Methods of Issuing Currency

Various methods have been tried during last hundred years or so to make the system elastic and scientific. Following are some important methods or systems of note issue which were prevalent in different countries of the world in different times:

1. Fixed Fiduciary Reserve System: Under it, currency is issued up to a certain amount without any reserve of gold, but against government securities. However, when currency is needed more than the fixed level it must be backed up by gold penny for penny. This method was adopted by Japan and Norway in early twentieth century.

2. Proportional reserve system: This system calls for a proportionate gold and silver reserve to the total issue of currency. It allows increase or decrease of the ratio as the need be. Due to strong benefits it has become internationally accepted currency-issuing system.

3. Minimum Reserve System: This system was adopted by Holland and the Union of South Africa. This system prescribes merely a minimum percentage of gold reserves against notes and deposits and makes the notes a first charge on all the assets of the central bank.

Bank Deposit Accounts

The first function of commercial bank is to receive deposits. Usually, the customers can deposit their money in several kinds of bank accounts. Some of them are as follows:

1) Fixed Deposit Account: This account is opened for a definite period of time without the expiry of which the amount cannot be withdrawn. The rate of interest is higher than that of savings account. The greater the period for which money is deposited the higher the interest rate is offered.

2) Savings Account: It was introduced by the banks for those who have low incomes and small savings. Those who open it include students, salaried persons, and small traders.

3) Current Account: It is the most popular form of bank account. Current account is operated by businessman. In this account the customer is authorized to deposit or withdraw money any time in or from the bank. The bank does not pay any interest.

Economic Goals

Economic policies are made to achieve following economic goals.
• It means to produce better goods and services and to develop a higher standard of living of the people.
• To provide suitable jobs for all citizens who are willing and able to work.
• To achieve maximum fulfillment of wants, using available productive resources.
• To avoid large upswings in general price level that is to avoid inflation and deflation in the economy.
• To guarantee that business, workers and consumers have a high degree of freedom in their economic activities.
• To ensure that no group of citizens faces poverty while most enjoy abundance of wealth.
• To provide for those who are disabled, chronically ill, aged, laid off from jobs or otherwise unable to ear minimum levels of income.
• To have overall balance of payments in international trade and financial transactions.

How Credit is Created

Now suppose, a person deposits $1000 with a bank, ten percent of which will go to the central bank as such reserve requirement. Hence the commercial bank is left with $900 to be used for advancing loans. The party ‘A’ that borrows this $900 will either buy goods from or make payment to the other party B. The party B will receive the cheque for $900 and deposit it its account with the same commercial bank. Now the bank receives the deposit of $900. Ten percent of this amount ($90) will as usual go to the central bank and the rest of the amount ($810) will be utilized in advancing loans. At this stage the bank has net deposit of $1710 ($900+ $810), though the original deposit is $1000. In this fashion the credit money will go on increasing at every transaction. If the original deposit is $1000 the extent of credit expansion will be $10,000.

Economic Wants

Economic wants means desire for goods and services. The attempt to satisfy wants forms the basis of all economic activity. A desire of a person cannot become want until he has money to purchase and is also willing to give away for that good. Economic wants are fulfilled by consumptions of goods and services.

Necessities of life are basic needs of a person, without which our life is not possible. These include ordinary food, clothing and shelter. Comforts of life make life easy and comfortable. These wants increase efficiency of a person. These wants include better food, comfortable bed and transport facilities. Luxuries of life are neither necessary nor they increase efficiency of a person. These wants include an expensive car, big bungalow etc. These wants are for pomp and show and for mental satisfaction of a consumer.

Economic wants are unlimited, after fulfilling one want another want comes up, hence there is no end to them. Wants once fulfilled, never ends, they are repeated again and again. Some wants are felt urgently than others. Some of them cannot be postponed while others can be postponed. Some wants can be fulfilled with the use of alternative goods.

Economic Policy

Economic policy and economic analysis are closely related. All economic policies are adopted on the basis of economic theories. The creation of policies to achieve specific goals is not a simple matter.

First step is to make a clear statement about economic goals. If we say that we want full employment, do we mean that everyone between 16 and 65 years of age should have a job? Or do we mean that everyone who wants to work should have a job? Therefore economic goals must be specific.

