Money and Banking Notes

MONEY AND BANKING
SECTION-I (MONEY)
CHAPTER # 1
THE NATURE AND FUNCTION OF MONEY

What is Money?
Money is the wonderful invention of man. The pity is that it has no
precise definition. Money has been defined differently by
economist, so these definitions are given below.
1) Descriptive definition: Anything that is generally
acceptable as a means of exchange and that at the same time
acts as a measure and store of value.
2) Legal definition: Anything which is declared by the state as
money is money. The general acceptable principles along with
legal support are essential for a thing to serve as money.
3) General acceptability definition: Money is anything that is
generally accepted in payments for goods and services or
repayment for debts.
Money is different from Wealth & Income:
Money is paid for exchange of goods & services, while wealth
includes all scarce resources which are owned by an individual or
firm or nation, such as land, property, shares.
Characteristics of Wealth:
i) It has utility ii) It consist of scarce goods iii) It is transferable
and iv) It is external to human being, e.g. Skill of a doctor,
musician etc., are internal qualities and cannot be transferred, so
they are not included in Wealth.
Money and Near Money:
Assets which are can be easily and quickly transferred into money
without loss in value are called Near Money. It is cannot be
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directly used for making payments. E.g. treasury bills,

government securities, saving bonds etc.
Stages in development of Money:

1) Commodity Money: Commodity money is the money which is
made up of precious metals like gold, silver or any valuable
commodity like wheat, skin, arrows etc. A large number of items
have served as commodity money at various time and places.
E.g. Agriculture stage, domestic animal like cattle, goats, horses,
cows sheep, rice grains etc. were used as money.
2) Metallic Money or Coins: The use of gold and silver as
commodity money created problem in exchange of goods. The
quality and quantity of precious metals were mixed with cheaper
coins; the coins were stamped on both sides by a competent
authority called coinage. The coinage guaranteed both the
amount and the quality of metal.
3) Paper Currency: The next development in the payment
system was paper currency. Paper made of paper and function as
medium of exchange. Initially the paper currency promised that it
was convertible into a fixed quantity of precious metals like gold
and silver. Today, the paper notes are inconvertible notes.
3.1 Fiat Money: Fiat money consists of paper money. It accepted
as money because the government says it is money; it is issued
by the government without any backing of gold, silver or
government securities.
4) Credit Money or Bank Money: Another step in the evolution
of payment system is the use of credit money or bank money.
Bank money is the use of cheques as medium for transactions are
mostly received and made through cheques. The use of cheques
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or credit money is that it has made easier and possible for making
transaction for large amount.
5) Electronic Banking Stage: Electronic Banking is the modern
system of transferring funds using electronic communications.
With the development of computers and advanced
communication technology, paper work in payment system is
reduced and electronic funds transfer system is taking place, now
payment are made through magnetic strip cards, viz. bank debit
cards, credit cards, telephone cards, smart cards, etc.
BARTER SYSTEM
Exchanging goods with goods is called Barter System. The direct
exchange of surplus commodity for commodity with another
person without the use of money is termed as Barter in
Economics.
Inconvenience/demerit of Barter System:
1) Double Coincidence of Wants: The exchange can only be
effective if a person is willing to offer what the other person wants
and at the same time needs what the other can spare. This
double coincidence, as is obvious, is very difficult to attain in this
civilized world especially where the range of human wants is very
wide. The transaction costs of double coincidence of wants are
very high.
2) Lack of common Measure: For instance, a man has a horse
with him and the other a cow and both are willing to trade. A man
who has a horse assign the value of one horse has two cows. The
other who has a cow design the value of one cow as one horse
and both stick to their respective valuation. In the absence of
common measure of value, the exchange between the two parties
cannot take place unless both of them assign the same value to
different commodities which they posse.
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3) Lack of Sub-division: For instance, a person has a cow with

him and he wishes to get 40kg of wheat. It is clear the value of
the cow is much more than the value of 40kg of wheat. What part
of the cow should be given in exchange for 40kg of wheat? So the
exchange may not take place between two parties.
4) Lack of store of value: Another demerit of barter system is
to storing the commodities for longer time period because they
lose their value as time passes.
5) Specialization not possible: Under the barter economy each
person is a jack of all trades and master of none. A high degree of
specialization cannot be achieved under barter system.
6) Payments in the future: it is very inconvenient to lend
goods to other people, with the lapse of time. The value of
commodities may fall. So it becomes difficult to make payments
in the future.
7) Difficulties of Transfer of Wealth: This also major drawback
of barter system to transferring the goods from one place to
another place. E.g. a person wants to send 100 sacks of flour from
Karachi to Peshawar, how much difficulty would he faces?
8) Difficulties in Tax collection: Another difficulty is that the
tax cannot be collected in the form of goods. If the commodities
are collected from the tax payers, they will not only lose value as
time passes on but are difficult to store also.
How money has removed the difficulties of barter system?
1) Money is accepted as medium of exchange both by buyers and
sellers. It has removed the difficulties of double coincidence of
wants.
2) Money has a high degree of acceptability in the country. It,
therefore, serves as a yardstick (unit of account) for measuring

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the value of all goods and services. The prices of goods are now
quoted in money.
3) Money retains purchasing power overtime. It therefore, has
removed the difficulties of store of value. The money store as
wealth can be used in future as and when needed.
4) Under barter system time spent in exchange of goods for
goods was very high (called transaction cost). The money stored
as wealth can be used in future as and when needed.
5) Commodities were difficult to transport from one place to
another. Money has made the transfer value of money easier and
safer.
6) In barter system the process of development was very slow.
With the use of money, division of labor, specialization has taken
place. Technology has developed. Researches are being carried
out. In monetary economy there is all round economic progress.
FUNCTIONS OF MONEY
A-Primary Functions of Money
1) Money as a medium of Exchange: money is used to pay for
goods and services. A person now can sell his goods to another
person for money and then he can spend that money to purchase
the goods he wants from others. Money has made the exchange
of goods easy.
2) Money as a unit of account: It serves as a common
measure of value. The value of goods and services can be
expressed in terms of units of money. The use of money as unit of
account has greatly reduced transaction costs.
3) Money as standard of deferred payments: The advantage
of selling goods on credit by the seller or making the payment on
a certain date in future by the buyer is only workable and
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acceptable in a money economy and least in a barter economy.

