Money, Banking and Finance by Ananya Jain
Money and banking are necessary components of every current economic system, since they facilitate production and consumption activities, as well as financial transactions inside and beyond national boundaries. Since the end of the fixed exchange rate system (1946–1973), financial market transactions have increased in volume and scale globally, while the frequency and ferocity of financial crises have increased considerably.
Money and banking are necessary components of every current economic system, since they facilitate production and consumption activities, as well as financial transactions inside and beyond national boundaries. Since the end of the fixed exchange rate system (1946–1973), financial market transactions have increased in volume and scale globally, while the frequency and ferocity of financial crises have increased considerably.
The nature and function of money and banking in developed countries will be discussed. We will study the role of bank loans to production and consumption activities, using a global macroeconomic perspective on the inflation phenomena. This will emphasise the fact that banks are the source of financial crises, and that the regulations proposed or implemented at the time of writing should be extended by a monetary-structural reform of banks' bookkeeping in order to eliminate systemic risks and thus reduce the financial fragility.
Money and banking are necessary components of all economic systems. Without money, products and services would be without a price, since there would be no objective means of determining their worth. Indeed, utility is a subjective, unquantifiable characteristic of every item. Its evaluation is contingent upon a variety of time-dependent individual preferences, rendering it hard to establish a socially objective measure of worth on the basis of continually changing subjective preferences over time and place. Money is a non-commodity, or the social form of value, in that it quantifies quantitatively in economic terms any generated products and services without being a measurable thing. Banks are consequently important since they provide the numerical methods of payment that are used to determine the worth of any goods transferred in the market. They so serve as monetary mediators, carrying out non-bank agents' payment orders until the latter are able to satisfy their financial commitments.
Bank credit is inextricably tied to bank money creation: it enables borrowers of any bank to engage into a payment even if they lack revenue (either generated or borrowed from other non-bank actors). Thus, the credit lines that a bank extends to its customers enable them to pay in advance of receiving an income. This is a critical element of monetary production economies, since enterprises must receive credit from banks in order to cover their production expenses before they can sell their output and remit to the banks the "final financing" gained on the market for created products and services.
Banks' financial intermediation is significantly facilitated by their ability to function as monetary intermediary in each payment they make on behalf of agents: only banks may create a credit line without having the required amount in the form of pre-existing deposits with them. Bank loans produce deposits, but non-bank financial organisations cannot make a loan without first liquidating pre-existing deposits.
When bank credit generates new deposits across the banking system, the money-to-output relationship remains unchanged if and only if the increase in bank deposits is accompanied by newly created output. If bank deposits exceed the volume of production available for sale on the product market, this has a negative effect on the buying power of each money unit, putting upward pressure on the price level when agents dispose of their deposits on the market for created goods and services. However, this inflationary pressure may go unreported when monetary authorities analyse it using consumer price indices, while agents spend their extra bank deposits on a real or financial market whose values are not included in these indices. The financial crisis that erupted in 2007–8 was precipitated by this phenomenon: over the preceding decade, an increasing amount of credit granted by banks in developed economies was used to purchase real or financial assets, creating a spiralling dynamic that monetary authorities were powerless to contain, as they manipulated their policy rates of interest solely on the basis of consumer prices (rather than also asset prices) in an attempt to maintain stability.
Encyclopedia of Life Sustaining Technologies (EOLSS) Financial market laws in place or being explored at the time of writing to avert another global crisis address a variety of issues arising from various sorts of conduct (such as greed and predatory lending) observed in the run-up to the 2007–8 financial crisis. However, the structural-systemic causes of this crisis cannot be resolved with a series of behavior-modifying regulations: a structural overhaul of banking is necessary. Given the fundamental contrast between money and credit, this article argues that the accounting structure of banks' balance sheets should permit the separation of payments for income-generating expenditures from payments for income-transferring activities. As the 1844 reform of the Bank of England imposed the separation of the latter into two distinct departments through which money emissions and financial intermediation were booked separately, there is a structural need to impose this accounting distinction on all banks – in order to avoid the emission of money in a credit operation that increases the amount of bank deposits available for purely financial market transactions.
The next section discusses the fundamental characteristics of money and credit, which are both products of banking. The third part illustrates how money and production are integrated when enterprises pay their production expenses with a bank advance, resulting in a freshly created net income for the whole economy. The fourth part defines inflation macroeconomically, as the process through which money is created. The fifth portion examines the monetary-structural causes of financial crises, while the sixth section discusses the various financial rules that exist or are being proposed at the time of writing. The seventh part makes the case for banking structural and monetary change in order to avert future systemic crises. The concluding section summarises the important points made throughout this work.
Credit and money
In economic analysis, money and credit are often confounded. This is especially true in reality, since the operation of local and cross-border payment and settlement systems blurs this difference. Nonetheless, in principle and practise, money and credit should be kept distinct. As we will see later, this difference is crucial and sufficient for understanding what banks may and should do, as well as for designing proper laws to prevent money and banking causing inflationary imbalances that might result in financial crises.
Since money was originally reified into certain precious metals (see, for example, Goodhart 2005), economists and a diverse range of scholars in other social sciences have been perplexed by the nature of money. Money is seen by economists via two lenses: metallism and chartalism. Money, according to the former, is a commodity that has often been represented by a precious metal such as gold or silver. By contrast, chartalism regards money as a social relationship that exists independently of any tangible manifestations: "Money is a 'claim' or 'credit' formed by social ties that exist apart from production and trade."
VALUE OF MONEY: MEANING, HISTORY AND THEORIES OF VALUE OF MONEY
Money's value is defined as its purchasing power or purchasing capacity. It refers to the number of products and services that a unit of money may purchase.
Money's worth is inextricably linked to the pricing of products and services. Money is used to quantify the worth of other items. The worth of money may be determined by examining the prices of other items. Money's worth is determined by the pricing of the things and services it may be used to buy.
According to the quantity theory of money, the amount of money is the primary predictor of its value or price level. According to this hypothesis, when the amount of money varies, the value of money changes as well. Irving Fisher pioneered the quantity theory of money's transactions method. According to Fisher, as the amount of money in circulation grows, the price level increases proportionately and the value of money drops, and vice versa.
