Disadvantages of barter system
- Double co-incidence of Wants
- Search Cost & Transaction cost is high.
- Storage of perishable commodities is difficult, results in loss of value.
- Doesn’t encourage specialization and division of labour
- Fungibility problems:
• Fungible item= Division & Mutual substitution possible e.g. 1kg gold bar = 100gm x 10 smaller bars, Currency Notes.
• Non-fungible items example: Diamonds, shares-Bonds of different companies
Functions of money
Primary:
- Measure of Value - gm=wt, ml=vol, ₹=value
- Medium of Exchange- Buy & Sell
Secondary (S-T-D)
- Store of Value
- Transfer of Value -Soldier in Kashmir to parents in Kanyakumari
- Deferred Payments - Airtel buy iphoneX @3499 only per month x 24 months = ₹ 83976/-
Contingent :
- Basis of credit system, Financial markets
- Employing factor inputs
- Creation & Redistribution of National Income
Money evolution
Commodity money - Metallic money - Paper /Token / Representative/ Fiat Money - Bank Money,Deposit Money- Crypto Currency
What is commodity money? Does it have intrinsic value? What are the problems?
- Iron Nails, Bear Pelts, Cocoa Beans, Whale Teeth, Gold Nuggets
- Intrinsic value - Yes
- Problems? Perishable, not uniform, not pure, foreigners may not accept.
What is metallic money? Does it have intrinsic value? What are the problems?
- Traders & Kings stamped their marks on gold nuggets for uniformity & trust.
- Indo Greek kings & Kushana kings issued gold coins, but Gupta Gold coins most spectacular- king is playing Veena, shooting animals, standing with wife
- Delhi Sultanate Kings: Silver Tanka.
- Sher Shah Suri - Rupiyah silver coin.
- Akbar: Muhr.
Gupta Coin: ~8 gm GOLD
Full Bodied Coins, Intrinsic Value is Equal to or MORE than its Face Value.
Challenge?
- Debasement: decreasing the amount of metal in coins. Usually happens when king’s treasury gets poor e.g. Aurangzeb, Roman Kings.
50 paisa modern coin: ~4 gm steel
Token Coins, Intrinisic value - less
Challenges?
- 1330s: Tughlaq’s Token coin experimentation = #EPICFAIL because Thomas Grisham’s Law- bad money drives out good money.
- Modern Indian coins are token coins. Cupronickel metal used to discourage melting. Coinage Act 2011 prohibits melting of coins.
What is Paper /Token / Representative/ Fiat Money? Does it have intrinsic value? What are the problems?
It MUST fulfil two conditions SIMULTANEOUSLY:
- It MUST BE in the form of Coin / Currency Notes / (or sometimes virtual crypto coin like Marshall Island’s SOV). AND simultenously
- It MUST BE issued by the order of a King / Queen / Government / Central Bank.
- Government issues all coins upto ₹ 1,000, using powers of Coinage Act 2011.
- ₹ 1 Note signed by Finance Secretary
- ₹ 1 note doesn’t contain “I promise to pay bearer…”
- RBI issues: Currency notes other than ₹ 1 Note using the powers of RBI Act 1934.
- Currency notes have Governor’s sign: “I promise to pay bearer…”
What is a legal tender?
To become a ‘legal tender’, a given coin/currency MUST fulfil two conditions SIMULTANEOUSLY
- It must be a FIAT MONEY. AND SIMULTANEOUSLY
- It must be legally valid for all debts & transactions throughout the country.
Is the demonetised 1000 note a legal tender, fiat money?
G-Sec,T-Bill, Shares, Bonds, DD, Cheque, ATM Cards, Kirana coin, Casino coin, Bitcoins, Filmstar-Currency - legal tender/fiat money?
The (demonetized) ₹1000 note in a museum, is a fiat money (because was a currency note issued by RBI), but no longer a legal tender because legally it is banned for transactions.
G-Sec,T Bill, Shares, Bonds, DD, Cheque, ATM Cards, Kirana coin, Casino coin, Bitcoins, Filmstar-Currency= are NOT Fiat Money, and therefore they’re not legal tenders.
Are Commemorative Coins fiat money/legal tender?
Fiat money yes but not legal tender unless notified to be used as legal tenders.
types of legal tender?
Limited Legal tenders: (coins)
- Payment beyond a limit can be refused.
- Coinage Act 2011
- Rs. 1 / above → upto Rs.1000
- 50 paisa x 20 coins → upto Rs.10
- Below 50 paisa withdrawn (2011)
Unlimited Legal Tender
- No such restriction.
