Money and Banking, Meaning, Functions, Types and Examples

Money and banking are fundamental concepts in the economy, especially for commerce students. Money is used as a medium of exchange, making trade and transactions easier by assigning value to goods and services. Banking refers to financial institutions like banks, which manage money by accepting deposits, offering loans, and facilitating financial transactions.

What is Money?

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Functions of Money

• Medium of Exchange: Money is used to buy goods and services, making trade easier by eliminating the need for direct barter.
• Unit of Account: Money provides a common measure for valuing goods and services, making price comparisons simple.

• Store of Value: Money can be saved and used later, allowing individuals to store wealth for future use.
• Standard of Deferred Payment: Money makes it possible to borrow and repay debts over time, ensuring smooth financial transactions.

• Transfer of Value: Money facilitates the transfer of assets or wealth from one person to another, such as through inheritance or gifts.
• Liquidity: Money provides immediate purchasing power, making it easier to convert assets into cash when needed.

Types of Money

• Commodity Money: This type includes items that have value in themselves, such as gold, silver, or other precious metals. Historically, people used these items as money because they could be traded for goods and services . For example, a gold coin could be exchanged for food or clothing.
• Fiat Money: Fiat money is a currency issued by the government that has no intrinsic value, but it is accepted as legal tender. Examples include the Indian Rupee, US Dollar, or Euro, which people use for everyday transactions like buying groceries or paying bills.
• Fiduciary Money: This type is based on trust. For instance, cheques, demand drafts, or promissory notes have no direct value but are accepted as a promise of payment between two parties.
• Commercial Bank Money: Refers to money created by commercial banks through lending activities. This includes bank deposits, which can be transferred using checks, debit cards, or online payments.
• Digital Money: Digital or electronic money exists in digital form and is used for online transactions. Examples include e-wallets like Paytm or cryptocurrencies such as Bitcoin. This type of money has grown in popularity with the rise of online shopping and electronic payments.

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What is Banking?

Types of Banks

• Central Banks: The central bank, such as the Reserve Bank of India (RBI), regulates all other banks and oversees the financial system of a country. It controls inflation, manages interest rates, and sets monetary policies but does not directly deal with the public.
• Commercial Banks: Also known as corporate banks, these banks serve businesses by offering services like trade finance, real estate, and cash management. Commercial Banks also provide loans and other financial services to companies.
• Retail Banks: These banks cater to the general public and provide everyday banking services such as savings accounts, personal loans, and credit cards. They also offer wealth management services and foreign exchange for individuals.
• Co-operative Banks: Co-operative banks are primarily aimed at helping rural areas by providing low-interest loans to farmers. They offer both short-term loans for things like seeds and fertilizers, and long-term loans for purchasing land. Their goal is to support rural development and agricultural growth.
• Exchange Banks: These banks specialize in handling foreign currencies and facilitating international trade. They manage transactions involving bills of exchange and provide services such as currency exchange for businesses engaged in import and export activities.

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