....Barter, Metallic coins, Leather
currencies to Paper currencies....
(Extract from the lecture given by : N.R. Jayaraman)
1) Money medium of payment consists of
coins, paper money and withdrawal documents. A Banknote or Currency is a type
of negotiable instrument or a promissory note and form part of money.
2) Some forms of money have always existed
since millenniums. Only their appearance, shape, name or quality have been
different. Several objects have been used as medium of exchange for transacting
business and purchase of goods needed without naming them as money, but all of
them were indirect forms of money.
3) Before Christ was born, every block of
1000 years were called millennium and when classic age began after Christ was
born, every block of 100 years have been called century. Therefore whenever use
of money in different periods of time is referred in millenniums, remember the
period is well beyond 1000 years from now.
4) Since majority of common people in India
live in Villages, they prefer transacting with liquid cash such as paper money
and coins instead of debit/credit cards, as liquid cash is instantly and easily
transactable. The trend is not uncommon even in cities where middle class
people live more in number. The common villagers prefer the use of hard cash
especially during seasons like Kharif and Rabi crop seasons besides festive
seasons for payment of wages and other purchases. This is one of the periods
when transacting with liquid cash is found to be higher.
5) The birth and growth of money in the
form of Paper Currencies and Bank Notes stemmed from the primitive barter, a
system through which goods in need were exchanged for other goods since no
payment system in the form of money was in vague anywhere in the world millenniums ago. Medium
of money in indirect forms like animals, food grains, shells, cowries, leather,
metal and paper were used for trading purposes beginning from 2nd millennium.
6) In 10000 BC and later the most popular form of barter was exchange of live stocks such as Ox,
Cow, and Goat, Sheep etc i.e animals to animals were transacted followed by agricultural
products such as grains, vegetable or other plants. Thereafter anything was
exchanged for anything. As time passed, food grains replaced animals in barter
due to the difficulties encountered in transporting heavy loads of live stocks
of animals from faraway places and therefore people began to feel that such
heavier stocks could be exchanged locally against heavier stocks while the
unavailable food grains in their region could be procured and brought from
faraway places in exchange of food grains needed for each other.
7) In the next few centuries gradually rare
pieces of expensive shells and cowries, considered to be treasured items all
over the world in the ancient period replaced all other items like animals and
food grains in barter, and began to be used as medium for transacting the
business in Asiatic region in particular as they were available plenty in China
8) During Stone Age say between 10000 BC to
3000 BC, only tribes constituted the population all over the world and their
standard of living was almost identical everywhere and as the civilization
began to dawn on them, gradually they learnt the art of making tools from stones,
cultivated food grains and made essential articles for daily use such as clay
pots etc to meet their requirement and to suit the atmosphere in which they
lived. Whatever one group made, they were exchanged with other group from whom
goods in need were procured. Still it was goods to goods and money did not emerge. This laid the foundation for organised trading of goods in later centuries.
9) One of the Greek historians recorded the
primitive form of bartering - purchase of goods- between tribes and civilized merchants
in a very interesting manner. The merchants of one nation may reach the shore
of unknown place and after anchoring the ship, they would lay out their goods
on seashore and retreat back to the ship awaiting response from the public in
that unknown area. Sometime later people from the unknown area would appear,
see the goods, take away some of them laid out, only to return back after some
time to keep other goods available with them in exchange against the goods they
have taken and retreat back into their villages. Till mid of night the
merchants from the ship would not come back to the shore, but late night they
would come, take away the new things leaving back the excess goods if remained any
in the ship as goodwill gesture and retreat back to the ship for onward voyage. Neither the
sailors on board nor the people in land interacted directly with each other to
negotiate what is exchangeable for which good. This is not a story, but was in
practice for centuries as saw by him in the seashore of some nations. Centuries
later such forms of bartering paved way for some kind of purchase
and payment system in alien lands.
10) As time elapsed, in about 1500 years ago, in transition from live stocks and food grains, some of the metals
represented the stored value of goods for exchange in place of shells and
cowries. In the history of money, only during this transition period, the
concept of something like money emerged for transacting the business as each
metal had their own discreet values depending upon their availability. Though
metals came to be used as precious material for barter, still metallic coins
did not surface but people began to recognize difference in the metals, their
worthiness and availability and accordingly transacted the exchange with metals as medium without
assigning any specific value to them in terms of money as valuating in
terms of money also did not emerge then.
11) Again as time elapsed, people began to evaluate the value of
metal used for exchange by various factors such as their availability, end use,
durability and strength in end use. For example strong weapons were made with
Iron, bronze and steel, utensils easier to handle and suited for making food
items like copper and steel and ornaments with silver and gold etc. Those
factors emerged slowly and steadily based on their experiences.
12) Beginning from 2nd millennium, money in
the form of metal was used in different forms in different periods of time.
Metals like Iron, bronze, Copper, Silver and Gold replaced other goods like
animals, food grains, shells and cowries in stages for exchanges as weapons made of metals instead of on stones, some kind of crude ornaments and household potteries began
to be developed. Gradually transaction of animals, food grains, cowries etc began to go to the background and metals began to emerge the major medium of exchange as money. Thus metals came into the
forefront for exchange.
13) As the trend continued various
materials were used as indirect form of money for sale and purchase. It was in
Mesopotamia ( It is a Greek word meaning land between two rivers)
civilization in 3500 BC that use of metal bronze first appeared. Ancient
Mesopotamia is the most influential civilization and first known in world
history, which was instrumental in bringing metals into money form, the
beginning of banking system and some sort of written record began to be
14) Mesopotamia is a name for the area of
the Tigris–Euphrates river system, roughly corresponding to present day
countries like Iraq, Syria and Kuwait including regions along the
Turkish-Syrian and Iran–Iraq borders.
historians say that in the Mesopotamia civilization, trade was based on a
regulated system of exchange of metal against goods by written law i.e. a given
amount of food grain or seed would be worth so many ounces of Silver or bronze
or Gold for example. Therefore when someone had to make small payment for
purchase of an item, they would cut the Silver or Gold bar available with them
into pieces with appropriate weight and exchanged them. The nonstandard, crude
shaped metallic pieces played the role of invisible form of coins or paper
currency. Since the metals came to be exchanged as form of money, the merchants
and traders kept the Gold and Silver bars safely in tall towers in the places
of worship as if the metals were coins and currencies and the places of worship
were banks to store the money in safe custody.