Fisher demonstrated his quantity theory of money via the use of his famous exchange equation:
Other things being equal, i.e., if V and T stay constant, there exists a direct and proportionate relationship between the amount of money and the price level. Fisher justified his transactions approach to the quantity theory of money by making several assumptions, including the following: the velocity of money in circulation remains constant, the total volume of trade remains constant, the price level is a passive factor, and money is a medium of exchange. The theory has been criticised on several grounds, including that variables are not independent, that it is a simple truism, that it makes unrealistic assumptions about long periods of time, that it makes unrealistic assumptions about full employment, that it is a static theory that is technically incoherent, that it fails to explain trade cycles, and that it ignores money's store of value function.
Marshall, Pigou, Robertson, and Keynes, among others, developed the Cambridge cash-balance technique at Cambridge University. According to this view, the value of money is determined by the demand for and supply of money. The cash-balance technique takes into account the demand for and availability of money at any given point in time. The strategy takes into account the desire for 49 money as a store of value rather than a means of exchange. According to the cash-balance concept, the value of money is defined by the demand for cash-balance at a specific moment in time.
Marshall's original equation is as follows: M = KPY. The value of money (1/p) may be determined using this equation by dividing the entire quantity of products desired by the populace out of total income (KY) by the total supply of money (M). Thus, similar to Fisher's transactions approach, the cash-balance approach has been criticised on a number of grounds, including that it is a simple truism, that it ignores the speculative motivation for holding money, that it ignores investment goods, that it ignores the role of interest rates, that it ignores the influence of real factors, that it ignores the real-balance effect, and that it provides no explanation for trade cycles.
Metallism and Chartism are not mutually exclusive
Both metallism and chartalism have analytical flaws (see Rossi 2007: Chapter 1). For example, under the earlier theory, the difficulty persists (and is logically insoluble) because the commodities utilised as "money" have intrinsic worth, which should be quantified by another kind of commodity-money to prevent circular reasoning. As Ricardo's (1951: 43) life-long quest for a "invariable standard measure of value, which should be immune to the fluctuations to which other commodities are subjected" demonstrates, there is no such thing as an invariable physical thing: no commodity can have an invariable value because commodities must be produced, which occurs at variable costs due to a variety of factors, including w If money is really the standard of worth, it is not a commodity, since it would have to be assessed against another standard of value, which would be logically impossible without reference to a physical standard of value. The fact that no national accountant would ever include money in the basket of manufactured products and services used to calculate a country's gross domestic product (and thus global total output) empirically confirms the non-commodity status of money.
Chartalism, on the other hand, has its own issues, such as the claim that the state may create debt (that is, fiat money) with inherent settlement authority. "This implies that the [US] government may acquire anything for dollars simply by creating dollars" (Wray 1998: ix). Indeed, each acquisition of commodities, services, or assets entails a final payment at some point in the future. Finality of payment entails, among other things, that "a vendor” The purchaser of an item, service, or other asset gets something of equivalent value from the seller, leaving the seller with no future claim on the buyer" (Goodhart 1989: 26). This, however, is problematic in the approach advocated by chartalists, because they believe the state obtains goods and services, including labour services and real/financial assets, as a counterpart to nominal tokens (that is, bank notes or coins) that the state "fabricates" at a low cost – just as metallists argue in support of the seigniorage view. This essentially means that if the state pays its purchases on any marketplaces by the issuance of a promise of payment, all agents selling goods to the state retain a claim on them. As Graziani (2003: 60) puts out, "[i]f a single promise of payment could serve as final payment, purchasers would be gifted with a seigniorage privilege, namely the power to remove goods from the market without making a payment." Thankfully, this is not the case in reality.
Modern money is neither a commodity (as metallists assert) nor an acknowledgment of debt with inherent settlement power (as chartalists argue): it is merely a double-entry (hence numerical) device that banks provide to quantify the debt–credit relationship between the payer and the payee in economic terms. As example, a bank creates money whenever it executes a payment order for a particular client (another bank, a non-bank financial institution, a non-financial enterprise, the government, or a household). To be certain, every bank (central or commercial) issues money when it completes a transaction. It does this by acting as a monetary mediator between the payer and payee, crediting and debiting each of them with the amount of money units necessary to fulfil the appropriate financial obligation between them
As see, the bank that executes the payment order issues a number of (x) money units (m.u.) both positively and negatively, crediting and debiting both the payer and payee in an instantaneous circular flow between the two banks. As such, money is neither a net asset nor a net liability: it is both an asset and a concurrent obligation, i.e., an asset-liability (Schmitt 1975: 13), whose purpose is to numerically indicate the subject of the relevant payment (see Cencini 1995). If this is the case, one must differentiate between money and bank deposits: the former is the method of payment used to credit a deposit to a payee's bank account; the latter is the method of payment used to debit a deposit from a payee's bank account.
Encyclopedia of Life Sustaining Technologies (EOLSS) Indeed, deposits with banks provide their holders with a positive buying power, which derives from the payment that money makes to these agents in order for them to get paid for any given commodity they sold to another agency. To summarise, money performs transactions, but bank deposits fund them. Banks, on the other hand, produce only the "form" of the payment; the "content" must be given by the economy, despite the fact that a bank is capable of opening a credit line to any of its clients in order for the latter to pay on time. Allow us to do a more thorough investigation into this matter.
Despite the theoretical and practical misunderstanding, the supply of money and credit are (must be maintained) different. "The supply of credit is the provision of a positive quantity of revenue and necessitates the presence of a bank deposit (a stock), while the supply of money refers to banks' ability to transport payments (flows) on behalf of their customers" (Cencini 2001: 7). According to proponents of the idea of money emissions (for a review, see Rossi 2006), "money is a flow whose immediate circulation is directed toward a stock of income (or capital)." Banks generate the flow but not the object, which is inextricably linked to manufacturing. That is, money and credit are not synonymous" (Cencini 2001: 3).
