OXFORD PUBLIC SCHOOL, RANCHI

CLASS-10 SUBJECT-ECONOMICS
NOTES-I
CHAPTER-3 MONEY AND CREDIT
BARTER SYSTEM
In the beginning of the civilization, human needs were simple and limited. People used to
exchange goods with each other to satisfy their wants. Barter system of exchange refers to
the exchange of goods for goods. An economy where there is a direct barter (exchange) of
goods and services, is called a ‘Barter Economy’ or C-C Economy (where C stands for
commodity). For example, when a farmer gives wheat and gets cloth from the weaver in
return, it is known as barter exchange.
Barter system can work when there exists ‘Double Coincidence of Wants’.
Double coincidence of wants refers to the simultaneous fulfilment of mutual wants of buyers
and sellers i.e. 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 the above example, want for clothing by the
farmer coincides with the want of the weaver for wheat.
With the rise in economic activities, the exchange through barter system became more
difficult and complicated. The major limitations of Barter system of exchange are:
 Lack of double coincidence of wants: barter system can only work when both buyer
and seller are ready to exchange each other’s goods. For example, A can exchange
goods with B only when A has what B wants and B has what A wants.
 Lack of common measure of value: in the barter system, all commodities are not of
equal value and there is no common measure (unit) of value of goods and services.
 Lack of Standard of Deferred payment: under barter system, contracts involving future
payments or credit transactions cannot take place with ease because it was difficult to
arrange the goods and also the goods may lose or gain its value at the time of
repayment.
 Lack of Store of value: under barter system, it is difficult for people to store goods for
future use because most of the goods do not possess durability and storage required
time and effort.

 How does the use of money make it easier to exchange things? (NCERT)
OR
How does money solve the problem of double coincidence of wants? Explain with
an example. (NCERT)
OR
How is money used as a medium of exchange? Explain with examples.
  Barter system makes the exchange process very difficult and highly inefficient. Money
has overcome the drawbacks of barter system in the following manner:
 Medium of exchange: as a medium of exchange, money has removed the major
difficulty of lack of double coincidence of wants in barter system i.e a buyer can
buy goods through money and a seller can sell goods for money.
 Measure of value: under barter system, different goods were of different values
and there was no common denomination to measure the value of goods. But
money has made it easier to compare the relative values of any commodity.
 Store of value: under barter system, it was difficult to store goods for future use.
But, money can be easily stored for future use.
 Standard of deferred payments: under barter system, contracts involving future
payments or credit transactions cannot take place with ease whereas money has
simplified the borrowing and lending operations.
MODERN FORMS OF MONEY
 EVOLUTION OF MONEY
 COMMODITY MONEY: In the earliest period of human civilisation, any
commodity that was generally demanded and chosen by common consent, was
used as money. Goods like salt, rice, wheat, weapons, utensils etc were used as
money.
 METALLIC MONEY: With the progress of human civilization, commodity
money changed into metallic money. Metals like gold, silver, copper etc were
used as they could be easily handled and their quantity can be easily
ascertained.
 PAPER MONEY: It was found inconvenient as well as dangerous to carry gold
and silver coins from place to place. The invention of paper money marked a
very important stage in the development of money. At present a very large part
of money consists mainly of currency notes.
 CREDIT MONEY: Emergence of credit money took place almost side by side
with that of paper money. People kept a part of their cash as deposits with
banks, which they can withdraw at their convenience through cheques. The
cheque (known as credit money or bank money), itself is not a money, but it
performs the same functions as money.
 PLASTIC MONEY: The latest type of money is plastic money in the form of
Credit Cards and Debit Cards. They aim at removing the need for carrying cash
to make transactions.

 What is a cheque?

 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.
 OXFORD PUBLIC SCHOOL, RANCHI
CLASS-10 SUBJECT-ECONOMICS
NOTES-II
CHAPTER-3 MONEY AND CREDIT

 Why is the ‘rupee’ widely accepted as a medium of exchange?

OR
“The rupee is widely accepted as a medium of exchange.” Explain.