16) Still even with such kind of
transactions, the perfect form of money did not emerge, but one has to agree
that only such acts laid foundation for the concept of money to
emerge several centuries later.
17) In or around the same century, the
Indo-Greeks and Kushans whose influence spread in J&K, northern
parts of India, Afghanistan, Peshawar etc issued large number of cut pieces of
Gold and Silver in different parts of their territories akin to coins, but they
were also issued in an unorganized manner without embedded seals or emblems or
images on those metallic pieces. Several non imaged Copper
pieces were also issued.
18) Elsewhere in the world, Roman and Greek
rulers have also issued non die cut, but almost round shaped cut pieces of
metals especially Gold with some images like seals impressed on both sides of
the coins. Historians termed it as metallic coins. By the 1st century,
coinage of Indo-Greek kingdom began to increasingly influence coins from
other regions in India. Historians also point out that every month around ten
shiploads of Gold coins have been exchanged between Romans and Kushan Empire in
19) During the reign of Chandragupta and
Samudragupta, who kept north India politically united for more than a century,
i.e. from A. D. 335 to AD 455, metallic coins mainly that of Gold and Silver
followed by Copper have been issued as the Kingdom had large treasure of Gold.
In the history of India, Guptas period was considered Golden age due to its prosperity. The Coins issued during the period of Gupta regime however were not even shaped and had rough finished edges. The
engraved design elements seen on them were reflecting valor, deities and martial
arts etc thus giving an impression that coinage system, a further step towards the
introduction of organized money format had already entrenched during the period
as Guptas regime. Surprisingly cowries
have also been been simultaneously used as money for trading in their Kingdom.
20) Though in early part of the 3rd century
metallic money in the form of Gold bars have been used in some parts of Egypt
for trading, between 4th and 6th centuries in Gupta dynasty the metallic money
was used in Asiatic region. It was also surprising to note that bimetallic
coins consisting of Silver plus Copper have also been issued during the ensuing
21) The word 'Coin' is derived from the
Latin word ‘cuneus’ and as per some of the Numismatics, the first recorded use
of coins was reported in China and Greece in around 700 BC whereas, it was
reportedly prevalent in 600 B.C. in India too.
22) It is also interesting to note that
organised form of coinage developed in India in the early period of 6th century
BC, only after the arrival of the British settlers.
23) Along with the use of metallic money,
paper money in indirect form surfaced in China assigning certain value to each
of the paper money issued for ease in exchanges while trading. The indirect
form of paper money was not printed currencies with designs and emblem embedded
over them, but were hand scribbled paper containing the seals of the traders
similar to rubber stamping on paper.
metallic coins (money) continued to be used in different parts of the
world in unorganized manner, interestingly similar to metallic and paper based
money, leather based money also came to be used sometime before 9th century
during the Han Dynasty, again in China. Specific pieces of specific
types of leathers, assigned with certain value and imprinted with seals of Kingdom were
used as money. This made one thing clear to the historians who studied the
origin of money that whether it was use of high valued cowries for exchange,
metallic coins, paper money or leather money, everything has originated only
from China in Asiatic region. Why limit them, even paper which is the
basic raw material meant for printing of Currencies and Bank Notes have
originated only from China several centuries ago!
25) Prior to the use of paper for writing,
thin material similar to Paper made of animal skins or other material to
document the texts have been used in China during 9th century A.D and that
led to the discovery of paper making technique. This thus strengthens the
widely accepted theory that the paper money may have also surfaced first in
26) Thus money in the form of Coins, Paper
and Leather were used independently in different provinces of China, in
different periods of time and under different rulers during 9th and 10th centuries.
27) Between 9th and 10th century, even as coins were issued and used in different places including in certain provinces in China,
some trading community in China resorted to the practice of issuing guarantee
or assurance note in print form for trading purposes within their own
territories. They were called Jiaozi notes and carried text message reading
‘the bill may be used instead of 77,000 wen of metal coinage’. Those notes were
convertible into hard metal currency with any one of the traders who formed
part of Jiaozi note user group. When the use of Jiaozi note gathered momentum,
the note was circulated widely and was readily accepted amongst the traders.
28) When limited exercise of issuing paper money in the form of Jiaozi note gained
momentum amongst the trading community, Song Dynasty in 10th century officially
began printing and issuing the paper money very similar to Jiaozi notes and set
up some agencies similar to banks for issue and exchange of those notes. However it
was not made mandatory to use Jiaozi Paper Money for trading.
29) Numismatics is of the view that the
Jiaozi note circulated in the 10th century was the stepping stone for the emergence
of Bank Notes and Currencies. But during usage, one very confusing aspect found in those notes
was multiple seals found stamped on the notes by the users. The value indicated on
each of the assurance note continued to differ as the note kept on exchanged
since the previous value was struck off and new value indicated by every next
issuer of the assurance note. Thus the assurance note in the name of paper
money kept on circulating amongst traders carrying different values till the
life of the assurance note was lost in scribbling or stamping.
this manner money on metal, leather and paper were put to use in several parts
of the world in their own manner without assigning certain value for
exchange and therefore they could not be used beyond the boundaries of
the rulers or traders who issued or supported them. Of course in whatever
format the money was issued, they were meant to be for used for trading only
within their own territories.
31) During the year 1123 in one of the wars
which led to the prolonged siege of city Tyre (in Lebanon), the Venetian
captain Doge Domenigo Michieli exhausted his entire treasury chest and unable
to pay wages for the huge army he took with him in the battle. Because of non
payment of wages, soldiers resented and some even contemplated desertion from
the army and therefore Doge issued to the troops specific sized cut pieces of
leather as token money with his special seal impressed on them assuring that the
value indicated in each of the leather pieces can be redeemed for full face
value whenever they return back to Venice. This act had to be resorted to, as
no form of regular money for use common to all, or exchange of money in alien
land existed. The leather token issued by him thus came to be called
32) The concept of issuing money on leather
continued till 13th century and even surfaced in the Yadava kingdom in Asia.
