Money and Banking system



It is a essential to  understand by a Nation's peoples about how money work and banking system is operated.

In my previous three article, it has been tried to make understand about money and banking system in very easy method. so about this, let us start the journey ahead.
For understanding this we have to know that Government and Bank are two different institute. Both are Interconnected which is followed by both under rules and regulation. but Bank are independent in many way. In India, RBI  was established on 1st  April 1935 in Kolkata .Before independent of India. later it is been nationalized on 1949. So As we have known that  RBI was a private financial intuition / entity and it is a autonomous body of Govt. of India after nationalized.
So know let us come to know how Bank make money. As we have known how Goldsmiths converted Gold into promissory acknowledgement and slowly the promissory acknowledgement become promissory note and like that this all was going on. Goldsmiths spreaded their network. now they become banker and opened Banks. after ended of Gold Standard on 1933. But those bankers should have issued note, only that much of Gold they have. but they issued as much as note they want and they started giving that note as Loan in interest. like that they got the Idea to control and manage people and society for their selfishness.
That is how and that is what, it has been being done by Bank. when Bank  increase money supply then money circulation become more automatically among us. and when Bank decrease money supply  then money circulation become less automatically among us. Everything goes in balance and they keep balance between supply and demand. so here we can understand as per below sentence.
Money supply Increase = Money circulation Increase  →  Value of Money will be Decrease.
Money supply Decrease = Money circulation Decrease →  Value of Money will be Increase.
Now we will try to understand about Central Banking system by Below.

Here People A took Loan Rs.100000 from Bank in Interest of 10% pa

People B took  Loan of Rs. 200000 from Bank in interest of 10% . and People C also took 100000 in same rate of interest. Now money circulation is Sum of Rs A+B+C = 400000.
End of the years A will refund 110000. B will refund 220000 and C will refund 110000.
Now money circulation is Sum of Rs.440000. 40000 is more. this 40000 is come from where. and now the next year Bank can give Loan of Rs. of Rs 440000. So next Bank can Generate more money than  before. This is a very very small example. but this all goes on in very-very big amount of money and among very big population of people. like that Bank legally make money. this is a Loan part only but when people come to deposit their money to Bank. Bank obtains that promise to pay the money with interest. your deposit money also is given in loan by Bank

Now If Depositor A,B and C each of them Deposit of Rs.100000/-. and the Bank give Loan to D,E and F. in that also Bank make Interest and some another way the money come to Bank again and again it is given in Loan to someone. and again it come to Bank. this process keep going on, because Money is in Circulation. in this process Banks are allowed to hold some amount of your money and rest of money can give in Loan. like that bank create new money. it is called Fractional Reserve Banking.we will understand this by this example.

In this process money supply effect and is 
Created a Magic Money Between  Actual Money and Circulation Money.
So Here we get Equation.
Magic Money = Circulation Money - Actual Money.
And amount of this Magic money made by Banks are Huge and Huge. By this magic money. Money supply effect for example,

if money supply increased→money circulation increased→money value decreased→ Goods and Services cost increased→Purchasing power will effect.

By studying as it seem Economics is nothing but the study of Money circulation or Money supply. and whoever has this power to control can control the whole world.
thank you for spending your precious time to read.
Journey will be keep going on. we will know more next.
for previous article get the link below :

https://sheikhmon.blogspot.com/2020/04/concept-of-money_88.html
https://sheikhmon.blogspot.com/2020/04/concept-of-money-and-banking-system.html

https://sheikhmon.blogspot.com/2020/04/money-and-banking-system.html


Comments

Unknown said…
Interesting to know.
April 16, 2020 at 3:29 PM
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