Bank Assets Liabilities Loan to customer I +x million U.S. dollars Client II's deposit +x million yen
When a bank's customer (I) takes a loan from the latter, the former is debited for the amount of the credit that this agent uses to pay another agent, who acquires the property right on a matching bank deposit. (Assume that there is just one bank in order to simplify the discussion without sacrificing analytical significance for the particular situation in issue.) As shown, the bank possesses a claim against client I that is offset by an analogous claim held by client II against the bank, which acts as a simple intermediary between payer and payee: the former's (client I's) position in this bank's accounts offsets the latter's (client II's) position.
Client II's claim against the bank, in the form of a bank deposit, establishes this client's creditworthiness. This does not indicate, however, that the bank loans the quantity of (x) money units used in the payment. Indeed, the lending operation involves the two agents engaged in that payment: the payee (client II) extends credit to the payer (client I) through the bank, or the banking system, which acts as an intermediary, even if both non-bank actors are unaware of this financial intermediation (see Gnos 1998). When a bank issues money, it is neither a net creditor nor a net debtor of the economy, since it gets debited and credited with the quantity of (x) money units issued by the Encyclopedia of Life Support Systems (EOLSS) in a certain payment.
Money and credit would not exist if the economic system was incapable of producing goods and services. Money and credit are certainly used to finance the creation, circulation, and final consumption of output. Therefore, in the next part, we will examine how output is created as a consequence of manufacturing and banking activity.
Money Demand Interest Rates Money Supply
When the central bank seeks to contain inflation by limiting the economy's money supply, it raises interest rates, resulting in decreased demand for money. However, this component results in poor investment, which results in job losses and a decline in national production.
On the other hand, when the central bank wishes to stimulate economic and business activity in the nation, it allows commercial banks to make loans at low interest rates, increasing the economy's money supply. At this level, individuals have access to a greater variety of investment choices but have no or little savings. With lowering interest rates and increased money supply, customers rush to spend their money on various items and services, resulting in a rise in the overall price level; hence, inflation grows as interest rates fall.
Banks are often incorporated and, like any other business, must maintain a specific level of capital (money or other assets). Banking rules require banks to maintain a minimum capital ratio of 121. Banks get funds via the sale of capital stock to shareholders. The capital stock paid by shareholders becomes the bank's operating capital. To safeguard the bank's depositors, the operating capital is placed in a trust fund. In exchange, stockholders get certificates attesting to their ownership of bank stock. A bank's operating capital cannot be depleted. Dividends to shareholders must be paid only from the bank's earnings or excess.
Shareholders' legal connection with a bank is determined by the provisions of the capital stock purchase contract. Certain rights accompany an investment in a bank, including the ability to see the bank's books and records and the right to vote at shareholder meetings. Shareholders may not sue a bank directly, but they may launch a stockholder's derivative litigation on behalf of the bank in certain circumstances (sue a third party for harm caused to the bank when the bank is unable to litigate on its own). Additionally, shareholders are often not personally accountable for a bank's debts and actions, since the corporate structure restricts their culpability. However, shareholders are not immune from responsibility if they agreed to or accepted the advantages of prohibited banking activities or criminal conduct by the board of directors.
Money has a key position in our culture. Money is defined as a unit of exchange that is widely accepted as a medium of exchange. Money has a variety of tasks; it serves as a medium of trade, a unit of account, a standard for delayed payments, and a store of value.
Initially, when society was basic, commerce was straightforward. It was a barter system in which products were exchanged for goods. For example, trading of rice for shoe by two persons. Barter was the term used to describe this exchange of commodities for goods. Numerous obstacles and inconveniences existed in this system of trading. It necessitated a double concurrence of desires.
Money developed throughout time and took on numerous forms, beginning with animal money and ending with electronic money today; the various stages of money evolution are as follows: animal money, commodity money, metallic money, paper money, super money, and electronic money.
Money has a variety of functions: it serves as a medium of exchange, a unit of account, a standard of delayed payment, and a store of value. Money is utilised to trade goods and services because it is widely accepted as a payment method. All commodities and services have a monetary value. Additionally, it functions as a store of value.
Money, income, and wealth are distinct concepts that are not synonymous. In contrast to income, which is a flow variable, money is a stock variable that can be measured at any moment in time. Money is one component of wealth. Wealth is a larger term that encompasses both physical and financial possessions.
Money has a dynamic effect on an economy, either boosting or impeding economic growth. It has a significant impact on the community's productivity, revenue, employment, consumption, and economic wellbeing. Economic planning, which is a necessary component, is feasible at both the micro and macro levels with the assistance of prudent financial planning.This is made feasible by financial resources. Money serves as the pivot for economic activity such as production, consumption, trade and commerce, and government functions. Money has restrictions, for example, it cannot be used as a store of value during periods of hyperinflation. It is to blame for social disparities and corruption. The credit card notion is also eroding its significance as a money concept.
Financial markets are classified into two types: money markets and capital markets. The money market is the segment of the financial market that deals in borrowing and lending short-term loans, often for less than or equal to 365 days. The money market deals with short-term funds up to one year and financial assets that are near replacements for money. The money market enables producers and consumers of short-term funds to meet their separate investment and borrowing needs at an efficient market clearing price. Apart from serving as the government's banker, the central bank (RBI) also controls the money market and publishes rules governing its activities. Apart from that, a money market is a system in which banks and financial organisations engage in short-term monetary operations such as money demand and supply.
There are two types of money markets: organised and unstructured. Additionally, the unorganised money market is referred to as an unlawful money market. The Organised Money Market is not a unified market; rather, it is a collection of marketplaces. The call money market is a leading indication of the money market's liquidity status. The RBI intervenes in the call money market because it is inextricably linked to other parts of the money market. The DFHI trades Treasury bills, commercial bills, certificates of deposit, certificates of participation, short term deposits, call money market, and government securities.While it is not an established money market, it is the largest among developing nations. It has both a regulated and an unstructured money market concurrently. The structured bill market is uncommon in the Indian money market.