The leather piece impressed with royal seal was considered money. The famous
Mogul emperor Muhammad Bin Tughlaq too introduced leather currency in India on
mass scale but it did not succeed.
33) When use of paper money concept caught
the attention of Kublai Khan (also known as Genghis Khan), the most
famous Mongol ruler of China who ruled in 13th Century, he introduced paper money and
decreed that instead of Silver and Gold coins and bars, only the paper money
issued by him be used by traders and to enforce it, he confiscated entire Gold
and Silver in the country, even if it was brought in by foreign traders. Thus
the use of paper money was seen widely prevalent in 13th century in China.
34) The chief officer deputed by Khan
smeared the paper with vermilion powder, and impressed his seal with a semi wet seal bar, so that
the seal remained imprinted upon paper in red colour. The excess powder was
blown off. Only those with his seal were considered authentic for transacting
as money. Anyone forging it would be punished with death. Kublai Khan made available
vast quantity of this paper money which cost him nothing but equaled in amount
all the treasure in the world.
35) However elsewhere in the world, the
metallic coins too continued to be used simultaneously as money, but the most
disturbing aspect noticed was non relating the value of paper money with that
of the metal coins put in circulation.
36) Money coins issued in earlier era were
not identical because the images were hand pressed from engraved stones or metals and therefore were not
uniform. This caused each coin of the same value of the same territory
differing in appearance. Also the metals being not machine cut the shape and
sizes were also not uniform.
37) The money put to circulation in earlier
era were non standard in size or in thickness or in weight or in
appearance and caused confusion in identifying the coin which led to several
working problems. This aspect was instrumental in standardizing the shape and
size of the currencies and coins issued in the later era.
38) In later part of the millennium, in order to
maintain uniformity in the money issued, die-struck coins impressed with some
seal mark or image on one side or both sides came up. They were called ‘Punch
39) When the
western-Deccan and Central India were under the rule of Satavahanas, metal
coins made of Copper and Lead have been issued. Some Silver coins have also been
40) Since the metallic
coins in use earlier were not of specific weight, neither their value nor the
exchange rate against the paper money was made known. Therefore the coins
issued were considered as representative money exchangeable for goods and other
41) It is very
interesting to note that the concept of paper money, first ever to surface in
China got the attention of the Europeans through the travel reports of Marco
polo, an Italian merchant traveler whose travels are recorded in a book that
introduced Europeans to Central Asia and China. The concept of paper money was
thus seeded by the Britishers in India only after 14th century.
42) In the meanwhile sometime in 15th or 16th
Century, Sher Shah Suri, a Mogul King who reigned after King Humayun considered
the practical difficulties of the non standard value of metal coins issued then
and ensured in his regime that Silver Coins with specific grammage were only
issued as money based on the standards of Britisher’s grains weight. This
practice sailed through till 17th century under British India rule. According
to the historians, the Indian currency i.e. rupee was brought into existence by
Sher Shah Suri in the 16th century and it was evaluated as equal to 40 Copper
coins per rupee.
43) Once the Britisher’s landed in India in 16th century under the guise of East India Company, they started minting
and issuing metallic coins from mid 17th century. British settlers in western
parts of India issued coins in Gold, Silver, Copper and Tin in the name of
rupees, in addition to some kind of paper money. During the same period
the princely states of pre-colonial India too issued their own coins, all of
which resembled to that of the Silver Rupee.
44) As metal coins
continued to be exchanged for trading in some parts of the world, in India
British settlers in the Southern and Eastern provinces too like those
settlers in the western part traded with some form of money and commenced
issuance of coins in various metals in addition to the paper money for trading.
45) From 15th to 17th Century metal
Coins in Copper and Silver have been issued by Britishers in the name of
46) The success story of coins for trading
led to the commencement of private banking system for transacting the business.
The banks began issuing paper money in the 17th century replacing the metallic
money partially. This is how the Britisher’s idea of introducing paper
Currencies began to be developed in India. At one point of time the use of
money both in metal and paper formats were in vague across the globe.
47) Initial coins
issued in India carried the portrait of Mogul Emperors and Muslim Kings. When
British gained control over the princely states, the supremacy of Mogul rulers
ended resulting in the replacement of their Portraits on coins with that of
Monarchs of Britain. Thus the dominance of Mughal over India started
diminishing after Britishers arrived in the country, not only on the coins, but
also on the paper money by replacing them with portraits of Monarchs of British emperors and Queen and which were widely introduced by the Britishers in the latter part of 17th and 18th
48) From plain Steel
for minting money, bimetallic metals like Copper and Steel came to be used
followed by Silver, Bronze and Gold. The metallic coins with some images
impressed as seals were adopted across the world as money.
49) Almost all the
Princely states within the then separate Indian States had put to use unique
coins and paper money in different shapes, sizes, weights and denominations
either on Paper, Gold, Silver, brass or other multi metals as money.
50) The circulation of non standard metal
coins (in respect of weight, size, and shapes) belonging to several
periods of rulers who issued them at their fancy without assigning specific
value per coins caused several working problems. The metallic coins in
the form of money of one area or territory could not be exchanged with the same
valued coin or used outside their territory in which the rulers of the
territories have issued coins for their own people.
51) The value
attributed to each metallic money were originally not based on the value of the
metal because they were only representative coins of territories in which they
were issued. But over time when coins in metals such as Silver, Gold,
Bronze and Copper were issued each of those metallic coins developed a value in
their own right and differed substantially from the metal from which they were
made and this subsequently came handy in valuating the metallic money in
use. Just to understand the above logic see the example.
a) Ten coins of
different metals, all weighing same were in use in different territories, if
specific quantity of grain was received against one iron coin, twice the
quantity of the same grain was given against Steel, three times against
Copper, five times against Silver and ten times against Gold because while Iron was easily available, Gold was hard to get. This is simple example and not actual.
b) This is how the
metals gained the denominational values of the metallic money in discreet
manner and this reflected in the paper money issued initially reflecting variations
in values of the paper money as evaluated by their sizes. For example paper money of
one rupee note was very small, two rupees slightly bigger and ten thousand very
big in size.
