Money and Banking

Money is an object that is usually accepted globally as an exchange for goods and services. Money is the primary thing that is responsible for the human civilization. Money plays a primary role in the economic activity of the country and the world. Money is accepted universally as a medium for exchange. Money supply is an activity that has to be controlled effectively for a proper running of the economy. This is where banking system plays a primary role.  A bank’s primary function is to transform money and information along with it. This is very important because the tax and police authorities can keep track of the money flow and hence can curb scams and bribery to a great extend.

The commercial banks are used as an instrument by the central bank to make various economic activities.  These activities include boosting the economic growth by increasing the cash flow in the economy, reducing the inflation by putting a control over the cash present in the economy this type of control over the economy by the central bank is called as monetary policy. Bank plays a major role as it is the medium through which money is circulated in the economy. The central bank spreads money into the market using these banks.

Banking plays the primary role of credit creation in the economy. This credit creation is the primary fact which boosts the economic activity. This process of credit creation multiplies the money in the economy. Money creation is primarily cause of this credit creation. The process of credit creation enables a process called use now pay later. This credit creation is also called as money multiplier. Credit creation is basically done in the form of loan issuance, lending etc.

Bank plays a major role in the foreign exchange as well. This is important in the current globalization environment. The currency of the foreign countries must be properly handled else it will deeply impact the export and import of our country. Foreign exchange is important in micro economic point of view as well. The settlement between two companies is done through banks as both of the company might deal with different currencies internally inside their country.

Question

• How banks play a major role in credit creation?
• List some of the bank’s role in foreign exchange?