Money & Banking System

It is very unusual for a guy like me who belongs from a technical background to write a blog on this subject who hardly used to understand economics in high school but later as time progressed no wonder that I wasn't spared with the beauty of this subject & Also this is my first blog on economics so please be free to review it and let me know your comments in the comment section box so that I can improvise it.

The progress of money & that of the banking institution has an interesting beginning. Back in time (a few millennia ago) when there was no concept of money involved in the market the people used to exchange goods & services with other goods & services popularly known as the Barter system, But there was one problem in it. Suppose you are a Mathematics teacher like me and want to teach music to your kid so what you would do? Well, you will find a music teacher who is interested to teach music to your child and in turn, agrees to send his/ her kid for mathematics classes. As easy it may sound but trust me though not "impossible" it is still very difficult to find one and if you manage to get somehow it will be a daunting task to agree that how many music classes are equal to one mathematics class or vice versa. This problem is known as " Double coincidence of wants". So when the concept of money came out this problem got inevitably resolved now you can pay the music teacher the agreed fees and could have your child learn music without the need of his/ her kid the want to learn mathematics & the evolution of money into modern times like paper currency & digital money has made our lives much more simpler than ever before. But this is not the end of the story as money took new form Enterprising businessmen saw an opportunity in this.

Yes, you guessed it right!, A financial institution called bank came up. As you know the value of a demand deposit with a bank is also considered as money since one can write cheque against it to make payments but just think why would bank sit on idle cash waiting to serve its customers, In other words, how a bank makes money? (good question!). The bank makes money because of the three tendencies of a customer. 1. When people deposit money in a bank they do not withdraw it immediately if they would have then why would they deposit in a bank instead of keeping to themselves? 2. Even if people do withdraw sooner or later they do not withdraw it in full 3. All People do not withdraw their money simultaneously. The bank is well aware of these fact. Therefore it keeps aside a certain portion of initial cash deposit (Primary deposit) of an account holder and lends the remaining amount to a firm on a condition that the firm should open an account in their bank in which the money loaned should be deposited. This creates an additional deposit (Secondary deposit) in a bank for which no new cash deposit is made. Once again assuming that the firm will not withdraw the amount in one go it again keep aside some cash and lends the remaining to another firm. This process continues and thereby bank creates chequable deposits which are much larger than the initial cash deposited by a person. This multiple creation of credit & deposit accounts allows a bank to charge interest on loans and make a profit!!. But what happens when all people do withdraw the amount simultaneously?, Bank run happens!! and what's that we will discuss it in our next blog, Until then Stay tuned & don't forget to comment.