Money and its value – Purely economic

September 25, 2013

There are some things about currency that always confuse me. Paper has value just because we all come together and agree that it does. What about the standing of Gold? Here are some things that can shed some light on many questions. Most of the information has been taken from RBI website and other information comes from the internet.

Authority regarding currency in India

The Reserve Bank of India (RBI) manages currency in India. The Reserve Bank derives its role in currency management on the basis of the Reserve Bank of India Act, 1934. The Government, on the advice of the Reserve Bank, decides on the various denominations. The Reserve Bank also co-ordinates with the Government in the designing of bank notes, including the security features. The Reserve Bank estimates the quantity of notes that are likely to be needed denomination-wise, and places the indent with the various presses through the Government of India. The notes received from the presses are issued and a reserve stock maintained. Notes received from banks and currency chests are examined. Notes fit for circulation are reissued and the others (soiled and mutilated) are destroyed so as to maintain the quality of notes in circulation.

Currency notes are printed at

  • Currency Note Press in Nashik,
  • The Bank Note Press in Dewas,
  • The Bharatiya Note Mudra Nigam (P) press at Salboni,
  • The Bharatiya Note Mudra Nigam (P)Mysore, and
  • The Watermark Paper Manufacturing Mill in Hoshangabad.

Only GOI can mint coins. Coins are minted at the five India Government Mints at

  1. Mumbai,
  2. Alipore(Kolkata),
  3. Saifabad(Hyderabad),
  4. Cherlapally (Hyderabad) and
  5. NOIDA (UP).

To facilitate the distribution of notes and rupee coins, the Reserve Bank has authorised selected branches of banks to establish currency chests. These are actually storehouses where bank notes and rupee coins are stocked on behalf of the Reserve Bank. At present, there are over 4368 currency chests. The currency chest branches are expected to distribute notes and rupee coins to other bank branches in their area of operation.

Printing additional currencies

The Reserve Bank estimates the demand for bank notes on the basis of the growth rate of the economy, the replacement demand and reserve requirements by using statistical models. The Reserve Bank decides upon the volume and value of bank notes to be printed. The quantum of bank notes that needs to be printed broadly depends on the annual increase in bank notes required for circulation purposes, replacement of soiled notes and reserve requirements.

The Government of India decides upon the quantity of coins to be minted. The responsibility for coinage vests with Government of India on the basis of the Coinage Act, 1906 as amended from time to time. The designing and minting of coins in various denominations is also attended to by the Government of India

Gold backing to print money

There is no external foreign or IMF control on the estimation, printing or circulation of Indian rupee notes and coins. But the only external control on the value of Indian money in the international circulation is the “Exchange rate”, with reference to various other national currencies. Officially, the Indian rupee has a market-determined exchange rate. However, the RBI trades actively in the USD/INR currency market to impact effective exchange rates. Thus, the currency regime in place for the Indian rupee with respect to the US dollar is a de facto controlled exchange rate. This is sometimes called a “managed float”. Other rates (such as the EUR/INR and INR/JPY) have the volatility typical of floating exchange rates, and often create persistant arbitrage opportunities against the RBI. Unlike China, successive administrations (through RBI, the central bank) have not followed a policy of pegging the INR to a specific foreign currency at a particular exchange rate. RBI intervention in currency markets is solely to ensure low volatility in exchange rates, and not to influence the rate (or direction) of the Indian rupee in relation to other currencies.

The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold and all currency issuance is to one degree or another regulated by the gold supply. To protect the public and guarantee the nation against any bankruptcy, the RBI keeps a certain percentage of gold in their own safe deposit vault, in proportion to the additional currency minted and directed into the circulation. The quantum percentage of gold kept in the deposit is not exposed in any documents or in the Websites of RBI or the Government of India.

In modern mainstream economic thought, a gold standard is considered undesirable because it is associated with the collapse of the world economy in the late 1920’s. That aggregated the need for the supply and demand in a far better means of regulating interest rates, money supply and monetary basis. However, many other theories have been advanced for the turbulent economic conditions that existed at this time. While the gold standard is not currently in use, it has advocates for its resurrection and forms part of a basic theory of monetary policy as a standard for comparison for other monetary systems. Advocates of a variety of gold standards argue that gold is the only universal measure of value, that gold standards prevent inflation by preventing the creation of unlimited money supply in a “fiat” currency, and that it provides the soundest theoretical basis for a monetary system.

Fiat currency

In today’s  economics the fiat currency (a legally binding command or decision entered on the court or government record ) or fiat money is money that enjoys legal tender status derived from a declaratory fiat or an authoritative order of the government. It is often associated with paper money because, without government fiat, bank notes are not a legal tender in payment of debt, and only specie (metal money) has unlimited legal tender for money debts. (Note : This is not universally true, as some currencies, notably sterling issued by Scottish banks, is not legal tender but is accepted by longstanding confidence in the Scottish banking system).

A Fiat currency or coin is guaranteed by the RBI and the Government of India that :-

  • A unit of paper or credit money (a “rupee”) can be presented to the issuing bank in exchange for a physical amount of gold, silver, or some other commodity.
  • A rupee can be returned to the issuing bank in exchange for a rupee worth of the bank’s assets.

To enable this guarantee, the RBI and the Government of India create adequate assets in the nation with assured value, equal or more than the additional notes and coins minted and sent in circulation. This is in addition to the percentage of gold kept in the safe deposit vault of the RBI.

The term “fiat” currency is also used specifically to refer to a currency that is not pegged or fixed to a mass of precious metal, and similarly the term “gold standard” is used to refer to fiat currency with a gold bullion exchange system, or to a parallel gold coin/fiat currency with a law that requires that the fiat currency bank of issue to pay in gold coin.

The fiat currency is explicitly circulated in the form of paper money. The inherent value of paper money is zero, except when it is measured against the value of consumables the bearer of such worthless paper can exchange for each unit of currency in his or her possession. Additionally; paper money has an intangible value that is directly related to the condition of need of its bearer. While a one hundred rupee currency may be inconsequential to a person with little material need the same may be the governing factor between homelessness, health, and even life for another with lesser means.. In other words,  paper money is valued at the maximum amount of consumable for which it can be traded either directly or indirectly.

Finally, there is no external power controlling the Indian money market or world money market who decide how much & how India should make currency in circulation other than the market forces.