52) The next development is in the aspect of ease in handling
and carrying. Even during the periods of Kings and Monarchs or later the
British Govt who issued metallic coins, most of the coins were issued with
holes in centre which were meant for the twin purposes of reducing the weight
of the coins and also because the coins could be chained together for ease in
carrying while transacting the business outside the premises of the owners of
53) Slowly as the Coins continued to be
used as money in several parts of the world in several formats, the concept and
use of paper based money was not widely known or practiced in Asiatic
region compared to metallic money till 17th century when Britishers were rulers even when some of the the private banks such as General Bank
of India, Bank of Behar and Bank of Bengal commenced issuing some kind of paper
money in the name of rupees in limited scale but in an organised manner. As
pointed out earlier, even though in 14th century itself Europeans got the
clue of some kind of paper money in use in China by the travel reports of Marco
Polo, the concept was not put to practice in India immediately when Britishers
landed in India.
54) Prior to 1835, the
East India Company (British Govt) issued coins through Bengal Presidency,
Bombay Presidency and Madras Presidency, the three Banks established by the
British East India Company (Banks of Bengal, Bombay and Madras). All the
three Presidency banks issued their own coinages as one Gold mohur, two mohurs
and in fractions of 1⁄16, 1⁄2, 1⁄3 and 1⁄4 rupee at various periods of time.
Further those banks also issued money in the name of rupees and fractions
thereof down to 1⁄8 and 1⁄16 rupee in metals such as Silver, some
in Copper and some in Gold. Bank of Madras also issued two-rupee coins
55) Those coins were circulated in local area for use in local
trade. Thus the three Banks continued to issue both Metallic coins and Paper
money till the Coinage act 1835 was enacted.
56) The Money issued
prior to 1835 whether paper or metal, were called Sicca Rupees and those issued
later were called simply Rupees.
57) Amongst the three banks, the Bank of
Bengal originally known as Bank of Calcutta was already issuing limited
quantity of paper money specifically for payment of revenues in certain circles
even before it was officially sponsored by British rulers to issue the
paper and metallic money as Presidency bank.
58) The Bank of Bengal with a capital of 50
laks Sicca Rupees equivalent to five million rupees issued Paper Money under
the name Sicca Rupees.
59) Three series of currencies on paper
were issued by Bank of Bengal namely:
a) 'Unifaced' Series which were one sided printed version and issued as one
b) The second was called 'Commerce' Series’ printed on both sides, carrying
c) The third one was called 'Britannia' Series' which had security features and
60) Against these developments when the
Coinage Act 1835 was enacted the issue of coins came directly under the Govt and to standardise the
coins. As per this act the weight of the rupee coin was standardized at 180
grains troy (one Tola) in which 165 grains should be pure Silver and remaining
15 grains would be alloy. Besides the weight, other aspects like multi
composition of metals, their shape, overall size and design element on both
sides were also standardized. The rupee coin bore the effigy of the British
61) This act was enacted by the Government
under British rule after taking into consideration the confusions and chaos
arising out of nonstandard weight of individual coins, their fineness and uneven size which were in circulation in different areas as issued by
different rulers at different periods of time. East India Company decided to
maintain uniformity in all aspects in the issue of coinage in the territories
62) As both metallic coins and paper money
were put to use, the messy situation of unorganized issue of Paper money
led to temptations of abuse and disputes and led the Government to take over
the issue of paper money as a sovereign prerogative when the threshold of the
Banking industry begun and India were under the rule of Britishers.
63) It is also note worthy that in those
period of time, the paper money was limited to only privileged set of users and
was not transacted on mass scale.
64) Why were the metallic as well as paper
money called rupees? Rupee probably is a word derived from Sanskrit. 'Rupiah'
means ‘stamped or image impressed metal coin'. Therefore the word Rupee could
have possibly emerged from this word Rupiah. Earlier the rupee coins were made
up of Silver and therefore Silver coins were called ‘rupyakam’. In Sanskrit
language rupyakam means Silver coin. May be rupee is singular and rupees plural
thus rupees meant several coins. Probably that could also be the reason why
when lowest valued note was referred to as one rupee and more than one rupee valued
notes were called as two rupees, five rupees, ten rupees and so on.
65) The status of Paper Money gained
momentum and respect in the 18th century only after Bank of Bombay, Bank of
Bengal and Bank of Madras were established by the East India Company in the
name of Presidency banks for the task of issuing and circulating the new Paper
Money in addition to the issuance of the metallic coins which was already going
on. However those banks were not Governmental banks but were only
supported by the Govt for the task of issuance of the paper money.
66) Along with the three presidency Banks,
private banks such as Commercial Bank, Union Bank, Bank of Western India and
Asiatic Bank too issued Currencies in tandem with the Presidency banks.
67) Further the Paper currency act enacted
in the year 1861 conferred upon the British Govt ruling India then, that the
monopoly of issuance of Paper Money and the Presidency banks naturally became
agents of secretary of states for the issuance of paper money as they were
already experienced in this respect. Once act enacted, eventually the management of paper currency was entrusted to the Mint masters, the Accountant Generals and the Controller of Currency.
68) The Currencies issued initially did not
resemble to that of modern era printed currencies which has many overt and covert
features, but were more of a simple form of bill or coupon portraying the value
of those notes in multi lingual words, name of the bank and the signature of
the person who issued it. No design elements were added, no security features
found, and no special paper like Watermark paper were also used.
69) When the 2nd World War began in the
year 1939, it lead to the shortage of Silver metal and thus the price of Silver
rose very high. When the metallic value of the Silver rupee coin surpassed its
face value (value of metal per coin including the processing cost etc for
the finished piece of coin), the Government decided to issue the pure
silver coins in combination with different other alloys. Thus pure Silver coins
were replaced by the metallic coins made in combination metals like Copper and
Nickel i.e as Cupronickel coins.
70) When uncertainty in Europe on account of World War caused
fluctuation in the value of metals, slowly the banks had to shut down their
operation on the issuance of metallic coins on account of declining profits.