Although the RBI attempted to establish the Bill Market Scheme in 1952 and then the New Bill Market Scheme in 1970, India continues to lack a properly organised bill market. The call money market is a marketplace for very short-term debt. While the Indian money market is regarded to be the most sophisticated among developing nations, it nevertheless has a number of flaws, or 141 faults. Numerous financial products such as Treasury Bills, Commercial Bills, Certificates of Deposit, and Commercial Papers are available in the Indian money market.
The Stock Exchange:
The stock market is a marketplace for the trading of stocks (common stock, a portion of a corporation's earnings and assets used as collateral for money contributed by individual investors to the firm) of various companies. Prices are determined by the market demand and supply of a company's shares. Increased share price implies that the corporation is operating in compliance with the rules, regulations, and commitments made by the directors to each individual shareholder.
Market for Foreign Exchange:
FEM is the market place where currencies are transacted from one nation (say, PKR) to another (say, US$). Foreign exchange has a significant influence on a country's economic standing. When 1 US dollar equals 52 Pakistani rupees, Pakistan sells less to other nations because Pakistani items are more costly for overseas purchasers than when 1 US dollar equals 86 Pakistani rupees, as they get less Pakistani rupees for one US dollar. On the other hand, when 1 US dollar equals 52 PKR, Pakistan imports more from foreign nations because Pakistani importers must pay less Pak rupees to get dollars than when 1 US dollar equals 86 PKR.
What Is the Point of Studying Banking and Financial Institutions?
Financial System Structure:
Finance is a term that refers to the management of money and finances. Businesses need such capital for long-term investments and day-to-day operations. Individual families save and lend their money to such firms indirectly. Banks, insurance companies, mutual funds, investment banks, savings banks, and financing banks are all types of financial intermediaries that accept household deposits and lend them to businesses and consumers. In exchange for families' savings, it pays reduced interest to households but charges high interest to businesses or consumers for loans. The spread between these two rates represents financial intermediaries' profit.
Financial Institutions such as banks and other financial institutions:
Banks are depository entities that provide loans and take deposits. Banks include central banks, commercial banks, investment banks, finance banks, savings banks, lending associations, credit associations, mutual funds, pension funds, and insurance companies, as well as other similar entities that function as brokers between lenders and borrowers. Banks collect collateral and complete additional legal paperwork as an assurance that they will get their money back. Banks often give consumer loans alongside industrial loans, however consumer loans have a higher interest rate than industrial loans due to their non-productive character.
Innovation in Financial Services:
Innovation entails the enhancement of existing systems or processes. Banks are innovating nowadays with a variety of financial tools and alternatives, ranging from information technology to e-finance. People used to withdraw money by writing a check, but now they use ATMs. Account balances may be seen on a personal computer. Consumer finance, which includes automobiles, housing, marriage, and other services, is a component of this invention. Foreign commerce through L/C or TT, as well as domestic trade via DD and TCs, are also novel concepts. Banks now provide insurance, operating financing, partnership, educational loans, and locker facilities as a means of attracting consumers and increasing their revenues.
What is the purpose of studying Money and Monetary Policy?
Money is defined as anything that is widely recognised as payment for goods or services or as a means of debt repayment. Economic variables vary as a consequence of changes in the money supply in the economy, and so monetary policy is critical to the economy.
Money and Economic Cycles:
The business cycle is the constant shift in the firm's position from boom to bust to depression to recovery and then back to boom. During a boom, the economy has a substantially larger money supply, increased production, and aggregate output. The labour force is employed, and the unemployment rate is lower. With a greater rate of interest, money supply shrinks, and national output and production decrease, resulting in a higher rate of unemployment during a time of economic decline. When an economy is in a depression, unemployment is very high and interest rates are extremely high, resulting in a small money supply and a low level of national productivity. Finally, when the economy recovers, money supply grows in lockstep with increased production and output, resulting in a low unemployment rate. This cycle is repeated indefinitely.
Inflation and Money
Inflation is the rate at which the prices of goods and services in the economy continue to increase. The aggregate price level or price level refers to the average price of products and services in an economy. Individuals, corporations, and the government all bear the brunt of such price increases. The most likely reason of this inflation is a rise in the economy's money supply, which raises people's purchasing power and consumption trends. When a large number of individuals rush to purchase a certain item or service, the price of that item or service increases, resulting in an increase in inflation throughout the economy. In general, the price level and money supply move in lockstep. The inflation formula is the rate of change in the price level compared to a base years ETMs price, which is what we investigate while creating index numbers. Countries with a greater inflation rate need a larger money supply, and vice versa. â€Inflation is always and everywhere a monetary phenomenon, ( Milton Friedman asserts).
Money and Rates of Interest:
Interest rates on bonds and bank loans vary in response to changes in the economy's money supply. With a greater money supply in the economy, interest rates will be lower; with a smaller money supply, interest rates will be higher. Thus, interest rates and money supply are two critical components of every economy's monetary policy.
Monetary Policy Conduct:
The central bank of an economy, such as the SBP, manages the money supply and interest rate in order to develop a prudent and growth-oriented monetary policy that ensures that all economic variables move in the direction of the economy's growth and prosperity.
Fiscal Policy and Monetary Policy are inextricably linked.
Monetary policy is the process of controlling the quantity of money in the economy in order to maintain a desired level of inflation, national production, and other economic variables, while fiscal policy is the government's choice about its income (taxes) and expenditures (development expenditures). The budget deficit is the difference between the government's spending and receipts. The budget surplus is the difference between the government's income and expenditures. During times of fiscal deficit, the government borrows developmental loans from the central bank, financial intermediaries, the IMF, the World Bank, the Asian Development Bank, and other financial organisations to satisfy its financial obligations. Additionally, a budget deficit leads in a rise in the money supply, which results in an increase in interest rates. Normally, surpluses and deficits are expressed as a percentage of GDP, or the economy's aggregate production.
MONEY'S SIGNIFICANCE IN A CAPITALIST ECONOMY
Money has a significant impact on the economy of any nation by boosting or even destroying it, stifling economic development regardless of the economy's nature. Nevertheless, in a capitalist society economy, in which resource allocation, output, and distribution of national dividends are all integrated the market mechanism, i.e. the forces of demand and supply, determines this. Money is a critical part of this system. It has a considerable impact on production, income, employment, and "consumption and consumption." Economic well-being of the society at large; economic planning as a necessary component is feasible at both the local and macro levels with the aid of prudent financial planning enabled by the following equation.