Money is the only unit of account which is easy to borrow and
easy to lend. The function of money as standard of deferred
payment is better served if the value of money more or less
remains stable.
4) Money as a store of value: When the goods were used as
money, there were problems in storing wealth in the form of
cattle, grains etc. They used to deteriorate and were costly to
handle. Money has removed this difficulty of store wealth.
B-Secondary function of Money
1) Aids of specialization, production and Trade: The use of
money has helped in removing the difficulties of barter. The
market mechanism, production of commodities, specialization,
expansion, diversion of trade etc, have all been facilitated by the
use of money.
2) Influence on income and consumption: The use of money
has a direct bearing on the levels of income and consumption in
the country. All production takes place for the market and the
factor payments (rent, wages, interest and profits) are made in
money. The higher the production, the higher are the
remunerations to the factors and vice versa.
3) Money as instrument of making loans: People save money
and deposit it in banks. The banks advance these savings to
businessmen and industrialists. Money is thus the instrument by
which savings are transferred into investments.
4) Money as a tool of monetary management: Money is an
important tool of monetary management. If the money is
effectively used, it helps in increasing output and employment.
Money is also an important factor in determining the distribution
of income and wealth among the members of the society.

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5) Instrument of economic policy: Money is an important

instrument of economic policy of the government. In order to
achieve growth, reduce unemployment and maintain regular
expansion of economic activity, money is the most powerful
factor.
C- Contingent of Functions
1) Distribution of national Income: Money facilitates the
distribution of national income among the various factors of
production. It also helps in bringing justice in distribution.
2) Basis of credit system: Banks create credit on the basis of
their cash reserves with Central Bank. Any change in the volume
of money is brought about mainly by an increase or decrease in
money supply.
3) Measure of marginal productivity: The marginal
productivity of each factor of production is measured with the
help of money. Money also helps in equalization of marginal utility
in expenditure.
4) Liquidity of property: Money gives a liquid form to wealth. A
property can be converted into liquid form with the use of money.
Qualities of Good Money
a) General Acceptability: The essential quality of a good
money material is that it would be acceptable to all without any
hesitation in exchange for goods and services.
b) Stability of Value: Good money material is that it should be
fairly stable in value. Money is that standard by which we
measure the value of all other commodities and if the standard
itself is influenced by changes in its demand and supply.

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c) Transportability: The commodity chosen should be easily

transportable without any depreciation, if should have a large
value in small bulk.
d) Storability: Another requisite of good money material is that
it should be storable without depreciation. If the commodity
chosen as money is perishable, then that cannot serve as good
money material.
e) Divisibility: The commodity chosen as money should be
capable of being re-united without losing its value.
f) Homogeneity: The commodity selected as money should be a
uniform quality and capable of standardization.
ROLE OF MONEY IN A CAPITALISTIC ECONOMY

Money is the sovereign queen of all delights. For her the teacher
teaches, the lawyer pleads, the dancer dances, the soldier fights.
1) Production Decisions: Production has been greatly
facilitated by the introduction of money. Money makes possible
the accumulation of wealth in those hands which are able to
organize the production. The decision of what, where, when and
how much to produce are all guided by the amount of money
offered in exchange of goods and services.
2) Pattern of Consumption: According to Adam Smith
Consumption is the sole and purpose of economic activity. With
the introduction of money, the exchange of goods has become
easy; people can sell their goods and services for money and can
obtain the assortment of goods which they need by parting with
money.
3) Exchange Transactions: The use of money has successfully
removed the uselessness of barter. Money, by acting as medium
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of exchange, has greatly stimulated the exchange of goods. It

splits up exchange process into two parts, sale and purchase and
thus facilitates flow of goods and services from producer to
consumer.
4) Distribution of National Dividend: As money is generally
acceptable as medium of exchange and at the same time acts as
measure and a store of value, therefore the distribution of
national dividend through the medium of money greatly facilitates
the processes of distribution.
5) Money in the Field of Public Finance: Money is renders a
very valuable service in the field of public finance in recent times
aims at increasing the rate of economic activities and reducing
inequalities of income. It also acts as an instrument of economic
and social justice of country. Money helps the state in the
achievement of objectives.
6) Money in the Sphere of Banking: The general confidence of
in the purchasing power of money makes it the chief form of
credit. The debtor can safely borrow money for consumption
purpose or for production purposes. This has led to the building
up of huge superstructure of banking and credit system.
7) Attainment of High Level of Production of Employment:
if the money is properly managed, it ensures rising level of
productions employment and real income in the country. In case,
the delicate instrument in not properly handled, it leads to decline
in the prices, output and job opportunities.

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CHAPTER # 2
FORMS OF MONEY
1) Metallic Money: consist of coins, made of gold, silver, copper
or nickel. Metallic Money varies in weight, fitness and value. The
Metallic Money is the full bodied money. The full bodied money
whose face value is equal to the value of metal contain in it.
1.1) Standard Money: represent the money of account. By
money of account is the meant the monetary unit in terms of
which prices and other transaction are expressed.
1.2) Token Money: is subsidiary money. Its face value is higher
than its intrinsic value. The total amount of coins depends on the
needs of people.
The usage of token coins in the country has the following
merits:
a) Token coins are of small denominations and so they meet the
needs of the people for payment in small amount.

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b) They can be easily converted at face value with the other

currency of the country.
c) They cannot be smuggled out of the country because their
metallic value is much less than their intrinsic value.
d) There are very few chances of their being hoarded or melted
with the rise of prices as the intrinsic worth of the coins is very
less than their face value.
2) Paper Money: The terms paper refers to the notes issued by
the State or by a Bank, usually the Central Bank (SBP).
a) Representative Paper Money: is that money which is fully
backed by equivalent metallic reserves, bank note can easily
get it converted into metallic money on demand.
b) Convertible Paper Money: paper money which is convertible
into coins on demand is called convertible paper money.
c) Fiat Paper Money: is that which is not convertible into gold or
silver on demand. It is been declared legal tender by the
issuing authority and has general acceptance as a medium of
exchange.
3) Bank Money: The term bank money applies to that near
money which is not legal tender currency but is accepted as a
medium of exchange on account of confidence in the issuing
authority. Bank Money chiefly consists of cheques, bills of
exchange and drafts.
a) Cheque: is merely an order on a bank by its client to pay a
sum of money to himself or third party on demand. There are 3
kinds of cheque are given below;
i) Bearer Cheque: is that which can be cashed from a bank by
any person who presents it at the counter.
ii) Order Cheque: if the word bearer is removed from the
cheque, writing the name of person/company to whom to pay, it
then becomes an order cheque, it is safe mode of payment
because it is paid to the right person.
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iii) Crossed Cheque: if two parallel lines are drawn across the
face of the cheque and the word payees account only are
written between them, it becomes a crossed cheque. The
payment is made by the crossed cheque is the safest form
because a cheque can only be deposited in the payees account.
b) Bill of Exchange: is an order from a drawer to a drawee to
pay a sum of money mentioned on the bill to the former or to the
bearer at a fixed further time. It has two types i) sight bill: which
is payable on demand ii) time bill: which can be paid after a
certain specified period. If it is used for foreign trade is called
foreign bill of exchange.
c) Draft: is a cheque drawn by the person named in it from one
branch to another branch of same bank. It is the cheapest method
remitting money to person both inside and outside the country.
Two other types of money are mentioned below (by: J.M.
Keynes):
1) Commodity Money: is composed of actual units of a
particular, free obtainable, non-monopolized commodity.
2) Managed Money: it shall have a determinate value in terms
of an objective standard. It is similar to Fiat Money, except that
the State undertakes to manage the conditions of its issue.
COINAGE OF MONEY
By coinage of money is meant by the process of manufacturing
metals into certain shape so that the uniformity in weight and size
is maintained in all the coins of the coins of the same kind. Before
the advent of coinage, the metals like gold and silver were used
to as medium of exchange. The sole power of coinage money has
been taken over by the Government.
Standardized coinage has the following advantages:

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a) It has become a useful commodity as a medium of exchange

and comparing of values.
b) The stamped coins become historical documents of the state.
Types of Coinage
1.(a) Free Coinage: called as free coinage because if the people
are allowed to take metals to the mint for being converted into
standard coins without limit. People are not bound to make lots of
coins they can make as they want.
b) Limited Coinage: called as limited coinage when people are
bound to make more coins because limit is imposed on free
coinage, government sometimes charges fee for converting
metals into coins, face value of limited coins is higher than its
intrinsic value, it is accepted as medium of exchange due to
convertible into standard coins.
2.(a) Gratuitous Coinage: Government does not charge any fee
for minting coins, the coinage is known as gratuitous. Gratuitous
coinage is practised when the intrinsic value of bullion is to be
brought at par with its face value.
b) Non-Gratuitous Coinage: Coinage is called non-gratuitous
when government charges fee for converting metal into coins.
3) Debasement of Coins: When there is difference between a
standard value of precious metals fixed by law and the real value
of the metal used as a coin, it is then a case of debasement.
Pakistani Rupee in accordance with Pak Coinage Act should
contain 4 grains of silver and 6 grains of alloy, this ratio now has
been changed and the silver content has been reduced by 2
grains without amending the Coinage Act. The Pakistani Rupee is
thus a debased coin.
COINAGE IN PAKISTAN

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History of coinage can be traced back to history of coinage in the

undivided India. The search of Moen Jo Daro has led the discovery
of much worn out gold coins whose history runs back into
antiquity. The Nishka(old coins of gold) in early civilization in India
the chief metals were used as gold, silver and iron. As the time
passed on and technology developed, the shape and execution of
the coins improved. An attempt was made by King Altamash, he
introduced new coins round shape silver weighting 173 grains.
With the fall of Mughal empire the country split up into small
states, they has their own coins of different shape, size etc.
during the WW-II people began to melt the silver coins as the
intrinsic value of the rupee exceeded its face value. There was no
central bank in Pakistan at the time of partition in 1947, the
Government of Pakistan authorized the Reserve Bank of India to
issue currency notes and the coins till June 30, 1948. The new
coins issued by the Government of Pakistan are pure nickel
rupee, half rupee and quarter rupee.
DECIMAL COINAGE IN PAKSITAN

Decimal coinage introduced in Pakistan on January 1, 1961. With
the introduction of decimal coinage in Pakistan, the rupee has
been divided into 100 units. The new unit has been named as new
paisa, therefore, there should be no confusion in the conversion of
old coins with the new ones.
Merits of decimal coinage;
a) There are no breaks in the circulations.
b) The quick and easy calculations in all transaction save time and
energy.
c) The working of banking has been greatly improved as totally,
subtracting and multiplying becomes easy.

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d) The adoption of decimal coinage has facilitated the preparation

of pay bills, telephone bills, electricity bills, and the maintaining
of cash books and ledgers.
Demerits of Decimal coinage;
a) There was confusion in the conversion of old coins with the new
ones with illiterate people.
b) Some people indulged in profiteering by paying less new
money in exchange with the old coins due to the ignorance of
the customer.
c) The prices of the commodities were also raised by a few paisa
for the purpose of rounding off the figure only.
d) The old counting machines were discarded with the
introduction of decimal coinage and that was national loss.

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CHAPTER # 3
MONETARY STANDARD
MONETARY STANDARD
Monetary standard is an economic unit by which all kinds of
economic values are measured.
Classes of Monetary Standard
1) Commodity Standard: is that monetary unit which has its
standard value equal to the value of a designated quantity of a
particular commodity. The commodity standard can be
established in gold or silver or in both gold and silver.
2) Fiat Standard: The unit of money which is neither equal to
nor convertible at a fixed ratio with a particular commodity used
as a medium of exchange is called Fiat Standard.
BI-METALLIC STANDARD
The monetary system where both gold and silver are standard
metals and their ratio of exchange is fixed and maintained by law
and they are also unlimited legal tender and is called BiMetallism.
Brief History of Bi-Metallism:
Bi-Metallism was adopted by France in 1803, the two metals, gold
and silver served well as monetary units. For the smooth running
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and better functioning of bi-metallism, France, Belgium, Italy,

Switzerland formed Latin Monetary Union in 1866. Monetary
Union of 6 countries could not succeeded and finally collapsed in
1874. America adopted bi-metallism in 1792 and abandoned bimetallism in 1900.
Advantages of Bi-Metallism:
a) Stability of Price Level: if one metal say gold or silver, is used
as money, it will not ensure price stability in the country,
because when one metal exceeds or falls short of currency
requirements, that leads to rising or falling prices in the
country.
b) Another advantage claimed for bi-metallism is that it helps in
arresting the fall in the price of the value of the depreciated
metal.
c) Bi-Metallism facilitates international trade because ratio of
exchange between gold and silver can be established easily
with all countries of the world which are on gold or silver
standard.
d) When there are two metals used as joint standard, the
government can easily meet its requirement of cash.
e) It makes easy for the banks to keep the necessary cash
reserves against liabilities.
MONOMETALLISM
The monetary system of a country is called monometallism when
the value of the monetary unit is fixed and maintained in terms of
one standard metal only. If the standard monetary unit is gold, the
country is said to have a gold standard, if the standard monetary
unit is silver so it is on silver standard.
SILVER STANDARD
Under silver monetary standard the monetary unit is a given fixed
quantity of silver and all other forms of money are maintained by
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making it convertible into silver at the fixed rate. Silver is allowed