 Rupee 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 the Indian law, no other individual or organisation is allowed to issue currency.
 The law legalises the use of rupee as a medium of payment that cannot be refused in settling
transactions in India.
 No individual can legally refuse a payment made in rupees.
Hence, rupee is accepted as a medium of exchange.
 What are demand deposits? Why are demand deposits considered as money?
OR
What are demand deposits? Mention any three features of it.
OR
What are demand deposits? What are their advantages?

 Since the deposits in the bank accounts can be withdrawn on demand, these deposits are
called demand deposits.
 People deposit extra cash with the bank 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 of interest.
 People also have the provision to withdraw the money as and when they require.
 Demand deposits are considered as money because the depositors get the facility of cheque
against their demand deposits when they open an account in the bank, which is used to settle
the transaction without the use of money.
 How do banks mediate between those who have surplus money and those who are in need of
money?

 Banks keep a small proportion of their deposits as cash with themselves.
 Banks use the major portion of the deposits to extend loans.
 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).
 What is the main source of income of the banks?
 Banks charge a higher interest rate on loans than what they offer on deposits. The difference between
what is charged from the borrowers and what is paid to the depositors is the main source of income
of the banks.
 What do the banks do with the deposits which they accept from the public?

 Banks keep a small proportion of their deposits as cash with themselves.
 This reserve is kept as a 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.
 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 and those who are in need
of money.
 In situations of high risks, credit might create further problems for the borrower. Explain.
 Sometimes credit is very painful as it pushes the borrower into such a situation where loan recovery
is very difficult. In this situation the borrower is not able to repay the loan and many a times is
caught in the situation of debt trap. For ex- a small farmer, Swapna took loan for crop cultivation but
she faced the situation of crop failure. She took a fresh loan but the production was not enough to
pay back the loan amount and she was caught in debt trap. She had to sell off a piece of land to pay
the loan amount.
 Look at a 10 rupee note. What is written on top? Can you explain this statement?
 Reserve Bank of India
Guaranteed by the Central Government
The first statement tells us that the 10 rupee note has been issued by the Reserve Bank of India. No
other organisation or individual has the authority to issue currency in India.
The second statement tells us that the law legalises the use of this note as a medium of exchange and
it cannot be refused in settling transactions in India.
 Differentiate between formal and informal sources of credit.

FORMAL SOURCES INFORMAL SOURCES

 The formal sources of credit includes the
banks and the co-operatives.
 The RBI supervises the functioning of
formal sources.
 The rate of interest on the loan is low.
 Documentation is required for getting
loan from a formal source.
 Collateral security is an important term
of credit.
 No exploitation is there in formal
sources.
 Loans are given for productive purposes.
 The formal sources of credit are
registered by the government.
 The loan process is long and complex.
 The informal sources of credit includes
moneylenders, traders, landlords, friends
and relatives etc.
 There is no such organisation to
supervise the functioning of informal
sources.
 The rate of interest on the loan is
comparatively higher.
 No or less documentation is required for
getting loan from a formal source.
 Collateral as a security against loan may
or may not be required.
 More exploitation is there in informal
sources.
 Loans are given for productive as well
as unproductive purposes.
 The informal sources of credit are not
registered by the government.
 The loan process is easier and simple.

 What is collateral?
 Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with
banks) and uses this as a guarantee to a lender until the loan is repaid.
 Why do lenders ask for collateral while lending?
 If the borrower fails to pay the loan amount, the lender has the right to sell the asset or collateral to
obtain payment. Property such as land titles, deposits with banks, livestock are some common
examples of collateral used for borrowing.
 What is meant by term of credit? What does it include?
 Terms of credit are the requirements needed to be satisfied for any credit arrangements. It includes
interest rate, collateral, documentation, mode of repayment and duration of the loan. However, the
terms of credit vary depending upon the nature of lender, borrower and loan.
 Why do we need to expand formal sources of credit in India?

 To reduce the exploitation from the informal sources.
 To provide cheaper loans.
 To reduce the dependence on the informal sources of credit.
 For the development of the country.
 To increase self-employment opportunities.
 To set up business, small scale industries etc.
 To increase trade.
 What are the reasons why the banks might not be willing to lend to certain borrowers?

 Lack of collateral security.
 Lack of proper documents.
 Most of the borrowers earn low income.
 In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this
necessary?