Money Consumption Economic Development
Money is a medium of exchange that facilitates investment, employment, and economic progress. Money boosts consumption via its buying power and as a store of value.
economic development via investment, employment, and economic development.
Consider the following ideas, which emphasise the dynamic nature of money: Various people specialise in different things in a monetary system. Results in the identification of two critical features, namely occupational specialisation and division. This resulted in the globalisation of the market with a organised framework. Households and businesses have an effect on two critical economic concepts, namely savings and savings and investing are mutually exclusive.
leads to an equilibrium state of income, production, and employment.
Savings are better mobilised when they are transformed into investments with the assistance of financial institutions. The modern monetary system enables the government to invest in social infrastructure. It also aids in the redistribution of income and wealth via economic and political measures via taxes and spending. In comparison to other types of investments, such as savings accounts, bonds, government securities, and treasury bills, In comparison to common stock, inventory, and real estate, money is the most liquid asset, since it contains two characteristics - fundamental determinants such as capital certainty and shift ability.
That it may be readily transformed to another kind of asset without sacrificing value.
A property of an asset guarantees that the commodity is easily exchangeable. Unlike other financial assets, money is completely liquid.time deposits and savings deposits with commercial banks and other financial institutions are referred to as near-money.
banks, postal savings deposits, unit trusts, bills of exchange, and treasury bills are all examples of financial institutions. government securities, savings bonds and certificates of deposit, and life insurance plans Transferable credit instruments, investment trust shares, joint stock company shares, and transferable credit instruments These types of financial assets are also extremely liquid and may be simply exchanged, converted to money without incurring considerable loss by selling and depreciating them.
Since the 1980s (see Gilroya and Lukas, 2005; Neto, Brandao, and Cerqueira, 2008), when the banking sector's second merger and acquisition wave crested, cross-border mergers and acquisitions1 have been the primary form of banks' foreign direct investments.
We conclude that various empirical specifications are used to examine the relevance of various firm-specific informational and performance factors, banking sector-specific regulatory and structural factors, and financial and legal institutional factors to the financing status of small and medium-sized enterprises in transition economies.
The findings provide substantial evidence in favour of the information-based theory.
To begin, all of the elements that led to more transparent enterprises are significant and favourably associated with the financial situation of SMEs. In comparison to the accounting methods of businesses, company performance is relatively insignificant. International Accounting Standards-compliant businesses have an easier time obtaining lower-cost borrowing. This indicates these enterprises' competitive edge when it comes to obtaining international bank loans. Similarly, organisations with external auditors have less funding barriers. Additionally, big enterprises and firms with a greater proportion of foreign ownership gain from informational advantages and easier financing in comparison to smaller firms and organisations with a lower proportion of foreign ownership.
Second, things that assist mitigate the negative effect of information asymmetries all contribute to the improvement of SMEs' financial condition. Rather than that, issues that increase worries about information asymmetries enhance SMEs' funding difficulties. The study discovers that a more concentrated banking industry results in fewer funding barriers for SMEs. Small businesses operating in highly concentrated marketplaces have more access to both long and short term bank loans and pay cheaper interest rates. The findings are explained by the fact that creditors with higher market power are more forthcoming and have a larger motivation to spend in getting information about private firms. SMEs situated in nations with a larger concentration of foreign bank ownership face greater access barriers and higher borrowing costs. These are also a consequence of international banks' difficulties when it comes to relationship lending to opaque small enterprises based on soft data.
It is shown that SMEs face bigger funding difficulties in nations with more market potential. One reason might be that bigger markets are more appealing to foreign investment. According to the above arguments, foreign investment does not always result in increased credit. If these foreign investments are funded domestically, the result may be a natural crowding out of domestic investments, particularly in transition countries with more severe information asymmetries and heavily foreign-owned banking sectors. As confirmation, the data indicate that enterprises with a higher proportion of foreign ownership had an easier time obtaining finance. Additionally, in nations with a higher proportion of foreign bank ownership, SMEs face greater lending limits.
Additionally, an inverse relationship between institutional development and market potential is seen. The findings indicate that only by enhancing a country's institutional development to a certain extent can the negative effect of market potentials be countered. That is, only when institutional development is sufficient to compensate for information asymmetries, such that the informational advantages of foreign-owned enterprises or large, transparent firms can be neutralised, can larger market potentials, which in this study equates to increased foreign entry, benefit SMEs equally.
At the present stage of transition markets, a bank-based financial system is shown to outperform a market-based financial system. Banking sectors that are more established lead to increased access to credit and lower financing costs. Small businesses in highly established banking sectors get a greater proportion of their loans from formal sources. Indeed, a greater stock market capitalisation ratio does not improve a firm's access to or cost of funding, but rather lessens its reliance on formal sources of financing.
The findings indicate that bank regulatory policies have a considerable influence on SMEs' 95 access to both short- and long-term bank loans, as well as on loan arrangements, and consequently on enterprises' financing status and patterns. More precisely, it is shown that broad regulatory constraints on banks and the emergence of financial conglomerates encourage enterprises to circumvent banks and seek money directly from stock markets. Increased constraints on bank operations and ownership of non-financial enterprises encourage banks to take risks by lowering lending criteria and compensating with greater interest charges. Restricting non-financial enterprises from holding banks exacerbates SMEs' troubles obtaining long-term loans from banks and increases interest rates and collateral requirements.
Multiple bank regulators encourage cautious lending by banks and help some SMEs by lowering financing costs. Multiple bank regulators, on the other hand, hurt other SMEs by worsening their difficulties obtaining bank loans. Bank regulatory procedures that impose stricter limits on how much information banks must disclose to the public contribute to SMEs' ease of access to more structured loans, which is consistent with the private interest position. Additionally, it is shown that more independent bank regulatory agencies result in both increased barriers to accessing bank loans and increased costs of getting bank loans for SMEs. Additionally, it is discovered that legislative constraints on minimum capital ratios may encourage banks to engage in riskier activity while facilitating enterprises' access to credit at a greater cost. Regulators' constraints on capital composition, on the other hand, may drive conservative conduct on the part of banks, even if they worsen enterprises' troubles obtaining loans.