Next step is to formulate alternative policies to achieve the goal and determine the possible effects of each policy. This requires a detailed assessment of economic impact, benefits, costs and political feasibility of alternative policies.

After implementing policy we need to check how well it worked. Only through unbiased evaluation we can improve on economic policy. These policies are augmented at a more specific level by measures designed for industrial investment, research and development and to protect consumer’s interests.

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’.

Customer

It is clearly established that the word “customer” generally denotes a relationship resulting from habit or continued dealings, but for a bank customer this habit of dealing is not essential. The person who has an account with a bank is known as an account holder or customer of that bank.

According to Lord Lindly:
“A customer is a person who has some sort of account, either deposits or current account or same other relationship with a banker.”

According to Dr. Hart:
“A customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such.”

Law of Demand

When price of a good goes up, people buy less of it and when prices goes down, people buy more it, other things being unchanged, it is called Law of Demand.

Prof. Alfred Marshall states the law of Demand as under:
“For the higher sale of the amount of a commodity, its price should fall or when the price falls, the quantity demanded increases and on the contrary, when the price rises, the demand falls provided other things remain the same.”

If different factor like consumer’s income, taste of the consumer, traditions, fashion, habits, prices of the substitute goods etc. will change, the Law of Demand will fail to operate.

What is Demand?

The word ‘demand’ is used as a term in Economics. Common meaning of word ‘demand’ is ‘desire’ but there is a difference in ‘desire’ and ‘demand’ as a term in Economics. If any thing is desired only, it will not be called demand in Economics. The desire, to become a demand, should have the backing of purchasing power or money.

The desire to purchase any thing depends on the demanded price of the commodity. The higher is the price, lower will be the demand. On the contrary, the lower is the price lesser will be the demand. No one can decide about the quantity or amount of a commodity to purchase so long he does not know about the price of the same.

The price that a buyer wants to pay for a certain quantity of a commodity is called ‘Demand Price’. The term ‘Demand’ may be defined as “The human desire of a commodity is called Demand which has support of purchasing power.”

Role of Central Bank in Economic Development

The economic stability of a country is solely dependent on the central bank. It is the only financial institution in the country which is responsible for regulating the banking and monetary system of the country. The need of central bank in a country is essentially felt considering the following services rendered by a central bank for economic development of a developing country.

1. Capital Formation: Economic progress of a country requires adequate amount of capital. Capital is required for agriculture, industrial and commercial development. But in a developing country, it is a chronic problem to procure capital. Central bank as a national institution plays prime role in capital formation in the interest of the nation as a whole. As the guardian of the money market, it regulates the capital flow in the country in proper form and suitable time.

2. Credit Control: Credit is one of the most important source of financing trade and industry. The central bank as the controller of credit can encourage a particular sector of economy by adopting selective credit control.

3. Stability in Prices: The central bank keeps the price level stable in the country by controlling money and credit supply.

Weapons of Credit Control (Qualitative Controls)

1. Direct Action: The central bank may take direct action against commercial banks that violate the rules, orders or advice of the central bank. This punishment is very severe of a commercial bank.

2. Moral persuasion: It is another method by which central bank may get credit supply expanded or contracted. By moral pressure it may prohibit or dissuade commercial banks to deal in speculative business.

3. Legislation: The central bank may also adopt necessary legislation for expanding or contracting credit money in the market.

4. Publicity: The central bank may resort to massive advertising campaign in the news papers, magazines and journals depicting the poor economic conditions of the country suggesting commercial banks and other financial institutions to control credit either by expansion or by contraction.

Weapons of Credit Control (General methods)

1. Bank Rate Policy: Bank rate is the rate of interest which is charged by the central bank on rediscounting the first class bills of exchange and advancing loans against approved securities. This facility is provided to other banks. It is also known as Discount Rate Policy.

2. Open Market Operations: The term “Open Market Operations” in the wider sense means purchase or sale by a central bank of any kind of paper in which it deals, like government securities or any other public securities or trade bills etc. in practice, however the term is applied to purchase or sale of government securities, short-term as well as long-term, at the initiative of the central bank, as a deliberate credit policy.