to move freely in and outside the country.
GOLD STANDARD
The system which exists in its fully developed form when the unit
of money is exclusively defined by law as a certain amount of
gold, of specified weight and fineness and when all forms of
money within a monetary system are kept at a parity with this
amount of gold in the worlds free gold markets.
Essentials of Gold Standard
a) The unit of account is defined by law as equal to a certain
quantity of gold of specified weights and fineness.
b) The gold bullion can readily be converted into the standard
money at a fixed price and vice versa.
c) All other types of money are kept at parity with standard
money.
d) The monetary authority buys and sells gold in unlimited
amounts at a fixed price per ounce (a unit of measuring weight)
of other unit.
e) There is free import and export of gold in the worlds free gold
markets.
Different Forms of Gold Standard
Full Gold Standard/ Gold Currency Standard: The standard
monetary units of a country are full bodied gold coins. People are
allowed to get the bullion converted in unlimited quantity into
standard gold coins with or without charge. They can import,
export, thus unlimited purchase/ sale of gold is allowed in country.
When the WW-I broke out, this system could not be maintained
due to the shortage of gold so finally given up.
Gold Bullion Standard: After the WW-I, all the countries except
U.S.A could not obey the discipline of the gold standard and so
had to abandon this monetary system. Restored gold standard
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was named as gold bullion standard. The gold bullions holder is

not entitled to get it converted into gold coins. Government buys
and sells all offerings of gold at a fixed price.
MECHANISM OF FREE GOLD STANDARD
The gold is allowed to move freely from one country to another
country. The rates of exchange among the gold standard
countries are established close to the gold parties. The inflow and
outflow of gold from the country sets in motion a mechanism to
restore equilibrium.
Rules of Gold Standard:
Firstly, there should be high degree of freedom of trade between
countries. If any country impose restrictions on the import/ export
of commodities, it will create a problem in movement of gold into
or out of a country, thus gold standard will not work properly.
Secondly, the economic structure of the countries on gold
standard should be highly elastic so that prices and wages react
quickly to changes in gold movements.
Thirdly, if there is an outflow of gold, the prices of the
commodities and the wage level should be allowed to fall.
Similarly, if there is an inflow of gold, the price level should be
allowed to rise.
Why Gold Standard Broke Down
1) Not obeying the Rules: almost all receiving countries did not
play the game of the gold standard. Gold was not allowed to go
into circulation and tone the internal price level.
2) Short term Investment: Before the WW-I, people used to
invest abroad in long term investment but after the WW-I, most of
the countries preferred to keep their funds for short term
investment for safety reasons.
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3) Repatriation/Repayment and War debts: another obstacle

which hindered the smooth working of gold standard was the
repayment of war debts. The debtor countries were willing to
make the payments in the form of goods but the creditor
countries demand that payment should be made in the form of
gold only.
4) A Fair Weather Standard: another weakness of this
standard is that it cannot bear pressure on its delicate working. It
is always liable to fall down in crisis. It is thus a fair weather
standard only.
5) Elastic Economic Structure: another factor which led to fall
down of the gold standard was that gold standard could not keep
the economic structure of their countries fairly elastic. Inflow of
gold, a policy of inflation was not adopted. Gold standard can
work successfully only when prices and wages respond to gold
movements.
Merits of Gold Standard
1) Stability of External Value: it ensures stable exchange rate
of all the countries on gold standard. If at any time there are
different kinds between the market rate of exchange, it is
automatically corrected by import and export of gold.
2) Stability of the Internal Value of the Currency: As the
volume of a countrys currency depends on its stock of gold, so
there cannot be over issue of bank notes.
3) Self-Regulative Character: The deficit or surplus in the
balance of payments is automatically brought into balance by
import or export of gold.
4) Universally Acceptable Currency: One very important merit
of the gold standard is that it provides a country with a currency
which is universally acceptable.
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5) Facilitates International Trade: In International dealings,

gold standard provides stability of exchange rates. This inspires
confidence amongst the traders and encourages international
trade.
6) Objective Standard: Gold Standard is an objective; it cannot
secretly interfere with by the government or the currency
authority.
7) Inspires Confidence: If a country is on Gold Standard, it
inspires confidence in the people and contributes to the national
prestige.
8) Simple Working: The working of Gold standard is so simple
that it can be easily understood by a layman (one have not
knowledge) also. It does not involve any complication like the
modern currency system.
Demerits of Gold Standard
1) Adoption of Independent Monetary Policy: One very
serious defect of the gold standard is that it makes it impossible
for a country to pursue an independent monetary policy.
2) Automatic Standard: It is an automatic standard provided its
rules are fully observed. It has been seen that prices and wages
do not respond to changes in gold movements.
3) Change in Gold Output: The changes in output of gold
caused variation in price from time to time.
4) Internal Stability: Another drawback with the gold standard
is that it sacrifices internal stability/ strength to external stability.
A country must adjust its internal prices to the prices prevailing in
other countries.

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5) Fair Weather Friend: One very serious charge leveled at

Gold Standard is that it is a fair weather standard. It is always
liable to collapse.
CHAPTER # 4
INFLATION, DEFLATION AND STAGFLATION
What is Inflation?
Inflation is a process in which there is continuous increase in the
general price level and the money is continuously losing its value.
Or Inflation is persistent and appreciable rise in general level or
average of prices.(by: Gradner Ackley)
Causes of Inflation
1) Demand Pull Inflation: is also called Aggregate Demand
Inflation. When aggregate demand increases faster than
aggregate supply of goods and services, the prices of goods tend
to rise.
1.1) Demand Pull Inflation and Full employment: If the
countrys resources are fully employed and there is an increase in
aggregate demand for goods, it will lead to an upward movement
in prices.
1.2) Demand Pull inflation at less than full employment: An
increase in aggregate demand can result in a rise in the general
price level at less than full employment. The rise in price level
occurs when output cannot be increased in proportion to the rise
in aggregate demand.
2) Cost Push Inflation: a situation where the process of rising
prices in initiated and sustained by rising costs which push up the
general price level. The main sources of increased costs are
following.