MONETARY STANDARDS AND PRESENT CURRENCY SYSTEM OF INDIA
A monetary standard is a collection of monetary arrangements and organisations that manage the money supply. There have been two distinct sorts of monetary standards/regimes throughout history: those based on the convertibility of all forms of money into currency, most often specie, and those based on fiat. According to game theory, an international monetary system that is successful both between and within nations requires a time-consistent credible commitment mechanism. The Characteristics of a Sound Monetary Standard:
2. Economical elasticity
3. Convertibility, Legality, and Automatic Operation:
4. Economic Growth:
1. Numerous varieties of monetary standards
2. Standard of Commodity or Metallic Standard
3. Inconvertible 'managed' paper standard, sometimes referred to as a Non-Commodity Standard or Fiat Standard.
Corporate Governance (CG) is the set of rules, procedures, and controls that govern a firm. The conflict of interests between ownership and management is addressed by CG standards.
Based on the separation of ownership and management in corporations, agency theory asserts that management's interests do not necessarily correspond with those of shareholders. Management, as the agent of the shareholders (the principle), may not always act in the best interests of the principal, as noted by Fama and Jensen (1998). Agency expenses arise from aligning management and shareholder objectives.
Globalisation, financial fraud, and corporate indifference to causes other than profit have all influenced corporate governance standards. The global financial crisis (2007) was the latest in a long sequence of events that shifted the stakeholder battle lines. This article examines corporate governance and its impact on MNC operations.
Though agency theory is essential to CG discussions, legislation and implementation have been tailored to many criteria. Now we'll look at how the CG notion has evolved and how it relates to the business structure.
Corporate Governance and Institutional Investors: While shareholders have a voice in the activities of a firm, they may opt to vote with their feet by selling their stock position and driving down market value. In the 1980s, shareholder activism arose in the United States. Because of their huge stakes (60 percent of total equity investment in OECD nations in 2000), seats on boards, and access to strategic choices, institutional investors are seen to have a moral obligation to demand good governance.
In contrast to geographically scattered, uneducated, and sometimes indifferent individual investors, institutional investors have the ability to take an active interest in CG due to their fiduciary capacity and experience in investment decision-making. 'Involved' institutional investors, such as CALPERS and Norway's pension fund, apply market discipline and help to maintain deep capital markets. Even in the West, institutional investors do not always take on the responsibility of enhancing corporate governance.
In the 1990s, US pension funds backed shareholder recommendations from religious groups; hedge funds, on the other hand, tend to interfere and effect management changes to safeguard their interests, which may or may not have governance ramifications. Institutional activism is often conducted "behind closed doors," and its corporate governance-enhancing motivations and outcomes are difficult, if not impossible, to determine.
Corporate Governance and Capital Markets: There is convincing evidence that good governance makes excellent economic sense, with firms with better CG having superior triple bottom lines and being rewarded by the market with greater values. Capital flows towards nations where CG standards are believed to be greater (and enforced). Not by chance, such nations tend to have robust capital markets.
CG may be evaluated on two levels:
i. Whether a country's law safeguards components of stakeholder rights, such as creditor, investor, and environmental protection.
ii. Whether companies in the nation are forced to comply with capital market authorities and accounting organisations in terms of increased openness and disclosure.
Capital market growth and CG advancements are inextricably linked. In a nation with a shallow, weak, and undeveloped capital market, there is minimal relationship between business performance and market value on one side, and corporate governance on the other. As a result, there is no motivation for firms to pay greater attention to, adopt, and engage in CG-enhancing behaviour, and for countries to pass corporate governance-enhancing legislation. As a result, there is a higher onus on rules to implement CG efforts at the company level.
As capital markets improve, share prices increasingly reflect the performance-enhancing advantages of effective governance. CG transitions from a regulatory imposition to a voluntary involvement. At the national level, this results in lower capital costs, a larger ratio of stock market capitalization to GDP, higher business values, and a lower risk of financial crises.
CG is about more than simply openness, disclosure, accountability, and ethical business practises. It also has an impact on the bottom line. According to the Kumar Mangalam Birla Committee (2000), there is a correlation between CG levels and corporate success, with well-managed businesses with high CG having higher values.
Since the Cadbury Committee Report was published in 1992, the OECD has issued various non-binding guidelines on CG and corporate social responsibility, as well as the UN's Global Compact (1999) and binding CG rules on corporate governance stipulated by stock exchanges. Several major financial services firms pledged to follow the Equator Principles, while others reaffirmed their support for the Millennium Development Goals.
INVESTMENT BANKING, ENTREPRENURIAL & CORPORATE FINANCE
An investment bank is not a traditional bank. It does not provide savings or recurring bank accounts, nor does it give loans. In plain words, it is a bank that assists enterprises, governments, and other nonprofit organisations in obtaining finance from investors. Regular banks do the same thing by lending Accountholders' money. In other words, investment banks function as a financial mediator between enterprises and other major organisations, bridging the gap between the demand for and supply of capital. Indeed, the phrase "investment bank" is rather misleading. Often, assisting businesses in raising finance is simply one component of a much larger process.
The primary premise around which an investment bank is built is to bridge the gap between a client's demand for cash and the availability of capital, as well as to bridge the gap between advise seekers (clients) and advice providers (the bank).
By and large, investment banks in India are institutions that earn money via the capital market, venture capital, or private equity.
Entrepreneurial finance encompasses a wide range of capital sources, and the majority of academic work in this topic is clearly divided by capital source (Cosh et al., 2009). Accordingly, entrepreneurial finance encompasses a wide range of subtopics, including financial contracts, financial gaps, capital availability, public policy, and international disparities resulting from differences in institutions and cultures (Cumming, 2012). Because these subjects are broad and complicated, most research on entrepreneurial finance often concentrate on just one of them at a time (Cumming, 2012).
