Money and Credit: Fuelling Economic Transactions
Money and credit are fundamental elements of any economy. They facilitate trade, investment, and consumption, making modern economies thrive. Let’s dissect their role and understand their significance.
1. Evolution of Money
The barter system, based on the principle of a double coincidence of wants, was replaced due to its inefficiency.
a. From Barter to Metal Coins:
The use of metal coins as a medium of exchange became prevalent as it reduced dependency on the coincidence of wants.
b. Paper Currency:
Introduced as a representative form of money backed by a tangible asset, usually gold or silver.
c. Modern Forms:
Now, digital money and cryptocurrencies also form part of the money’s evolutionary journey.
2. Credit: Fueling Growth and Development
Credit acts as a bridge, allowing borrowers to meet their short-term and long-term needs.
a. Formal Credit Sources:
Banks and cooperatives play a pivotal role in the organized credit market.
b. Informal Credit Sources:
Moneylenders, friends, relatives, and landlords come under this category.
c. Challenges:
While credit can stimulate growth, it’s essential to assess risks. Defaults can lead to a chain reaction in the economy.
3. Role of Banks in the Economy
Banks ensure that money is not just kept idle but is circulated to promote growth and development.
a. Safe Custody:
People deposit money in banks for safekeeping and earn an interest on it.
b. Granting Loans:
Using the deposited money, banks provide loans to those in need, charging a higher interest than what they offer to depositors.
c. Financial Inclusion:
Efforts to ensure even the marginalized sections can access formal banking services.
4. Credit Situation in Rural India
Rural India, with its distinct challenges, relies heavily on credit for agricultural and ancillary activities.
a. High Dependency on Informal Sources:
Despite the proliferation of banks, many still rely on informal sources due to easier accessibility.
b. Crop Loans:
Farmers often need loans before the sowing season, which they repay after harvest.
c. Microfinance and SHGs:
Self-help groups and microfinance institutions play a pivotal role in providing small loans without collateral to rural folks.
5. The Global Paradigm of Credit
The credit market is not just restricted to individual nations; it operates globally.
a. International Loans and Creditworthiness:
Countries often borrow from international banks and institutions. Their creditworthiness, determined by credit rating agencies, dictates the terms of the loan.
b. Global Financial Crisis (2008):
A stark reminder of how intricately global credit markets are linked and how defaults can lead to a domino effect.
6. The Road Ahead
With rapid technological advancements, the landscape of money and credit is continuously evolving.
a. Digital Transactions:
UPI, wallets, and online banking have transformed the way we transact.
b. Cryptocurrencies:
The decentralized digital currencies, like Bitcoin, have posed new challenges and opportunities for global economies.
Key Takeaway: Money and credit remain central to economic activities. As they evolve, so does our understanding of economics. Grasping their nuances is essential for anyone keen on understanding the modern economic landscape.