Goldsmith Lala holds 100 kg of gold deposited by the villagers and le…

Goldsmith Lala holds 100 kg of gold deposited by the villagers and lends 25 kg of it to Ramu. Consider the following statements:

(A) Lala could lend the gold because everyone with gold deposits would not come to withdraw them at the same time.
(B) In return for keeping the villagers’ gold, Lala issued paper receipts and charged a small fee.
(C) If the 25 kg lent to Ramu comes back to Lala as a deposit, the paper receipts acting as money rise to 125 kg.
(D) Lala’s paper receipts began to circulate as money after he started lending gold.
(E) If the 25 kg lent to Ramu comes back to Lala as a deposit, the gold held by Lala rises to 125 kg.

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → (A), (B) and (C) only

(A) Lala could lend the gold because everyone with gold deposits would not come to withdraw them at the same time. — Correct. So he could lend gold that had claimants.

(B) In return for keeping the villagers’ gold, Lala issued paper receipts and charged a small fee. — Correct. These were his terms for safe-keeping.

(C) If the 25 kg lent to Ramu comes back to Lala as a deposit, the paper receipts acting as money rise to 125 kg. — Correct. A new 25 kg receipt joins the 100 kg of receipts: 125 kg.

(D) Lala’s paper receipts began to circulate as money after he started lending gold. — Incorrect. They circulated as money before any lending.

(E) If the 25 kg lent to Ramu comes back to Lala as a deposit, the gold held by Lala rises to 125 kg. — Incorrect. The same 25 kg left and came back. Lala still holds 100 kg of gold.

NCERT (2026-27): “Commercial Banks … Once there was a goldsmith named Lala in a village. In this village, people used gold and other precious metals in order to buy goods and services. In other words, these metals were acting as money. People in the village started keeping their gold with Lala for safe-keeping. In return for keeping their gold, Lala issued paper receipts to people of the village and charged a small fee from them. Slowly, over time, the paper receipts issued by Lala began to circulate as money. … Now, let us suppose that Lala had 100 Kgs of gold, deposited by different people and he had issued receipts corresponding to 100 kgs of gold. At this time Ramu comes to Lala and asks for a loan of 25 kgs of gold. Can Lala give the loan? The 100 kgs of gold with him already has claimants. However, Lala could decide that everyone with gold deposits will not come to withdraw their deposits at the same time and so he may as well give the loan to Ramu and charge him for it. If Lala gives the loan of 25 kgs of gold, Ramu could also pay Ali with these 25 kgs of gold and Ali could keep the 25 kgs of gold with Lala in return for a paper receipt. In effect, the paper receipts, acting as money, would have risen to 125 kgs now. It seems that Lala has created money out of thin air!”