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a) Increase in money wage rates: When the cost of living goes

upward, workers demand the increases in wages. The increase in
wages raises the cost of production of goods and push up price
level.
b) Profit push Inflation: When few powerful firms increase the
profit margins, the smaller firms also increase their profit margin.
Therefore, inflate price level increase.
c) Material push Inflation: If there is increase in the prices of
some basic materials such as gas, oil, steel, chemical etc. which
are used directly or indirectly in almost all industries, it cause
increase in the cost of production and hence in the general price
level.
d) Higher taxes: If the government imposes new taxes or raises
the rates of old taxes, the producers generally shift the burden of
taxes on to the consumers in the form of indirect taxes. The
increases in the selling prices of commodities push up the
inflationary in the economy.
e) Rise in import prices: If prices of imported goods increase, it
also contributes towards inflation.
Remedies of Inflation
1) Monetary Policy: is a policy that influences the economy
through changes in the money supply and available credit.
Monetary policy is adopted by Central bank of country. Monetary
measures which are used to control are; i) Quantitative Control ii)
Qualitative Control.
2) Fiscal Policy: It is budgetary policy of the government
relating to taxes, public expenditure, public borrowing and deficit
financing. It can be measured as under;

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i) Changes in Taxation: If the govt. of a country brings about

changes in tax rates, it can help in stabilization of prices in the
country.
ii) Changes in Govt. expenditure: If the inflation is at or above
the level of full employment in the country, the govt. can bring
down the price level by its own unproductive expenditure.
iii) Public Borrowing: Public borrowing is another effective
method of controlling inflation. Public borrowing reduces the
aggregate demand for goods and hence price level.
iv) Balanced Budget Changes: A balanced budget decrease
has an effect on national income and hence on bringing down the
price level.
v) Control of deficit financing: The bank borrowing and
printing of new notes increases the money supply in the country
and pushes up the price level. Deficit financing therefore, should
be avoided to control inflation.
DEFLATION
A situation where price level falls causing major increase in
unemployment, reduction in output and decrease in the income of
the people.
Causes of Deflation
When the level of money income falls relatively to the current
supply of goods and services, it may occur due to fall in the
private investment unfavorable balance of payments , sudden
increase in output, or by action of the central bank to raise
discount rate or by selling securities or due to the combined
effect of all these factors.
Measures to control Deflation
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Deflation can be controlled both by fiscal and monetary measure.

The task of increasing the demand for goods and services could
be done by government by increasing public spending, by
reducing taxes, by stimulating private investment or private
consumption or a combination of all these.
Effect of deflation on various sections of society
a) Over production: When the prices are falling the producers
buy material and other inputs at higher prices and are forced to
sell the products at lower prices, it finally results in over
production of commodities.
b) Traders lose: During deflation, the traders purchase goods at
higher prices and have to sell later on at lower prices due to the
deflationary trend.
c) Investing Class: The equity holders lose during deflation and
debenture holders gain when prices fall.
d) Fixed income group: The prisoners, wage earners, gain
during deflation as the wages, pensions etc. do not decrease with
the fall in the prices.
e) Consumers: When the prices of the commodities fall, the
consumers, whose debtors is fixed gain.
f) Tax Payers: The tax payers lose during deflation as the value
of money rises in this period.
g) Private Sectors Unit: The private sector units suffer when
their price of goods falls.
REFLATION
A situation of a moderately rising general price when efforts are
made by the government to lift the economy out of depression.
The inflation and reflation both, the money supply increases.

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DISFLATION
The process through which prices are brought down without
causing unemployment and reducing output is called disinflation.
STAGFLATION
Stagflation involves inflationary rise in prices and wages at the
same time. The people are unable to find jobs and firms are
unable to find customers for what their plants can produce.
Causes of Stagflation
i) Resource Costs: Reduction in aggregate supply may be due to
rise in resource costs, price of raw materials, rise in wage rates,
imported material. The rise in resource cost leads to rise in prices
and reduction in output.
ii) Reduction in labor supply: Reduction in labor supply
adversely affects output of goods. If the reduction in labor supply
is caused by a rise in money wages on account of strong union or
by a rise in the legal minimum wage rate, there will be a fall in
output and employment and the price level rises.
iii) Increase in Taxes: If there is rapid increase in indirect taxes,
it will raise costs and prices of domestic goods and reduce output
and employment.
Measures to control Stagflation
a) The government should make every effort that minimum wages
are not raised during stagflation.
b) The increase in money wages should be linked with increase in
productivity.
c) The personal and business taxes should be reduced to bring
down the costs or goods.
d) Through manpower training, the supply of labor should be
upgraded. This will help in reducing unemployment.

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e) Transportation should be improved to provide facilitates for

searching out jobs in production areas.
f) The government itself should take up development programs to
creative jobs in the country.
KINDS OF INFLATION
1) On the basis of Rate of Inflation
i) Creeping Inflation: is a situation in which the rise in general
price level is at a very slow rate over a period of time. Under
creeping inflation, the price level rises up to a rate of 2 percent
per annum.
ii) Walking Inflation: Walking Inflation is a marked increase in
the rate of inflation as compared to creeping inflation. The price
rises in around 5 percent annually.
iii) Running Inflation: Under running inflation, the price
increase is about 8 to 10 percent per annum.
iv) Galloping or Hyper Inflation: Galloping inflation is called
full inflation. It is a stage of inflation which starts after the level of
full employment is reached; here price level rises very rapidly
within a short period.
2) On the Basis of Degree of Control
i) Open inflation: It is a stage when the rise in price level gets
out of control.
ii) Suppressed Inflation: Under this type of inflation, the
government makes efforts to check and control the rise in price
level through price control and rationing. When the price level is
suppressed by the above short term measures, it results in many
evils such as black marketing, corruption and profiteering.
3) Inflation on the Basis of Causes

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i) Demand Pull Inflation: inflation caused by increase in

aggregate demand, not matched by aggregate supply of goods,
resulting in rise of general price level, is called demand pull
inflation. Simply, occurs when the demand for goods and services
in the country is more than their supply.
ii) Cost Push Inflation: Cost push inflation occurs when the
increasing cost of production pushes up, the general price level.
Cost Push Inflation occurs when the economy is below full
employment with prices rising even though there is no shortage
of goods.
iii) Profit Induced Inflation: Profit Induced Inflation is in fact
categorized under cost push inflation. When entrepreneurs, due to
their monopoly position raise the profit margin on goods, it may
cause profit push inflation.
iv) Budgetary Inflation: When the government of a country
covers the deficits in the budgets through bank borrowing and
creating new money, the purchasing power of the community
increases without an increase in the production of goods.
v) Monetary Inflation: Inflation is caused by a too rapid
increase in the money supply and by nothing else.
vi) Multi Casual Inflation: inflation has a number of causes. It
may be caused by increase in money supply, excessive wage
demands, excess aggregate demand for goods, shortage of goods
etc. The chief cause of inflation in one year may not be in the next
year. Since inflation is multi casual, therefore, a variety of policy
measures are needed to deal with it.
INFLATION IN PAKISTAN
In Pakistan, the general price level is persistently rising since
Partition of the Subcontinent. Prices remained volatile during the
decade of 1990s ranging from 5.7% to 13% mainly because of
declining economic growth. The inflation rate started declining
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from 1998 onward due to improved supply position of goods.

