Payments Cheque Payments Cheque Payments
A shoe manufacturer, M. Salim has to make a payment to the leather supplier and writes
a cheque for a specific amount. This means that the shoe manufacturer instructs his
bank to pay this amount to the leather supplier. The leather supplier takes this cheque,
and  deposits it in his own account in the 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.
Thus we see that demand deposits
share the essential features of money.
The facility of cheques against demand
deposits makes it possible to directly
settle payments without the use of cash.
Since demand deposits are accepted
widely as a means of payment, along
with currency, they constitute money
in the modern economy.
You must remember the role that
the banks play here. But for the
banks, there would be no demand
deposits and no payments by
cheques against these deposits.  The
modern forms of money — currency
and deposits — are closely linked to
the working of the modern banking
system.
Account number
Coding used by banks Cheque number
Demand deposits offer another
interesting facility. It is this facility
which lends it the essential
characteristics of money (that of a
medium of exchange). You would
have heard of payments being
made by cheques instead of cash.
For payment through cheque, the
payer who has an account with the
bank, makes out a cheque for a
specific amount. 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
issued.
Bank branch
code
LET US TRY AND UNDERSTAND
HOW CHEQUE PAYMENTS ARE
MADE AND REALISED WITH
AN EXAMPLE.
2024-25
Page 5


NOTES FOR THE TEACHER
CHAPTER 3 : MONEY AND CREDIT
Money is a fascinating subject and full of
curiosities. It is important to capture this
element for the students. The history of
money and how various forms were used at
different times is an interesting story. At this
stage the purpose is to allow students to
realise the social situation in which these
forms were used. Modern forms of money are
linked to the banking system. This is the
central idea of the first part of the chapter.
The present situation in India, where
newer forms of money are slowly spreading
with computerisation of the banking system,
offers many opportunities to students to
explore on their own. We need not get into a
formal discussion of the ‘functions of money’
but let it come up as questions. There are
certain areas that are not covered, such as
‘creation of money’ (money multiplier) or the
backing of the modern system that may be
discussed if you desire.
As you would see in the chapter, the stock
of money consists of currency held by the
public and the demand deposits that they hold
with the banks. This is the money that people
can use as they wish and the government has
to ensure that the system works smoothy.
What would happen when the government
declares that some of the currency notes used
by people would be made invalid and would be
replaced by new currency? In India, during
November 2016, currency notes in the
denomination of Rs. 500 and Rs. 1,000 were
declared invalid. People were asked to
surrender these notes to the bank by a specific
period and receive new Rs. 500, Rs. 2,000 or
other currency notes. This is known as
‘demonetisation’. Since then, people were also
encouraged to use their bank deposits rather
than cash for transactions. Hence, digital
transactions started by using bank-to-bank
transfer through the internet or mobile
phones, cheques, ATM cards, credit cards,
and Point of Sale (POS) swipe machines at
shops. This is promoted to reduce the
requirement of cash for transactions and also
control corruption. Students could be asked
to debate on the process and the impact of
demonetisation. They can be guided to make
a collage of the major areas where people use
digital and cash transactions which are
legitimate and legal. They can also discuss the
transactions which are legal and why. It is also
important to intimate students that different
types of plastic cards are used in place of cash
transactions but not all of them money per se.
Credit is a crucial element in economic
life and it is, therefore, important to first
understand this in a conceptual manner.
What are the aspects that one looks at in
any credit arrangement and how this affects
people is the main focus of the second part
of the chapter. The world around us offers a
tremendous variety of such arrangements
and it would be ideal to explain these
aspects of credit from situations that are
familiar to your students. The other crucial
issue of credit is its availability to all,
especially the poor, and on reasonable
terms. We need to emphasise that this is a
right of the people and without which a large
section of them would be kept out of the
development process. There are many
innovative interventions, such as that of
Grameen Bank, of which students may be
made familiar with but it is important to
realise that we don’t have answers to all
questions. We need to find new ways and
this is one of the social challenges that
developing countries face.