 The RBI supervises the functioning of formal sources of credit.
 The banks maintain a maintain cash balance out of the deposits they receive.
 The RBI monitors the banks in maintaining the cash balance.
 The RBI sees that the banks don’t give loans only for earning profit to businesses and traders
but gives loans also to small farmers, small scale industries etc.
 The banks have to submit a periodical information to RBI on how much they have lended, to
whom, at what rate of interest etc.
 Analyse the role of credit for development.

 It leads to the development of the country.
 It improves the economical condition of individuals and the country as a whole.
 It increases trade.
 It helps people borrow money for variety of purposes.
 It helps to set up business.
 It helps in setting up industries.
 Manav needs loan to set up a small business. On what basis will Manav decide whether to
borrow from the bank or the moneylender? Discuss.
 To decide the source of credit following points are important:
 It is important whether Manav is aware about the formal sources of credit or not.
 It is also important whether his area has a bank or not.
 The source of credit will also depend upon his income.
 It is also important for him to have collateral security.
 If he is aware about the formal sources, the other important areas will be rate of interest,
documents required, duration of the loan, etc.
 Dhananjay is a government employee and belongs to a rich household whereas Raju is a
construction worker and comes from a poor household. Both are in need and wish to take loan.
Create a list of arguments explaining who between the two would successfully be able to
arrange money from a formal source. Why?
 Dhananjay will be able to arrange loan from the formal source because of the following reasons:
 He will be able to give collateral security.
 Since, he is a government employee his income is stable and he will be able to repay the loan.
 He will be able to provide the required documents.
It will be difficult for Raju to get loan from the formal source due to following reasons:
 Banks are not present everywhere.
 It is difficult for Raju in rural area to get loans from formal sources.
 It is easier for people in rural areas to get loans from informal source of credit.
 In India, about 80% of farmers are small farmers, who need credit for cultivation.
a) Why might banks be unwilling to lend to small farmers?
 Lack of collateral security.
 Most of the people earn low income.
 Some people cannot fulfil the formalities (documentation) of bank.
 Some people are illiterate.
b) What are the other sources from which the small farmers can borrow?
Money lenders, landlords, big farmers, traders, friends and relatives etc.
c) Explain with an example how the terms of credit can be unfavourable for the small
farmer.
Some farmers take loan from informal sources like money lenders at high rate of interest.
Because of crop failure and low production, the farmers are not able to pay back the loan and
the burden rises and they fall in debt trap.
d) Suggest some ways by which small farmers can get cheap credit.
 Expansion of formal credit.
 Increase in the number of banks and cooperatives.
 Making the loan process easy and simple.
 What is the basic idea behind the SHGs for the poor? Explain in your own words.

 The SHGs help borrowers overcome the problem of lack of collateral.
 Timely loans for a variety of purposes and at a reasonable rate of interest.
 SHGs are the building blocks of organisation of rural poor.
 It helps women to become financially self-reliant.
 The regular meetings provide a platform to discuss and act on a variety of social issues.
 What is the role of SHGs? What are the reasons of its growing popularity?
OR
What are Self Help Groups? Describe in brief its functioning.
 SHGs have 15-20 members who pool their savings and use the pooled savings to give loans to the
members at reasonable rate of interest.
Role of SHGs are:
 It reduces the functioning of informal sources of credit.
 It helps to create self-employment opportunities.
 It helps in women empowerment.
SHGs are becoming popular because of the following reasons:
 They help borrowers to overcome the problem of collateral.
 They provide timely loans for a variety of purposes at reasonable rate of interest.
  They are the building blocks of development of rural poor.
 It helps women to be self-reliant.
 They provide a platform to discuss on various social issues.
 Discuss the characteristics of Self Help Groups.

 The function of the SHG is to organise rural poor, particularly women, and pool their savings.
This group has 15-20 members, usually belonging to one neighbourhood.
 Saving per member varies from Rs25 to Rs100 or more, depending on the economic
condition of the member.
 When the group is regular in its savings for a year or two, then the group is eligible for
getting loan from the bank.
 Bank provides loan in the name of the group and then the SHG gives loan to its members at a
very low rate of interest.
 Loan is provided to help them to create self-employment opportunities. All the group
members together take decision regarding saving and loan activities.
 SHGs help women in making them to financially self-reliant and provides platform to discuss
and act on a variety of social issues.