Inflation rate based on the CPI (consumer price index) has
averaged 4.6% during 2003-04. However, during 2007-08 (JulyApril) inflation increased to 10.3%, during 2008-09 inflation
increased to 22.3%.
Causes of Inflation in Pakistan

1) Demand Pull Inflation: is generated when aggregate
demand for goods for all purposes- consumption, investment and
government expenditure exceeds the supply of goods at current
prices.
i) Rapid Monetary expansion: In Pakistan, the rate of growth in
monetary assets is much higher than the rate of growth in GDP.
The easy monetary policy is adopted to kick start the economy is
a major factor responsible for price hike in Pakistan.
ii) Deficit Financing: Due to the lack of resources for economic
development , the government has been restoring to deficit
financing over the years. The excessive growth in money supply
compared increase in output has resulted inflation.
iii) Consumption habits: Pakistanis living in urban and rural
areas are mostly money waster. They are proud of spending
money on the goods which are used by the people in advanced
countries of the world, as expenditure on clothes, foods,
cosmetics etc. have added much to the inflationary pressure to
the economy.
iv) Construction Houses: Since 1970, people are spending their
savings mostly on the purchasing land and constructing houses.
The unproductive expenditure on the construction of houses,
plaza etc.

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v) Population explosion: The population is increasing at the

rate about 1.9% in Pakistan, the pressure of population has
increased the aggregate demand for commodities thus pulling up
the general level of prices in the country.
vi) Black Money: it is generated through smuggling, tax evasion,
price control etc. It is estimated that annual generation of black
money is about 25% of GNP of the country. This huge amount
pushes up the prices of land, houses, car , air-conditioners and
other expensive items.
2) Cost Push Inflation: the rise in general price level is also
caused by rising costs of the factors of production, it is called cost
push inflation.
i) Increase in wages: in Pakistan one the factors leading to cost
push inflation is the rise in wages not backed by increase in
productivity. The compensatory wage increase and the rise in
prices are chasing each other at quite a rapid speed causing
persistent rise in the level of prices.
ii) Rising prices of imported goods: the import prices of
chemicals, fertilizer, non-electrical machinery, etc. have gone up
in the world market. The cost and so the prices of commodities
using the imported items have gone up in the country.
iii) Increase in indirect taxes: For increasing the revenue, the
government is heavily depending on indirect taxes. The increase
in the indirect taxes every year has given the general price level
an inflationary push.
iv) Rise in POL, Excise duty, Gas: The multiplier effect of the
rise in POL, gas prices and sales tax on number of items has
greatly contributed to the cost push effect.
vii) Rise in support prices of agriculture crops: The
Government raised the support prices of cotton, wheat, sugarcane
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to protect the interests of the farmers. This also has an

inflationary impact on the economy.
SECTION-II (BANKING)
CHAPTER # 5
ORIGIN AND GROWTH OF BANKING

Banking: the business activities of banks.
Evolution of banking
It has not decided as to how the word Bank originated. Some
authors state that this word is derived from the words Bancus or
Banque which means a bench. When the business was failed, the
Bancus was destroyed by the people. Other authors opinion that
the word Bank is derived from the German word Banc which
means joint stock fund/firm. Yes not confirm what the correct
opinion is.
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Early Growth
Banking is fact is as primitive as human society. Perhaps it were
Babylonian who developed the banking system. It was evident
that the temples of Babylonians were used as banks because of
prevalent respect.
King Hamurabi was the founder of Babylonian empire, he draw a
code where he laid down standard rules of procedure for banking
operation by temple and great land owners. He got his code
inscribed on blocks of diorite about 8 feet tall, containing 150
paragraphs which was dealing with all aspects of loans, interest
pledge, natural accidents, loss.
It is not certain who invented money, but history records
suggested that King Lydia casted electrum( natural alloy of gold
and silver) ingots of identical shape and uniform weight were
formulated.
Also in Greece the temples of Ephesus and Delphi were the
biggest banks of their time were people were depositing their
money and other valuables for safety. The Roman though did not
organize state banking nevertheless the conduct of private banks
in such a way the utmost confidence was created in them.
Early bank was the public lank called Bank of Venice was
established. Seeing the demand these money lenders starting to
organize themselves, the banking was started to come at sea port
in southern Europe.
In 1401 German public Bank was established comprising on the
operation of discounting, depositing, and transfer of money.
In order to stream line banking organization and techniques,
conference was held in from 1548 to 1551, it was agreed
commercial interest of time needed a bank facilities growth and
transfer but it should not run by private individuals.
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Modern Banking
Banking in its modern form and structure started in Britain when
many Lombardy merchant came in England now called Lombard
Street. They were so much resourceful.
The Business of changing was so lucrative that king Edward-II
establish the Royal exchange of changing foreign money at a
profit for the benefit of the crown.
The discovery of America brought riches to Britain and gave a
fruitful boost to foreign trade. Consequently, the business was
taken by Gold smith upto that time they were dealing with gold
and silver.
Over the time period, Gold Smiths discovered the large sum of
money were left in the custody, since they issued loans to
customers.
In 1672, however, Britain faced a great crisis when Charles-II
borrowed huge sum of money from gold smith later he refused to
return it. Therefore, a number of gold smith bankers formed
themselves into corporation in 1665, known as Bank of England
12,000,00 at 8% interest to William-III, who in return allowed
them number of privileges to the bank.
By the year 1700, the bank of England was only issuing notes but
also conducting accounts of customers. The Joint Stock bank was
dissolved into private banks.
Types of Banks
1) Commercial Banks: are those banks which are engaged in
performing the routine duties of banking business. They collect
surplus money from the people. They make loans and advances in
the form of overdraft, cash credits, discounting bill of exchange.
E.g. HBL, NBP,UBL, etc.