Sources for Information
The data on formal and informal sector credit
used in this chapter is drawn from the
survey on rural debt by the National Sample
Survey Organisation (All India Debt and
Investment Survey, 70
th
 Round 2013,
conducted by NSSO) now known as National
Statistical Office (NSO). The information and
data on Grameen Bank is taken from
newspaper reports and websites. In order
to get the details of bank-related statistics
or a particular detail of a bank, you can log
on to the websites of the Reserve Bank of
India (www.rbi.org) and the concerned
banks. Data on self-help groups is provided
on the website of the National Bank for
Agriculture and Rural Development
(NABARD) (www.nabard.org).
38 38 38 38 38 U U U U UNDERST NDERST NDERST NDERST NDERSTANDING ANDING ANDING ANDING ANDING E E E E ECONOMIC CONOMIC CONOMIC CONOMIC CONOMIC D D D D DEVEL EVEL EVEL EVEL EVELOPMENT OPMENT OPMENT OPMENT OPMENT
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M M M M MONEY ONEY ONEY ONEY ONEY     AND AND AND AND AND C C C C CREDIT REDIT REDIT REDIT REDIT 39 39 39 39 39
The use of money spans a very large
part of our everyday life. Look around
you and you would easily be able to
identify several transactions involving
money in any single day. Can you
make a list of these? In many of these
transactions, goods are being bought
and sold with the use of money. In
some of these transactions, services
are being exchanged with money.  For
some, there might not be any actual
transfer of money taking place now
but a promise to pay money later.
Have you ever wondered why
transactions are made in
money? The reason is simple.
A person holding money can easily
exchange it for any commodity or
service that he or she might want.
Thus everyone  prefers to receive
payments in money and then
exchange the money for things that
they want.  Take the case of a shoe
manufacturer. He wants to sell shoes
in the market and buy wheat.  The
shoe manufacturer will first exchange
shoes that he has produced for
money, and then exchange the money
for wheat. Imagine how much more
difficult it would be if the shoe
manufacturer had to directly
exchange shoes for wheat without the
use of money. He would have to look
for a wheat growing farmer who not
only wants to sell wheat
but also wants to buy the
shoes in exchange.
That is, both parties
have to agree to
sell and buy each
others commodities.
This is known as
double coincidence
of wants. What a person
desires to sell is exactly what the
other wishes to buy. In a barter
system where goods are directly
exchanged without the use of money,
double coincidence of wants is an
essential feature.
In contrast, in an economy where
money is in use, money by providing
the crucial intermediate step
eliminates the need for double
coincidence of wants. It is no longer
necessary for the shoe manufacturer
to look for a farmer who will buy his
shoes and at the same time sell him
MONEY MONEY
MONEY MONEY MONEY
AND AND AND AND AND
CREDIT CREDIT
CREDIT CREDIT CREDIT
CHAPTER 3
MONEY AS A MEDIUM OF EXCHANGE
I’LL GIVE
YOU SHOES
FOR YOUR
WHEAT.
I DON’T NEED
SHOES. I NEED
CLOTHES.
I WANT SHOES.
BUT I DON’T HAVE
WHEAT.
2024-25
40 40 40 40 40 U U U U UNDERST NDERST NDERST NDERST NDERSTANDING ANDING ANDING ANDING ANDING E E E E ECONOMIC CONOMIC CONOMIC CONOMIC CONOMIC D D D D DEVEL EVEL EVEL EVEL EVELOPMENT OPMENT OPMENT OPMENT OPMENT
We have seen that money is
something that can act as a medium
of exchange in transactions.  Before
the introduction of coins, a variety of
objects was used as money. For
example, since the very early ages,
Indians used  grains and cattle as
money. Thereafter came the use of
metallic coins — gold, silver, copper
coins — a phase which continued well
into the last century.
Currency
Modern forms of money include
currency — paper notes and coins.
Unlike the things that were used as
money earlier, modern currency is not
made of precious metal such as gold,
silver and copper.  And unlike grain
and cattle, they are neither of
everyday use. The modern currency
is without any use of its own.
Then, why is it accepted as a
medium of exchange?  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. Moreover, the law legalises
the use of rupee as a medium of
payment that cannot be refused in
settling transactions in India. No
individual in India can legally refuse
a payment made in rupees. Hence,
the rupee is widely accepted as a
medium of exchange.
Deposits with Banks
The other form in which people hold
money is as deposits with banks. At
a point of time, people need only some
currency  for their day-to-day needs.