3. Change in Reserve Ratios: Every commercial bank is required to deposit with the central bank a certain part of its total deposits. When the central bank wants to expand credit it decreases the reserve ratio as required for the commercial banks. And when the central bank wants to contract credit the reserve ratio requirement is increased.

4. Credit Rationing: Credit rationing means restrictions placed by the central bank on demands for accommodation made upon it during times of monetary stringency and declining gold reserves. This method of controlling credit can be justified only as a measure to meet exceptional emergencies because it is open to serious abuse.

Credit Control

Credit control is one of the principal functions of the central bank. Credit money expands through commercial banks by means of cheques. Credit plays an important role in maintaining and changing the price level as a medium of exchange. It is the responsibility of the central bank to regulate the volume of credit and its direction to maintain stability of the price level.

Credit control means, regulating the volume and direction of bank loans. On the volume of credit depends largely the level of employment and the level of prices in the country.

Economics as an Art

Science is a theoretical aspect whereas Art is a practical aspect. In economics we study consumption, production, public finance etc. which provide practical solutions to our daily economic problems. Study of cause and effect of inflation or deflation falls within the purview of science but framing appropriate and suitable monetary and fiscal policies to control inflation and deflation is an art.

Lionel Robbins used the word science for Economics. He says Economics is a science, which studies human behavior as a relationship between ends and scarce means which have alternative uses. According to Keynes study of fiscal & monetary measures and their application to solve problems of unemployment, depression, and inflation etc for promoting welfare of human being makes economics an Art.

Economics as a Science

Economics, like other social sciences, make little use of laboratory methods in which changes in variables can be explained in controlled conditions. Economics usually have to examine what has already happened in the past in the real world in order to test their theories. If a simple model can explain observed behavior repeatedly, it has some value, for example, law of demand explains cause and effect relationship between price and demand for a good.

Economics is not an exact science because it depends upon economic behavior of a man and behavior of a person is complex and unpredictable. Economics is a social science, which is concerned with proper use and allocation of resources for achievement and maintenance of growth with stability.

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Macro-Economics

Macro-economics, the other half of economics, is the study of the behavior of the economy as a whole. In other words, macroeconomics deals with total or big aggregates such as national income, output & employment, total consumption and the general level of price.

In the words of Boulding:
"Macroeconomics deals not with individual quantities as such but with the aggregates of these quantities, not with individual income but with the national income, not with individual prices but with the price level, not with individual outputs but with the national output."

Macro analysis is helpful in understanding the functioning of economic system because one individual's economic study is not helpful for framing any policy, hence whole economy's study and its analysis is important.

Micro-Economics

Micro-economics is that part of economic analysis which studies decisions of individuals and firms in economy. Microeconomics is the study of specific individual units, particular firms, particular households, individual prices, wages, income, individual industries, particular commodities etc.

In the words of Samuelson:
"In microeconomics we examine among other things how individual prices are set, consider what determines the prices of land and capital and enquire into the strength and weakness of market mechanism."

Microeconomics explains how consumers and producers take their decisions regarding allocation of productive recourses among various goods and services.

Economics By Lionel Robbins

Lionel Robbins claiming his definition of Economics to be precise, scientific and superior defines economics in his well known book "Nature and Significance of Economics, Science" (published in 1931) a "Science which studies human behavior as a relationship between ends and scarce means which have alternative uses."

This definition is based on the following four pillars:
1. Human wants referred to as ends by Robbins are unlimited. They increase in quantity and quality over a period of time. They vary among individuals and over time for the same individual. It is not possible to find person who will say that his want for goods and services has been completely satisfied.
2. The ends or wants are of varying importance. Man satisfies his urgent want first and less urgent after wards in order of their importan,ce.
3. According to Robbins, the unlimited ends and the scarce recourses provide foundation to the field of economics. If all things were freely available to satisfy the unlimited human wants, there would not have arisen any scarcity, hence no economic goods, no need to economies and no economic problem.
4. The fourth important proposition of Robbins definition is that the scarce recourses available to satisfy human wants have alternative uses. They can be put to one use at one time.