Most of the metallic coins in vague then were in Copper and Silver weighing
particular grammage and issued against certain value of paper money.
a) For example when the weight of a Silver coin issued was 20 gms
and valued as one rupee, it became obligatory to issue one Silver coin weighing
20 gms against one rupee note whenever produced in the bank. When the value of
the Silver went up and equaled to 1½ rupee, still one coin of Silver weighing
20 gms had to be issued against one rupee note produced resulting in a loss of
½ rupee per every one coin exchanged against one rupee paper money. This
resulted in huge loss to the banks as they had transacted with huge quantity of
b) Since the Banks were obliged to issue
equivalent quantity of metallic coins in lieu of the value of the Paper Money
that guaranteed the payment, it caused economic crisis in the Banks on account
of declining profits. Those issues were not anticipated in advance. This
resulted in the closure of some of the banks and to subsequently amalgamate
with their parent firm Alexandria & company.
71) All such aspects
and anomalies were studied and well taken care of to prevent incurring loss in
banking operations while issuing the metallic money after enacting the coinage
act. Some of the measures taken to prevent losses were by readjusting the
weight of metallic coins to match the value of the paper money for the
same value of coins issued. For example, on the issue of Silver coins, whenever
the price of Silver went up, it reflected on the cost per coin, and therefore
either the weight of the pure Silver coins were reduced in size or in their
thickness, or pure Silver content in the coins altered by issuing bi
metallic coin with only certain percentage of Silver content, rest being other
metal so that the face value of the metals did not exceed face value of the
paper money against which it was exchanged. Thus the value of the metallic
coins and paper money issued were determined and necessary modifications done.
All such factors hastened the thinking to issue more paper money instead of
issuance of metallic coins.
72) Initially the Paper Money issued had
carried only three languages like Urdu, Bengali and Devanagari (Hindi)
besides English because all the activities for the issuance of the Paper Money
began from the northern parts of Asia where many areas were under Muslim rulers
and whose population spoke the language Urdu.
73) Since first of the Bank established was
in Bengal whose people spoke mainly Bengali and rest were Hindi or
Sanskrit speaking people, Bengali and Devanagari (Hindi) languages
besides English were given more prominence on the language panels of the notes
74) The notes issued prior to the takeover
by Reserve Bank of India from the year 1950 were issued by the Govt as official
Currency notes and the printed promissory clause carried the signature of
Commissioner for Government of India. The currencies were then issued from the
banks in Allahabad, Calcutta, Bombay, Karachi and Rangoon (presently Myanmar
also known as Burma).
75) The currencies showed the issue Office
by an alphabet printed glaringly. For example alphabets like ‘R’ for Rangoon,
‘B’ for Bombay, ‘K’ for Kolkata etc. The value of the paper money were in
numerals like Rs 10, Rs 20, Rs 100 and so on, followed by words say ten rupees,
twenty rupees, hundred rupees etc along with some design elements printed in
one or two colours.
76) Initially Paper Money called Currencies
were issued in denominations of Rs.10, Rs.15, Rs.20, Rs.25, Rs.50, Rs.100,
Rs.250, Rs.500, Rs.1000, and Rs.10,000.
77) When certain Indian territories were
ruled by Portuguese (Goa,
Daman and Dieu) and
French rulers (Karaikkal,
Mahae and Pondicherry)
they too issued their own notes which were in use only within their territory
but exchangeable for equivalent value of currencies in the banks in other parts
78) When several parts of India were ruled
by Nizams, Maharajas, Zamindars and Princes of some erstwhile Kingdoms they
were called Princely states and every state issued their own Paper money and
metallic coins for trading and other general purposes like payment of salary,
wages and other purposes. Some of the Princely states even issued printed
coupons in the name of money. The Princely states which issued their own money
included states like the one in Jammu & Kashmir, Hyderabad, Bikaner, Bundi,
Indergadh, Menghi, Junagadh, Dewas, Sailana, Navanagar, Vithalgadh, Dhar,
Jaisalmer, Dinajpur, Balwan and Chuda (Gujarat).
80) Probably the first
of the Currencies that were used for Hawala type of transaction has been from
Princely states like Morvi, Dhrangadhara and Navanagar from Saurashtra.
81) During World war when Japan felt the
shortage of Silver and Gold to raise funds, in order to wreck the economy of
other enemy nations under British control the Japanese Govt deceived a dubious
method by issuing large quantities of high quality counterfeited notes in some
parts held by British rulers, and India became one of their targets. This was
probably the first of the known counterfeiting exercise carried against Indian
82) As part of well
worked out strategy in the war, the British Empire considered India to be a
safe haven for housing the Prisoners of War. Several Camps were therefore set
up in interior places like Tiruchy in south, Ahmednagar, Nilgiris etc to house
the Prisoners of War (POW) from Germany, Italy and Japan during the Boer
War and the other two World Wars. The paper money issued to those prisoners in
the camps was called Prisoner of War Coupons.
83) Currencies were also issued by Netaji
Subhash Chandra Bose when Andaman and Nicobar Islands came under the control of
Subhash Chandra Bose. He issued them in the name of Bank of Independence.
84) In the year 1919 when the Colombo Banks
ran short of Currencies and experienced shortage of Silver Coins it concluded a
barter like deal with Indian Government to facilitate export of three million
Silver Rupees to Colombo, which in turn will print the Indian currencies in
Colombo on behalf of the Indian Govt and send them to the Bank of Madras. Thus
for some time part of the Indian currencies were printed abroad and imported.
85) One interesting
feature in the history of the paper money has been that during pre independence
period the British India notes facilitated inter spatial transfer of funds. As
security measure the notes were cut into two halves and only one side of the
note was first sent by post. On confirmation of the receipt of one half of the
currency, the other half was also dispatched by post and when both halves were
produced in the bank the entire amount indicated in the notes were instantly
released to the producer of the half cut notes. The currencies involved in such
transaction were called ‘Half cut Currency Notes’.
86) After RBI was formed in the year 1934 by an act,
the issue of currency note was entrusted to it and w.e.f 1935 the Indian
currency notes were printed and issued by RBI. However only from 1950 onwards the Currencies called Bank Notes were exclusively issued by RBI on behalf of the Govt
of India. So far the Indian currencies have been
issued with the signatures of more than 23 different Governors in different
periods of time commencing from the year 1935 onwards when
issue of currency notes came under the orbit of RBI.