Corporate finance is a subset of finance that focuses on the financial choices made by businesses and the tools and analysis used to make these decisions. Corporate finance's fundamental objective is to increase a company's value without incurring undue financial risks.
The major role of a corporation's management is to maximise shareholder wealth, which translates into stock price maximisation.
ECONOMIC FLUCTUATIONS AND THEIR IMPACT ON ECONOMIC GROWTH STRUCTURE
Inflation is a sustained increase in the overall level of goods and services prices in an economy. Inflation occurs when the costs of gasoline, diesel, and vital commodities such as rice, wheat, and cooking gas increase and consumers must pay more for the same products and services. It is a condition in which there is a plenty of money but a scarcity of products and services. Consumer Price Index, Producer Price Index, Wholesale Price Index, and GDP deflator are all examples of inflation measures.
Keynes defined inflation as an increase in the price level that occurs after the stage of full employment. He differentiated between two sorts of price increases: those that accompany an increase in production and those that occur without a concurrent increase in output.
Deflation is defined as a condition in which the prices of essential services and products fall over time. Inflation is the polar opposite of this. Deflation happens when the supply of products exceeds the supply of money, which fits these four characteristics.
Deflation is caused by four fundamental factors: growth deflation, cash-building deflation, bank credit deflation, and confiscatory deflation.
When aggregate demand exceeds aggregate supply, an inflationary gap is created. It refers to a scenario in which demand exceeds available supply at current pricing.
Deflationary gap is the inverse of inflationary gap, which occurs when aggregate supply exceeds aggregate demand.
The report concludes to portray an independent yet interconnected relation between the industries of money, banking and finance after looking at the general, economic and fundamental regulations and workings of the same.
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- Pfaff Pfaff (2001). Monetary Policy: Objectives, Institutions, Strategies, and Instruments. Oxford: Oxford University Press. [This book presents an in-depth examination and explanation of monetary policy, with a particular emphasis on the US Federal Reserve System and the European Central Bank.]
- Bosse B (2001). Banking and finance are circuit theories. Banking and Finance Journal, 25, 857-890.
[This article discusses the integrated roles of banking and finance inside any producing economy's monetary cycle.]
- Xavier Bradley (2001). The Bank Act of 1844 provided an early example of banking departmentalisation. Laboratory of Monetary Economics Working Papers 5, Centre for Banking Studies and Research [This article reconsiders the Bank of England's division into two departments in light of money's endogeneity and argues for a commercial bank-level division along similar lines.]
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Money, Income, and Time: A Quantum-Theoretic Approach. Cencini, A. 1988. The London and New York offices of Pinter Publishers. [This book provides a novel perspective on the nature of money by demonstrating the logical and empirical inadequacies of classic monetary analyses using a quantum-theoretical method.]
- A. Cencini, National and International Monetary Theory, 1995. London & New York: Routledge. [This book examines the functioning of domestic and international payment systems macroeconomically, using the theory of money emissions.]
- A. Cencini (2001), A New Approach to Monetary Macroeconomics. London & New York: Routledge. [This book proposes a novel approach to monetary economics, based on the accounting character of money, in order to better understand the reasons that contribute to monetary disorders and to provide new cures to prevent them.]
- Mr. R.W. Clower (1967). A re-examination of monetary theory's microfoundations. Western Economic Journal, Volume 6, Number 1, pp. 1–8. [This article defines a monetary economy as one in which one or more commodities may be exchanged directly for another, giving the intellectual groundwork for explaining the presence of a "cash-in-advance" restriction.]
- Encyclopedia of Life Sustaining Technologies (EOLSS) (1911/1931). Fisher, I. Money's Purchasing Power: Its Determination and Relationship to Credit, Interest, and Financial Crises New York, Macmillan. [This book discusses the buying power of money in relation to the overall price level and extends this concept to the study of historical changes in that purchasing power.]
- Theodore Friedman (1974). A theoretical framework for monetary analysis, pages. 1–62 in Milton Friedman's Monetary Framework: A Debate With His Critics. University of Chicago Press, R.J. Gordon (Ed. ), Chicago. [Milton Friedman presents his version of the quantity theory of money in this contribution, integrating Fisher's difference between real and nominal rates of interest with Keynes' observation that market rates of interest are determined by speculators.]
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London & New York: Routledge. [This work demonstrates how Keynes's concept of effective demand is related to an income distribution theory in which profits are a redistributed part of factor income earned by companies through their mark-up over factor cost.]
- C. A. E. Goodhart (1989). Uncertainty, Money, and Information London and Basingstoke: Macmillan, 2nd edition v. (first published 1975). [This textbook discusses the microeconomics of money and banking and discusses a variety of monetary policy concerns, including the transmission mechanisms of a central bank's action.]
- C. A. E. Goodhart (2005). What is money's fundamental nature? 817-825 in The Cambridge Journal of Economics.
[This article is a review of Geoffrey Ingham's The Nature of Money, and it argues in favour of the chartalist argument that fiat money originated with the state's authority to collect taxes.]
A. Graziani Graziani Graziani Graziani (2003). The Monetary Theory of Production is a theory of production that is monetary in nature. Cambridge, England: Cambridge University Press. [This book is a rebuttal to standard monetary economics, stating that the functioning of any money-using economic system can be described simply in terms of the credit circuit that banks give in order to carry out production.]
- Thirty-Nine Group (2009). Financial Reform: Establishing a Foundation for Financial Stability The Washington Group of Thirty (DC). [This paper focuses on ways to reform the global financial system in order to improve its capacity to maintain a fair level of stability. It contributes to the debate among policymakers and the international financial community about a range of pertinent issues, including redefining the scope and boundaries of prudential regulation, its organisational structures, including the role of central banks, and the need for increased international coordination in these policy-relevant fields.] Critical Essays in Monetary Theory, J.R. Hicks, 1967. Oxford: Oxford Clarendon Press. [This collection of articles casts a critical eye on monetary theory, critiquing more mainstream monetary ideas.]
- The Nature of Money, G. Ingham, 2004. Cambridge: Polity Press [This book argues that money is not a neutral veil, as orthodox economics maintains, but rather a social relationship that exists irrespective of the creation and exchange of things.]
