Money and Banking Essay

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The use of money and its transmission through the economy by means of a banking system characterise modern economies. Money has been used for thousands of years, but has evolved to more sophisticated forms and its transmission has improved over time. There have long been questions over the effects money and banking have in the economy. Frequently they have given rise to intense debate, and are seldom far from discussion on the economy's performance, prices, exchange-rates and so on. The British economy was the first to industrialize. It developed a sophisticated financial system around the same time. The relationship between the two has been a constant topic of discussion.

Beyond the point thus described changes in money can only
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Secondly, it provides an earning outlet for those with surplus funds and provides funds for those with a deficit. This process, known as intermediation, freed a huge amount of wealth that could be used productively. When banks combine monetary and lending

Figure 1. Source: Capie and Webber (1985)

functions in the best way they constitute a powerful intermediary for channelling available funds to where they could be used to the greatest effect to promote economic growth. This was the British experience when industrializing in the eighteenth centuryModern British banks were amongst the earliest to develop. They precede industrialization, growing out of financial capitalism of the seventeenth century, and then played an intimate part in the process of industrialization and economic development that gained pace in the eighteenth century and that has continued since. The early associations of banking with goldsmiths and scriveners gave way in the eighteenth century to links to different kinds of businesses, notably brewing and retailing, or to those engaged in the transfer of funds - such as tax from the provinces to London - and therefore sometimes to solicitors. In the late eighteenth century their number grew enormously, so that there were hundreds of individual banks. There were a lot of failures too as the system groped its way slowly towards a more stable form. The banks of the early nineteenth century were small, locallybased, often with only one office.
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