87) For many years prior to the formation of
RBI the Indian rupee was used as the official Currency in several areas that
were controlled by the Britishers and governed from India. Some of the areas in
which the Indian Currencies were issued with some imprint of the name of the
country which used them, include countries like East Africa, Southern Arabia,
Burma, Pakistan and the Persian Gulf.
a) Indian Currencies imprinted with text
like 'For use in Pakistan' have been issued.
b) When Burma was separated from India in
the year 1938, the Reserve Bank of India took the responsibility of issuing the
Currencies. For many years the Indian Currencies overprinted with 'Burma
Currency Board / Legal Tender in Burma only' were in use in Burma.
c) During Britishers rule, Indian
Currencies were in circulation in the Gulf countries as External rupees,
printed entirely in different colour compared to the one issued in India with
special Alphabet Z appearing in number panel to indicate that it was external
note of India meant for use only in Gulf countries.
d) In addition to Gulf Currencies, the
Government of India also arranged for the special issue and distribution of the
Currencies to ease the problem of Haj Pilgrims visiting Saudi Arabia beginning
from the year 1959. The Haj Currencies were issued to pilgrims proceeding on
Haj Pilgrimage to Saudi Arabia and they were valid exchangeable Currencies
against local Currencies. The Indian Currencies with 'Haj' imprint on them
carried by the Pilgrims could be exchanged on par with local Currencies
anywhere in Saudi Arabia which in turn were collected by the Banks and sent
back to India for conversion into foreign exchange. This arrangement was
however subsequently withdrawn after few years of experimentation.
e) Rs 1000 and 10,000 notes were first
printed in the year 1938.
f) After incorporating several Security
features which were not easily counterfeitable, the "Mahatma Gandhi
Series" was introduced in 1996.
g) In the year 1946, two Ordinances were
issued, demonetizing notes of the denominational value of Rs.500 and above.
h) The currency sign of
Rupee Symbol was adopted by the Government of India in 2010 as a symbol for
Indian Rupee on par with the European pattern where they have their own symbol
for the Currencies. The rest is history.
88) The total value of bank notes in
circulation at the end of March 2015 was 14289** billion rupees (Rs
14289000000000/-) equivalent to 83,579 million pieces of notes in various
denominations. It was 8044.45 million pieces of notes during 1970-71. While the
volume of currencies issued is around 11% increase compared to the previous
year, the value of the same worked out to only around 8% which indicates that
the circulation of notes have not gone up very high and remains controlled
considering the all round price level rise in economy.
89) Similarly the total value of metallic
coins in circulation at the end of March 2015 was 98,964 pieces of all
denominations equivalent to 194** billion rupees (Rs 194000000000/-). (**Figures based on Annual
report of RBI)
What is Gold or Silver Standards and why was the Gold
or Silver Standards abolished? What were the other standards adapted?
1) Initially when the paper currency which had no physical value,
began to be issued, it was released with a solemn promise that the holder of
the note would be given equivalent value in Silver or Gold coins as and when
the paper currency is exchanged. That means paper currencies are freely convertible into specific
quantities of Gold or silver. Thus the value of each of the paper money issued was based on
precious yellow or white metal.
2) Therefore each piece of paper money was accounted and could not be released
just like coupons as each one of them needed to be guaranteed by precious metals such as Gold or Silver.
3) In order to stand guarantee for the value of the paper money issued
by the countries, the practice such as Silver or Gold Standard became the norm.
4) A Gold or Silver standard or Gold or Siver reserve is the quantum of such
metal held by a national central bank, intended as a store of value and
guarantee to pay depositors, paper money holders, or trading peers, to secure a
currency. The countries which had adapted Gold or Silver standard agreed to
convert paper money into a fixed quantity of Gold or Silver.
5) The Gold or Silver reserve policy was primarily meant to maintain trust in
the money such that we can pay strangers of any country, money bond redeemable
from the issuers country in settlement of obligations without having to worry
whether such strangers will decline the money bond in internationally
accepted format exchangeable in any part of the world.
6) Between 17th till the first quarter of 19th century the currency systems of
the world were based upon Silver i.e. Silver coins issued in particular
weight to equivalent value of paper money.
7) However since the Silver crisis emerged in the year 1873, number of nations
adopted Gold standard but India continued to remain on the Silver standard.
8) During the period from 1919 to 1925, worldwide successful effort was made to
replace the monetary system from Silver standard to the Gold Standard system.
It did not succeed.
9) Why was Gold standard insisted and other metals not preferred? The reason
was that the metal was precious, nature born and cannot be artificially made
with combination of metals. Thus Gold is not made but found as ore in rocks and
it occurs naturally in an elemental form.
10) In the meanwhile Gold coins ceased to be minted as
a circulating currency in the 1930s, and from then on the world Gold standard
was also finally abandoned including in India as alternately space saving internationally accepted other norms and instruments such
as reserve foreign exchange, internationally acceptable security bonds etc were available.
11) Most nations abandoned the Gold standard as the basis of their monetary
systems at some point in the 20th century, although some of the countries still
hold substantial Gold reserves.
12) Thereafter money in India are no
longer backed only by Gold or Silver but also partially backed by
internationally accepted other norms and instruments such
as reserve foreign exchange, internationally acceptable security bonds
13) Several other factors too contributed to the cause of abolishing Gold
standard, one of which is space constraint to hold the ever increasing
quantities of Gold or Silver against the Paper currencies issued.
14) It has been estimated that the entire Gold mined in the world by the end of 2011 totaled
to 171,300 tonnes and India has little over 550 Metric tons as of 2012.
1) A reserve currency or reserve money is foreign currency held in significant
quantities by governments and institutions as part of their foreign exchange
reserves. The reserve currency is commonly used in international transactions
and often considered a hard currency or safe haven currency.
2) In the recent past it has been internationally accepted that it is not
necessary that Gold reserve alone be kept against the value of Currencies as
there are internationally accepted other norms and instruments as mentioned in pre paras were available.
3) Since only few nations had their own resources for generating Gold, the
fluctuation of the metal put strain on the value of other currencies of other
nations. Therefore foreign exchange reserves, security deposits in foreign
banks, and Forex came to be adapted.