For instance, workers who receive
their salaries at the end of each month
have extra cash at the beginning of
the month. What do people do with
this extra cash? They deposit it with
the banks by opening a bank
account in their name. Banks accept
the deposits and also pay an amount
as interest on the deposits. In this way
people’s money is safe with the
banks and it earns an amount as
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.
1. How does the use of money make it easier to exchange things?
2. Can you think of some examples of goods / services being exchanged or wages being
paid through barter?
LET’S WORK THESE OUT
MODERN FORMS OF  MONEY
Early punch-
marked coins
(may be 2500
years old)
Gupta
coins
Gold
Mohar
from
Akbar’s
reign
wheat. All he has to do is find a buyer
for his shoes. Once he has exchanged
his shoes for money, he can purchase
wheat or any other commodity in the
market. Since money acts as an
intermediate in the exchange process,
it is called a medium of exchange.
Tughlaq
coin
Modern coin
2024-25
M M M M MONEY ONEY ONEY ONEY ONEY     AND AND AND AND AND C C C C CREDIT REDIT REDIT REDIT REDIT 41 41 41 41 41
Cheque Payments Cheque Payments Cheque Payments Cheque Payments Cheque Payments
A shoe manufacturer, M. Salim has to make a payment to the leather supplier and writes
a cheque for a specific amount. This means that the shoe manufacturer instructs his
bank to pay this amount to the leather supplier. The leather supplier takes this cheque,
and  deposits it in his own account in the 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.
Thus we see that demand deposits
share the essential features of money.
The facility of cheques against demand
deposits makes it possible to directly
settle payments without the use of cash.
Since demand deposits are accepted
widely as a means of payment, along
with currency, they constitute money
in the modern economy.
You must remember the role that
the banks play here. But for the
banks, there would be no demand
deposits and no payments by
cheques against these deposits.  The
modern forms of money — currency
and deposits — are closely linked to
the working of the modern banking
system.
Account number
Coding used by banks Cheque number
Demand deposits offer another
interesting facility. It is this facility
which lends it the essential
characteristics of money (that of a
medium of exchange). You would
have heard of payments being
made by cheques instead of cash.
For payment through cheque, the
payer who has an account with the
bank, makes out a cheque for a
specific amount. 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
issued.
Bank branch
code
LET US TRY AND UNDERSTAND
HOW CHEQUE PAYMENTS ARE
MADE AND REALISED WITH
AN EXAMPLE.
2024-25
42 42 42 42 42 U U U U UNDERST NDERST NDERST NDERST NDERSTANDING ANDING ANDING ANDING ANDING E E E E ECONOMIC CONOMIC CONOMIC CONOMIC CONOMIC D D D D DEVEL EVEL EVEL EVEL EVELOPMENT OPMENT OPMENT OPMENT OPMENT
Let us take the story of banks further.
What do the banks do with the
deposits which they accept from the
public? There is an interesting
mechanism at work here. Banks keep
only a small proportion of their
deposits as cash with themselves.  For
example, banks in India these days
hold about 15 per cent of their
deposits as cash. This is kept as
provision to pay the depositors who
might come to withdraw money from
the bank on any given day. Since, on
any particular day, only some of its
many depositors come to withdraw
cash, the bank is able to manage with
this cash.
Banks use the major portion of the
deposits to extend loans.  There is a
huge demand for loans for various
economic activities. W e shall read more
about this in the following sections.
Banks make use of the deposits to
meet the loan requirements of the
people.  In this way, banks mediate
between those who have surplus
funds (the depositors) and 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.
LOAN ACTIVITIES OF BANKS
People make
deposits
People make
withdrawals and
get interest
People take
loans
People repay
loans with
interest
DEPOSITORS BORROWERS
1. M. Salim wants to withdraw Rs 20,000 in cash for making payments. How would he
write a cheque to withdraw money?
2. Tick the correct answer.
After the transaction between Salim and Prem,
(i) Salim’s balance in his bank account increases, and Prem’s balance increases.
(ii) Salim’s balance in his bank account decreases and Prem’s balance increases.
(iii) Salim’s balance in his bank account increases and Prem’s balance decreases.
3. Why are demand deposits considered as money?
LET’S WORK THESE OUT
What do you think would happen
if all the depositors went to ask
for their money at the same time?
2024-25