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2) Merchant Banks: are those banks which have mainly

financing the domestic and international trade in country.
3) Saving Banks: are those banks which collect and keep the
small savings of the public. The saving banks invest the funds in
the safest government securities. E.g. Post Office Saving bank,
Saving Account at National Saving Organization.
4) Consumer Banks: are those banks which provide finance for
purchasing consumption goods for the use of the borrowers. E.g.
Consumer Finance Companies, Sales Finance companies, Credit
Unions etc.
5) Mortgage Banks: are those banks mainly deals with the
providing loan on the basis of submitting securities for mortgage
for construction purpose or other. E.g. Loan associations, FarmLoan associations etc.
6) Investment Banks: are those banks which assist the business
houses and the governmental bodies to raise money through the
sale of stock and bonds for usually long term purposes.
7) Agricultural Banks: are set up to provide financial assistance
to the agriculturalist. The Agricultural banks provide short term
credit and medium term advances to the farmers for the purchase
of seeds, manure, tractor etc. E.g. Agricultural Development Bank
of Pakistan etc.
8) Industrial Banks: are those banks which mainly provide
medium and long term credit to the industries. E.g. Industrial
Development Bank of Pakistan.
8) Cooperative Banks: These are banks established to provide
short and medium term loans for rural development in general.
E.g. Federal Bank of Cooperative etc.
9) Eximp Banks: These are the banks which provide finance for
promotion of imports and exports to trade, commerce and
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industry. These banks are contributing mainly toward the

expansion of international trade.
10) Central Bank: Central banks occupy unique position in the
banking structure of a country because they have been entrusted
with the responsibility of controlling the money supply, interest
rates and financial market of the country for the purpose of
economic development. E.g. State Bank of Pakistan, Bank Of
England, Reserve Bank of India, Reserve Bank of U.S.A. etc.
Banking in Indo-Pakistan
The Indian society was quite familiar with banking right from
beginning. When money became the medium of exchange.
Informal banking practices were continuing in those days.
The Vedic Epics clearly mention about giving and taking credit
and also contract of debts. These are also sufficient evidence to
show during the 5th century people were accustomed to use
hundies as the credit instrument, the land revenue was collected
generally in kind, services were generally paid in cash. Bankers
enjoyed banking while offering loans to different communities.
Banking Rule in India
The Muslim rulers, therefore, provided encouragement to the
farmers by giving them interest free loans and grants in cash on
one hand, and allowing them to pay the land revenue in cash or
kind on other hand. Muslim historians of the 12 th century have
also mentioned some bankers known as Multani and Shroffs
who were acting as agents to the government to collect revenue
as also to change money to government.
Muhammad Tughlaq was the first king to have introduced token
currency in India. He issued metal coins as well as paper currency
from the Royal Mints.

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Akbar established mints all over the country to prepare and issue
currency. Though the Muslim rulers did not establish any Bank as
such, yet they revolutionized the entire financial and monetary
structure in India wherein the old Sahokars and Mahajans were
not only eliminated but the Government introduced reforms were
effective that these classical bankers were pushed into the past.
Banking in Pakistan
Commercial Banking facilitates were provided fairly well in
Pakistan. There were 487 offices of scheduled banks in the
territories now constituting Pakistan. After the independence of
Pakistan the committee recommended that the Reserve Bank of
India should continue to function in Pakistan until 30 th September
1948, so the problems of time and demand liability, coinage, and
currencies exchange etc. are settled in India and Pakistan.
This system run one year, thereafter, Government of Pakistan
decided to establish a full-fledge Central Bank. Consequently, the
Governor General of Pakistan and Father of Pakistan Quaid-eAzam founded the State Bank of Pakistan on July 1,1948.
The first important task which the State Bank of Pakistan had to
issue of currency notes and withdrawal of Reserve Bank of India
notes with overprinting, then Pakistans currency circulated in the
country.
THE STATE BANK OF PAKISTAN
After Partition, the newly born state was faced with a serious
banking situation due to the wholesale migration of banking staff
to India. Rather created further difficulties by refusing to give
Rs.55 crore which Pakistan was entitled to share the cash balance
of the undivided India.
Therefore, decided to establish its own currency authority earlier
than it was mutually agreed upon. The Reserve Bank of India was
relieved of its functions in Pakistan from the first day of July, 1948.
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The Governor General Quaid-e-Azam Muhammad Ali Jinnah order

for the establishment of State Bank of Pakistan on 1 st July 1948.
The Bank is entrusted with the duty of regulating the issue of
bank notes and keeping of reserve with a view to seeking
monetary stability in Pakistan.
The original share capital of the Bank is three crore rupees
divided into three lac fully paid up shares of Rs.100 each. Of the
total share capital 51% were owned by Government Sector while
49% were owned by private sector. The State Bank of Pakistan
has 14 departments, and employing over 5000 employees.
Functions of State Bank of Pakistan
1) Bank of Issue: the State Bank of Pakistan has sole right to
issue notes except one rupee coin and subsidiary coins which are
issued by the Government of Pakistan. This system of note issue
is known as Minimum Reserve System.
2) Framing and organizing of monetary policy: Monetary
policy is conducted by the SBP to regulate and control the volume
of money and credit supply in the country in order to achieve
specific economic objectives such as price stability, reducing
employment etc.
3) Regulation and Supervision of Bank: The State Bank of
Pakistan has full powers to supervise and control the banking
system in the country. The regulatory powers relate to the
licensing of banks, and their branch expansion, liquidity of assets
of banks, management and methods of working of the banks.
4) Foreign Exchange Management: The State Bank of Pakistan
acts as a custodian of foreign exchange reserves manages
exchange control and external value of the rupee and acts as the
agent of the government in respect of Pakistans membership of
the IMF.

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5) State Bank as a Clearing House: The State Bank of Pakistan

acts as a clearing house for the commercial banks. A clearing
house is a place where the representative of commercial banks
meets each day to exchange cheques drawn on each other and
then settle the difference owned to each other.
6) Adviser of Government: The SBP also acts as adviser to
government in all financial matters. Since the SBP is directly
involved in the money and foreign exchange markets, it,
therefore, tenders advice on all economic matters.
7) Lender of Last resort: The State Bank of Pakistan is the
lender of last resort for the commercial banks. If at any time, the
banks are short of cash reserves, the SBP comes to their rescue. It
provides cash to commercial banks.
8) State Bank and Economic Growth: The State Bank playing
a significant role in facilitating economic development and growth
of the banking system and other financial institutions in the
country.
CHAPTER # 6
SPECIALIZED CREDIT INSTITUTIONS
1) International Monetary Fund (IMF): The need for economic
recoveries of countries devastated after WW-II, the United States
of America invited 44 countries of the world to the United Nations
Monetary and Financial Conference in Bretton Woods, decided
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upon the agreement of the fund which was signed by 27 countries