- A.M. Innes (1913). How do you define currency? 377-408 in Banking Law Journal, May. [The author claims in this article that money is based on double-entry accounting, rejecting the metallist conception of money as a physical medium of trade.]
- Fonds monétaire international (1998). Prospects for the World Economy Washington, D.C. : International Monetary Fund (DC). [This study presents a typology of financial crises, identifying currency, banking, foreign debt, and balance-of-payments problems.]
- Fund monetari international (2009). The Financial Crisis's Lessons for Future Financial Institutions and Market Regulation, as well as for Liquidity Management Washington, D.C. : International Monetary Fund (DC).
[This article draws many lessons from the 2007–8 financial crisis for financial sector regulation and oversight, as well as central bank liquidity management.]
W. S. Jevons (1875). Money and Exchange Mechanisms. London, Appleton: [The author claims in this book that money is a market creature, arising from a search process conducted by market players seeking to eliminate the double-coincidence-of-wants limitation that significantly impacts and restricts barter transactions.]
- Encyclopedia of Life Sustaining Technologies (EOLSS) (1930-1971) J.M. Keynes Money: A Treatise (Vol. I The Pure Theory of Money). London: Macmillan
John Maynard Keynes's Collected Writings, Vol. V The Pure Theory of Money: A Treatise on Money. London and Basingstoke: Macmillan [In this fundamental work, the author defines money as an admission of debt and identifies many forms and ideas of money.]
- A. P. Lerner (1947). Money is a state-created commodity. 37, no. 312-317, American Economic Review. [The author argues in this article that the validity of money is contingent upon the state's willingness to accept it as payment for taxes and other financial obligations owed to the state by the populace.]
- Mr. B.T. McCallum (2004). In economies with little or no money, monetary policy is difficult to implement. 9, pp. 81–92, Pacific Economic Review. [The author argues in this article that although money will not evaporate in the future, the amount of central bank money may continue to fall, which will not imperil monetary authorities' control over overnight interest rates.]
- Knapp Menger (1892). Concerning money's origins. The Economic Journal, vol. 2, pp. 239–255. [This article discusses that money is created via trade, as agents seek the most convenient and widely accepted medium of exchange on the market.]
- Fuselage Panzera (2011). Price stability and financial imbalances: revisiting the macroeconomic framework in the aftermath of the financial crisis of 2007–2008. Fribourg-based university. Mimeo. [This article calls for a rethinking of the macroeconomic stability paradigm. Macroprudential measures and a countercyclical tax on private debt may be effective tools for restraining excessive credit growth and smoothing asset price swings.]
- S. Rossi, F. Panzera (2011). Risks and solutions associated with "too-large-to-fail" financial institutions. International Journal of Trade and Global Markets, Vol. 4, No. 3, pp. 311-327. [This paper proposes a structural reform of banks' accounting with the goal of perfecting it in order to achieve the competitive advantage that comes with a more robust financial sector.]
- R. D. Ricardo (1951). Political Economy and Taxation: Fundamental Principles Cambridge, England: Cambridge University Press (first published 1817). [This landmark work establishes the concepts of "political economy," or macroeconomic analysis in current parlance, in contrast to so-called "economics," which departs from microeconomics and views macroeconomic magnitudes and phenomena as the product of aggregate forms of behaviour.]
- L. -P. Rochon, S. Rossi (2010). Economic and financial crisis of 2007–2009: a monetary circuits-based analysis European Journal of Economic and Social Systems, Vol. 23, No. 7, pp. 7–23. [This introduction to a series of articles included in this special issue shows that the economic and financial crisis of 2007–9 was caused by systemic occurrences and failures.]
A New Macroeconomic Analysis of Money and Inflation Cheltenham and Northampton are both home to Edward Elgar. [This book critiques standard inflation studies, stating that the widely held view of money and output as two distinct and independent things cannot account for either the buying power of money or its fluctuation over time.]
The theory of money emissions, pp. 121–138 in A Handbook of Alternative Monetary Economics.
- Edward Elgar: Cheltenham and Northampton, P. Arestis and M. Sawyer (Eds.).
[This article surveys the theory of money emissions and examines domestic and international monetary problems through the lens of this theory.]
Theorizing and Applying Money and Payments London & New York: Routledge. [This book discusses the characteristics and functions of money and banking in local and international payment systems.]
- Theodore Schmitt (1975). A unifying theory of currency, both domestic and foreign. Albeuve - Castella [This book proposes a reform of the international monetary system by providing a new theoretical explanation for the nature of national currencies and expanding on it.]
- B. Schmitt, 1984, Inflation, deflation, and capital deformities. Paris and Albeuve: Economica and Castella [This is a foundational study in the branch of macroeconomics known as quantum macroeconomics. It develops a synthesis of classical, neoclassical, and Keynesian perspectives on money, income, and capital, explaining production and capital accumulation within this new theoretical framework.]
- Encyclopedia of Life Sustaining Technologies (EOLSS) Mseccareccia Seccareccia Seccareccia Seccareccia Seccare (2011). Financialization and commercial banking change in Canada.
Post-Keynesian Economics Journal. Forthcoming. [In this paper, the author explains how, as a result of financialization, the role of commercial banks has shifted away from the critical relationship between banks and non-financial firms and toward a complex series of unstable relationships between banks and non-bank financial institutions.]
- Nicolai Wallace (1980). The model of fiat money with overlapping generations, in Models of Monetary Economies, pp. 49–82. Federal Reserve Bank of Minneapolis, Minneapolis: J.H. Kareken and N. Wallace (Eds.). [The author argues in this contribution that fiat money is a pointless invention within a fixed time frame, since there would be no desire for money. As a result, the author proposes an overlapping-generations model to account for the real-world presence of a money demand.]
- L.R.Wray (1998). The Key to Full Employment and Price Stability is to Understand Modern Money. Cheltenham and Northampton are both home to Edward Elgar. [The author argues in this book that full employment and price stability are not mutually exclusive policy objectives since both may be achieved via a policy mix that incorporates functional finance and the endogeneity of bank money.]