4) Foreign-exchange reserves (also called forex reserves or FX reserves) are
assets held by a central bank usually in various reserve currencies, mostly the
United States dollar, and to a lesser extent the Euro, the Pound Sterling, and
the Japanese Yen, and used to back its liabilities e.g., the local currency
issued, and the various bank reserves deposited with the central bank by the
government or by financial institutions.
5) Holding the currencies of other countries as assets or deposits allow
governments to keep their currencies stable and reduce the effect of economic shocks.
The use of foreign exchange reserves became popular after the decline of the
6) The development of the modern concept of a reserve currency took place in
the mid nineteenth century. Why reserve currency is important because they are
internationally accepted assets like Gold and Silver standards. Therefore the
countries simply stockpile reserve currencies such as the USD or Euro in order
to avoid the additional costs incurred by way of paying more money while in
exchange whenever the foreign currencies value rose higher.
7) In short it is suffice if we understand that all such measures are
meant for the purpose of safeguarding or honoring the promised value of the
issued Paper money against bankruptcy.
What is Fiat Money?
1) Fiat money is guaranteed paper or coin money of the Govt that assured value
indicated in them by itself without linking them to Gold or Silver and
therefore the banks are not obliged to replace the money with either Gold or
Silver. However since it is guaranteed money they are obliged to give small
changes of coins or paper money in equivalent value against the same and cannot be refused to be accepted against any payment.
2) In short, the Fiat money is money declared by a government to be legal
tender or a state issued money with certain face value attached to them by Govt
decree and freely exchangeable for any commodity unlike representative money
which is backed by Gold or Silver with the legal requirement that the bank of
issue of the representative money redeem it in fixed weights of Gold or Silver
3) The paper money issued in 11th century in China under Yuan and Sang dynasty
is believed to be the first ever Fiat money issued in the world.
4) Indian currency is Fiat money as it is pegged to the US dollar and not to Gold or Silver.
Who issues Coins and Currencies in India.
1) Though the Govt of India is sole authority to issue of
Coins and Currencies, the issue has been divided between the Govt and
RBI by certain acts. While the issue of Coin rests with the Govt of
India, the Reserve Bank of India has been assigned the task of issuing
Currencies in the name of Bank Notes. Thus the authorities to issue
Currencies are held by two agencies.
2) One may wonder why the Govt has not entirely kept the issue of both
metallic and paper money and entrusted a part of it to RBI. Also why one
rupee paper money is issued by the Govt, while the rest of the paper money i.e bank notes
commencing from two rupees notes and onwards are issued by RBI?
3) During Britisher's rule coinage act was enacted in the year 1835 placing the
prerogative of issuing and standardizing the coins with the Govt. However after
India attained Independence, the coinage act 1835 was amended as 'Coinage act
1906' which not only conferred upon the Govt the monopoly of issuing metallic
coins but also bringing the entire mints under its authority and
control. Even after the formation of RBI this act has not been amended to
transfer the authority of issuing the Coins to RBI. Hence the Govt of India is
directly minting the coins in the mints under their control however in
consultation with RBI, who places annual indent for the supply of coins and the
Govt draws up the production plan to supply Coins to RBI.
4) Similarly the Paper currency act 1861 enacted by the British Govt was
superseded by another act in the year 1934 to establish Reserve Bank of India
on the basis of the report of the Royal Commission on Indian Currency and
Finance. The commission was also known as Hiltan-Young commission. From the year
1861 to 1934 Govt of India under British rule managed the issue of paper
currency under the paper currency act 1861 and in deference to the Reserve Bank
of India Act 1934, the issue of paper currency was entrusted to RBI and w.e.f
1950 the Indian currency notes are printed and issued exclusively by RBI on
behalf of Govt of India.
5) During world war the Govt unable to meet the requirement of coins in one
rupee denomination due to scarcity of metal, resorted to the issue of one rupee
paper money in place of metallic coin as temporary measure. Since the
prerogative of minting of coins was held by the Govt, the one rupee note,
replacement to one rupee coin was held by the Govt and the promissory clause
is signed by the Secretary of Finance instead of the RBI Governor.
6) This is how two different agencies are controlling the issue of Coins and
Paper currencies in India.
Who decides the quantum of money issued and what is the basis?
1) The Govt in consultation with RBI decides the quantum of bank notes to be
printed annually based on the income and expenditure and the revenue linked to
the economics of the Country. The most important factors taken into consideration for the
printing and circulation of currencies are GDP & GNP growth,
inflation, replacement of soiled and spoiled notes etc.
2) GDP is Gross Domestic Product which is derived by measuring entire income of
the products and services rendered within the country after deducting the
expenditure involved in them. Similarly the GNP is Gross National Income which is
derived by measuring entire income coming from external sources i.e beyond the country after
deducting the amount given back for the services rendered by the foreigners.
7) Let us understand the logic of how the currency in
demand for each year is worked out with a very simple example as shown below which is only to understand the logic by a simple narration. The example is meant to only show the logic and not accurate work out.
(iii) Supposing the value of asset increases to 2000
crores, but the population has remained static as only 1000 people, the Govt will
not issue more coupons to pay each member a coupon , but the value of the
coupon will go up as 2 crore per coupon.
a) Assume in a nation with Rs 1300 crore quantum of currencies issued by the
Govt, a group of manufacturers produce certain quantity of goods and services, valued
to a total of Rs 1000 crore within a particular year.
(i) Production of goods and services per annum -value : 1000 crore rupees
(ii) Value of Currencies in circulation : 1300 Crore rupees
b) During the particular year the
goods and services thus produced above are consumed by the public to the
extent of Rs 1000 crore available with them out of Rs 1300 crore
(i) Production of goods and services per annum -value : 1000 Crore rupees
(ii) Value of Currencies in circulation : 1300 Crore rupees
(iii) Value of goods and services purchased by the public
out of the 1300 Crore rupees in circulation : 1000 Crore rupees
c) Thus the public money valued at Rs 1000 crore goes to the manufacturer or
producer of the goods and services. Thus the manufacturer or producer who is
also one amongst Rs 1300 crore money in circulation gets additional Rs 1000
crore for the said year for the goods and services produced by them. The
manufacturer thus with the extra money (Rs 1000 crore) received from public produce more and more goods say goods and services
worth Rs 2000 crore (Instead of 1000 crore produced in the previous year) with the extra money received.