on December 27, 1945; funds operations started May, 1946.
2) International Bank for Reconstruction and
Development/ World Bank: The economic and financial experts
recognized the necessity of relief and physical reconstruction of
economies immediately after the WW-II, then representative of 28
countries signed the Articles of Agreement and the Bank was
established on December 27, 1945.
3) International Finance Corporation (IFC): The activities of
World Bank did not cover all needs of development financing, the
World Bank formally submitted a proposal Charter, and 31
countries signed the Article of Agreement in April 1955, bringing
the International Finance Corporation came into being in July,
1956, as an affiliate of the World Bank.
4) International Development Association ( IDA): The Board
of Governors of the World Bank at its annual meeting in 1959
approved a United States resolution calling upon the Executive
Directors of the Bank to draft Articles of Agreement for IDA, and
submitted to the Member-Countries in January, 1960 and it is
established.
5) Multilateral Investment Guarantee Agency (MIGA): This
agency established in 1998, as an affiliate of the World Bank, but
it is legally and financially separate from the world Bank. Its basic
object is to encourage the flow of investment in productive
purpose in its member countries.
6) Islamic Development Bank ( IDB): The conference of
Finance Ministers of Muslim Countries held in Jeddah in December,
1973 issued a Declaration of Intent and the Islamic Development
Bank was subsequently established and commenced operations in
October,1975. With the object at the economic development , and
social progress of member-countries and Muslim Communities.
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7) Asian Development Bank (ADB): The Asian Development

Bank commenced operation in December, 1966, with its
headquarter in Manila (Philipines). The aim to raise funds from
private sources then it provides financial and technical assistance
for development purposes in the Asian region.

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CHAPTER # 7
THE BANKERS FUND, BANK CREDIT, INSTRUMENT OF
CREDIT
The fund available to a banker for the purpose of his business
comprise of the following;
i) Bankers own paid-up capital, the reserve fund, and liquid
assets.
ii) Money received from depositors in current, fixed and term
deposits.
a) Banks Capital: The amount with which a banking company in
Pakistan has been registered is called Nominal or Authorized
Capital. It is further divided into paid-up capital and subscribed
capital. Paid-up Capital is that portion of capital which the banking
company has actually received from the public, while the
subscribed capital is that part of the issued capital which is
applied for by the public, including the shares issued to the
vendors or promoters.
b) The Reserve Bank: This fund consists of accumulated undivided trading profits set aside to provide for possibility and any
unusual call upon the banks resources. In this case many
Pakistani banks the reserve fund has approached in amount more
than the paid-up capital.
CREDIT
The word credit is derived from the Latin word Credo. The word
Credo means I trust you. Defined as: An exchange which is
complete after the expiry of certain period of time after payment.
Functions of Credit

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1) Economy in the Use of Metal: Credit instrument are used as

medium of exchange in place of metallic coins. There is thus a
saving of precious metals.
2) Provision of Working Capital: If an industrialist is short of
spending power when the production is going on, he can finance
the industry by obtaining credit from the banks.
3) Sales and Bonds: If the prospects of invested capital are
bright and the profits are being earned left and light, the firm can
obtain possession of funds even by selling bonds.
4) Case of Young Firm: Credit enables the entrepreneur of a
young firm to develop its resources at a rapid speed which
otherwise would not have been possible.
5) Large Scale Production: The institutions of credit have
provided a ready flow of money to the industrialist. When the
requirements of capital accumulation are met, the production is
increased on large scale.
6) Purchase of Goods: Credit makes it easy and convenient to
the consumers to purchase or hire durable goods. A consumer can
acquire flour, cloth, radio, telephone, car, house, washing
machine, etc. from the dealer s with an obligations to pay in
future either by installments or in lump sum.
7) International Payments: International Payments, especially
through the bills of exchange, have been greatly facilitated. There
is no need now to import or export gold for settlement of
international business transactions.
8) State Revenue: If government expenditure is in excess of its
current revenue, it can meet the deficit by the sale of bonds. Thus
the timely needs of the state are satisfactorily met through credit.
Dangers of Credit

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1) Over-issue of Credit: The expansion of credit beyond safe

limits usually results in over investment, over production, and the
rise in prices. The contraction of credit generally leads to
recession and depression in the economy.
2) Bad Debts: If an individual consumer, a businessman or a
nation is not careful in the use of borrowed money and rash
enterprises are undertaken which prove failure; the loans will not
be paid to credit institutions which will create panic in the
monetary circle.
3) Insufficient Business Concern: Another inherent danger of
credit is that money may accumulate in the hands of those
entrepreneurs who are financially weak and running uneconomic
concerns.
4) Monopolistic Exploitation: If large amount of money is
placed at the disposal of individuals or companies, then there is
danger of combines and monopolistic exploitation. The
monopolistic can adopt unfair methods in business dealings.
5) Borrowing by Government: A government may spend
borrowed money in lavish manner. If the citizens are vigilant, they
will lose confidence in the credibility of the state.
INSTRUMENT OF CREDIT
1) Pay roll Credit: is also called oral agreement. Some credit
extended to individuals, friends, business associates without
keeping any record or documents. The agreement to pay back the
money is purely oral. If a borrower refuses to pay the money, the
creditor cannot prove the existence of any obligation. Oral
agreements are mostly confined to small loans.
2) Open Book Accounts or Book Credits: Open book account
merely consists of entries on the books of business concerns.
These entries appear as an account receivable on the books of
lender and as an account payable on the books of the borrower.
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University of
MONEY AND BANKING
The main advantage claimed for the book account is that it is very
simple and speedy way of carrying on the business transaction.
3) Documentary Credit Instruments: However, most of the
credit is evidenced by a written contract. The instruments of
credit or debit exhibit the existence and terms of debt, identity of
the debtor, the amount of the debt, the rate of interest, the time
of the maturity of the loan etc. When the instruments of credit or
debt are evidenced by records and documents, they eliminate
doubts about the nature and terms of loans.
NEGOTIABLE INSTRUMENT
A written document which entitles a person to receive a sum of
money. The kinds of negotiable instruments are; i) Promissory
Note, ii) Bill of Exchange and iii) Cheque.
Characteristic of negotiability
1) Transferable by delivery: it is transferable from one person
to another by delivery or endorsement.
2) Entitled to receive money: The legal holder of the
instrument is entitled to receive money mentioned in it.
3) Filling a suit: The holder of negotiable instrument has the
right to file a suit in his name for payment from all or any of the
concerned parties.
4) Transferee is not affected by defective title: If the
transferee has accepted the negotiable instrument in good faith,
then he is not affected by the defective title of the transferor in
any way. In other words, he is protected against all defects of title
of persons from whom he receives the payment.

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MONEY AND BANKING

THE NATURE AND FUNCTION OF MONEY

Compiled by: Seetal Daas