Creation of Credit

Creation of credit is one of the most outstanding function of modern banks. The commercial banks create multiple expansion of their bank deposits and due to this say have sometimes been called manufacturers of credit. The notes and currency issued by the central bank is not the only form of money. The supply of money also includes some sort of credit money in addition to real cash money.

The commercial banks extend loans by much more than the amount of cash possessed by them. This tendency of deposit making by customers and lending more loans by bank in excess of its fund is called ‘creation of credit’.

Exchange Bank

Exchange bank deals mainly in the finance of the foreign trade of the country. It deals in foreign exchange. On the other hand, the main function of such bank is to buy and sell foreign currencies, rather titles to foreign exchange, drafts, telegraphic transfers etc. It purchases the bill of exchange which arises in connection with the import and export trade of the country and they deal in exchange.

The exchange banks liquidate the international indebtedness by exporting and importing precious metals and securities, if necessary. They purchase bills and in the international money market and deposit those with their banking agents in big commercial centers like London, Paris, New York etc. They draw and sell their own drafts on these deposit accounts.

Origin of Banking

Modern banking system, in practice, is spread over the whole civilized world from England. The banking system originated from the following three sources:

The Goldsmiths:
In ancient time, it was very difficult for an individual person to protect his wealth. So, some persons having the qualities of solvency, safety and safety, were trusted to keep money of the people as deposits. The depositors would be given slips as the proof of their deposits. With the reputation of gold smiths these slips were accepted by the people instead of money in transacting business. These slips were the origin of modern bank notes.

Money-Lenders:
Money lenders were those people who lend their own money to the people and earned profit in the form of interest. They were considered original bankers.

Merchants:
The merchants were considered respectable people due to good repute of dealings and strong financial background. These merchants mainly financed foreign trade by issuing slips through their agents. These slips were the origin of modern bills of exchange, bank's draft, letters of credit etc.