Read the following passage and answer the questions 96–100 :
“In the beginning, money was a commodity like any other, save that its physical characteristics allowed of its being divided into parts of varying but specific weight, and it had high enough worth in small enough bulk so that it could be readily carried around. Thus it served as an intermediate step in exchange, eliminating the inherent awkwardness of barter. And it was a convenient way of holding wealth—a storehouse of value.
But in major measure the separate identity of money, its personality, was discovered with the establishment of banks; through banks the supply of money could be increased or, on occasion, sharply diminished, and this, more or less at will. The funds thus made available could be used for investment, necessary or frivolous consumption or the needs of the State.
Together, the deposits and the banknotes were in excess of the value of the metal on which they were based. This, however, was entirely safe and acceptable for so long as everyone—original depositors, borrowers, noteholders—did not come at the same time for the hard money. Unless there were fear, panic or spreading rumour and unease about the competence and solidity of the bank—all by no means negligible possibilities—this would not happen.
Given the profits possible from this manufacture of money—the return in interest for an effortless act of lending—the temptation to overdo a quite wonderful thing was obvious. Out of temptation were born the central banks and much of the structure of modern bank regulation. In return for various privileges, including in latter times the exclusive right to issue notes, central banks came into existence. They then proceeded to regulate the lending and money creation of the lesser banks, which they did in an inconveniently disciplinary way by returning to the smaller banks their notes for payments in metal and by enforcing minimum levels of reserves against deposits.”
(John Kenneth Galbraith, A History of Economics : The past as the present, Chapter 12)
The supply of money in an economy can be increased or decreased at will
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