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Currency Holding, Mobilisation of Savings, and Dangers of Inflationary Spending

Suraj Gupta
Economic and Political Weekly
Vol. 7, No. 37 (Sep. 9, 1972), pp. 1877+1879-1882
Stable URL: http://www.jstor.org/stable/4361794
Page Count: 5
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Currency Holding, Mobilisation of Savings, and Dangers of Inflationary Spending
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Abstract

There is a widespread misunderstanding of the nature and role of currency holding by the public - both absolutely and in relation to deposit holding with banks and other financial institutions. This has led to a gross overestimation of the role of such institutions in the mobilisation of saving. In fact, the popularly held view that deposit mobilisation is identical with saving mobilisation is largely, though not entirely fallacious. The fallacy and the misunderstanding become a matter of serious concern if they come to vitiate the thinking of official advisers and policy-makers. As illustrations of this, consider the following statements of the Banking Commission in its Report (1972): "[1] The holding of savings in the form of currency makes them currently infructuous from the social standpoint and [2] involves the constant danger of inflationary spending." (p 86); "[3] Increasing deposits with the banks will help to bring to the organised market savings that are idle, or are wasted..." (p 87; also p 571 - recommendation 4). "... [4] A part of funds of NBFIs [Non-Bank Financial Intermediaries] consists of deposits which are transfers from currency holdings and to that extent represents the process of resource mobilisation by financial institutions" (pp 414-15): Points [1],[3], and [4] relate to the same issue, viz, the role of financial assets in the mobilisation of saving, and are discussed together in the first part of the article. Point [2] is discussed separately in the last part of the article. [The author is grateful to K A Naqvi and G S Raychaudhuri for helpful suggestions on an earlier draft of this paper.]

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