(i) Production of goods and services in previous year -value : 1000 Crore rupees
(ii) Value of Currencies in circulation : 1300 Crore rupees
(iii) Value of goods and services purchased by the public
out of the 1300 Crore rupees in circulation : 1000 Crore rupees
(iv) Manufacturers of services and goods thus get extra income: 1000 Crore rupees
(v) Production of goods and services in next year thus becomes -value : 1000 + 1000 = 2000 Crore rupees
d) In above scenario the money with public goes down and they do not have currencies to to purchase the extra
goods worth Rs 2000 crore since the total volume of currencies in circulation
was only Rs 1300 crore. Therefore Govt releases further currencies to level the value of 2000 Crore rupees.
(i) Production of goods and services in current year -value : 2000 Crore rupees
(ii) Value of Currencies issued in previous year : 1300 Crore rupees
(iii) Shortages of currencies to procure the above
valued goods and services : 700 Crores
(iv) Therefore Govt will accordingly work out and put to circulation
the requirement of currencies for the next annum : 2000 Crore rupees
f) This is how the Govt of a nation takes into account the Growth of
Domestic Product and goods with their value and decides the quantum of
currencies required to meet both ends. Thus the nation initially worth Rs 1300
crores will plan to circulate not less than Rs 2000 crores money taking into consideration the previous years scenario so that the
money will circulate amongst public and manufacturers indirectly raising the
value of GDP too to Rs 2000 crore for the nation in the ensuing year.
above example is only to understand the logic by a simple narration.
The services rendered by the manufacturers includes the payment of wages
and salaries. Also the payments made by the manufacturers for the
purchase of goods even from outside the country. Therefore the value of
production of goods and services includes everything.
g) Similarly the same principle is applied in the case of working out the Gross National
Product in which the total value of income earned from other nations after
deducting the expenditures involved in it is worked out to
arrive at the total currency in demand.
h) On their part RBI while advising the Govt on the circulation of the currencies takes into consideration the growth rate in economy, increase in money supply needed for growth in economy, increase in demand for money supply, replacement for spoiled and soiled notes, reserve requirement, PFCE i.e private final consumption expenditure, seasonal fluctuation etc. Though RBI has the power to print the currency, still the Govt has the final say on majority of RBI actions including various denominations to be printed, design elements and security features etc.
How is the value of the currency determined?
1) A country that used the Gold or Silver standard set a fixed price for the
Gold or Silver and brought and sold them at the announced rate and thus
the said rate determine the exchange value
of the currencies of that Country. This is one of the important factor
that determines the exchange value of a nation's currencies with
currencies of other nations.
What will happen if more notes are printed and circulated?
Who monitors the
situation of the circulation of currencies?
Are there any international restriction?
1) The Reserve Bank decides upon the
volume and value of bank notes to be printed. Based on the
demand requirement as worked out by RBI with statistics and several
methodologies, they indicate the volume and
value of banknotes to be printed each year to the Government of India
which approves the final requirement in mutual consultation with RBI.
The quantum of banknotes to be printed annually depends broadly on the demand for banknotes by public, GDP
growth, replacement of soiled banknotes etc.
2) Let's understand it with the following example.
a) Supposing the nation has 1000 crore rupee asset (national income by several activities)
and it is divided amongst 1000
people in the nation. Now instead of giving 1000 crore in cash you give
each of them a coupon which can be used for needs. This means the 1000
divided for 1000 family members and each get one coupon valued to 1
b) Sometime later the population goes up to 2000 people. There is no increase
in asset, and then what will be the status of each coupon?
(i) The coupons cannot be cut into half and issued. The Govt will have to therefore print
additional 1000 coupons to give each a coupon. Since there is no increase in the assets (national growth by activities) the value of each coupon
will be reduce to 50% i.e each member will have only 0.5 crore to enjoy.
(ii) However to retain the value of the coupons as one crore
per coupon issued to 2000 people, the Govt will have to increase the
3) Therefore simply
printing more currencies for circulation without increasing the national
asset by way of growth in activities will only decrease the value of
the currency, increase inflation and ultimately bring down the exchange
value of the currencies against the foreign currencies.
4) Every nation can circulate currencies only to the extent
of reserves kept in all spheres and
in all formats. Supposing the nation has reserve to back up only 1000
can circulate notes including the metallic coins only to the extent of
1000 rupees. It can be any no of currencies or coins consisting of
several denominations or simple two denominations, it does not matter.
total value of such notes shall not exceed 1000 rupees or less. In such a
status let us assume that in the exchange rate of rupees is say 50
dollar or Euro.
5) Now the nation has circulated 1100 rupees worth of currencies against
reserve back up of 1000 rupees. What will happen to the exchange rate of rupees
per dollar or Euro? The exchange rate will become 55 rupees (1100÷1000 x 50 = 55 ) per dollar or Euro . That means the rupee value has decreased in international market.
a) When the
value of rupee has goes down, for every international trade
or dealings you may have to pay more money in every international
transaction. If the trend continues, the nation will face fall in
economic growth and receptivity of currency in International area in
trading. The support from the International monetary fund or World Bank
will be affected
ultimately ruining the economy. Therefore a nation cannot afford to
currencies beyond their reserve back up.
International Monetary Fund (IMF) consisting of several nations keep an
eye on the issues of money in circulation and a nation's economy by
special surveillance group and takes appropriate action to warn the
member nations exceeding the limits of money put to circulation
imbalance to their assets and growth. Since the IMF in tandem with World
Bank function as credit institution and lend short term and long term
loans to overcome financial crunches appropriately to the growth
activities of the member nations and they are considered to be the
watch dogs on the economy of the nations.
7) The International Monetary Fund (IMF) is an international organization
headquartered in Washington, DC, consisting of 188 countries working to foster global
monetary cooperation, secure financial stability, facilitate international
trade, promote high employment and sustainable economic growth, and reduce
poverty around the world.