- RBI Act 1934 - Section 26: Every bank note is legal tender in India.
- They can be used for settling any amount of debt in India, lender can’t refuse to accept it.
❓MCQ: Which one of the following correctly describes the meaning of legal tender money? (Asked in UPSC-Pre-2018)
(a) The money which is tendered in courts of law to defray the fee of legal cases
(b) The money which a creditor is under compulsion to accept in settlement of his claims (c) The bank money in the form of cheques, drafts, bills of exchange, etc.
(d) The metallic money in circulation in a country
b
❓MCQ: Consider the following statements (Asked in UPSC-CDS-2011-II)
1. In India the minimum denomination coin acceptable for transaction is 50 paise.
2. Coins below 50 praise is not a legal tender for payment.
Which of the statements given above is/are correct?
(a) Only 1 (b) Only 2 (c) Both 1 and 2 (d) Neither 1 nor 2
c
What are Visually Handicapped (VH) friendly Coins?
Visually Handicapped (VH) friendly Coins, 2019-March
✓ Govt launched new series of VH-friendly coins of ₹ 1, 2, 5, 10, 20. Ascending order of size & weight. National Institute of Design (NID) helped to design.
✓ ₹ 20 coin: 12-sided Polygon (Dodecagon), grains/agro motifs, no serration on edges.
✓ Remaining coins are round shaped.
What is RBI’s App to help the blind identify currency notes?
80 lakh people in India are blind. To help them identify currency notes:
- Old series of Gandhi notes have square (50), triangle (100)
- New series of Gandhi notes have bleed lines, raised printing of Gandhi etc.
- But, so many varieties of notes, difficult for VH persons to remember size & shapes so,
- IIT Ropar developed Roshni App.
- Separately, 2020-Jan: RBI launched ‘Mobile Aided Note Identifier (=MANI)’ App.
- Mobile camera scan & identifies the note (Even if it’s half folded), gives audio notification in Hindi/English, also works offline. But can’t validate whether note is genuine or fake (Counterfeit),
- Daffodil Software company has developed it for RBI. If a user is both blind and deaf, the app will identify note by giving different set of vibrations.
26th January parade chief guests= 2018, 2019, 2020, 2021?
26th January parade chief guests= 2018: 10 ASEAN leaders; 2019: South Africa President Cyril Ramaphosa. 2020: Brazil President Jair Bolsonaro
New rupee symbol and designed by
₹: through competition by Dept of Eco.Affairs in 2010. Designed by D.Udaya Kumar, an Associate Professor @IIT Guwahati.
Nation Symbols of India?
- Lion Emblem: Sarnath Pillar, Uttar Pradesh.
- “Satyamev Jayate”: Mundaka Upanishad
Languages in India?
While 8th Schedule has 22 languages, but currency note has only 17.
Where is the museum on numismatics and trade?
Budget-2020: a museum on numismatics and trade - at the historic ‘Old Mint Building’ in Kolkata .
“I promise to pay the bearer…”: Meaning of this promise?
Currency note is zero interest, anonymous bearer bond / Promissory Note.
Colonia era: Promised to convert into full bodied gold or silver bars / coins worth the equal value in weight. E.g. 1 US Dollar = ~14 grams of gold. 1 British pound = ~73 grams of gold.
Modern era: Conversion into other Bank notes and “token coins” of equal face value. ₹ 2000 = 500 x 4 Nos.= 100 x 20 Nos etc.
- Not inflation adjusted value. Not linked with weight of gold or silver.
Demonetization definition, what and when did it happen?
Definition? Demonetization is the wholesale withdrawal of currency notes from circulation.
- 8/Nov/2016: FinMin → Dept of Economic Affairs gazette notification to ban the “Specified Bank Notes” (SBN) of Mahatma Gandhi series ₹ 500 and 1000.
- Specified Bank Notes (Cessation of Liabilities) Act 2017= RBI not required to honor “I promise to pay…”.
- Old notes can’t be kept except for research or numismatics or museum- and that too in limited amount!
What is REDENOMINATION? How is different from demonetisation?
- Inflation is the rise in the general level of prices of goods and services in an economy over a period of time.
- REDENOMINATION involves removing zeros from currency’s face value, to facilitate transactions during high inflation.
- Here, the old currency is not instantly declared illegal / withdrawn from circulation immediately. Old currency is allowed to continue side by side with new currency.
- But people are given the option to switch to the new currency. Thus redenomination is considered to be different than demonetization.
- REDENOMINATION doesn’t fix inflation problem in reality because 1) not increasing the supply of goods 2) not increasing your salary. Proportionally purchasing power remains the same as before.
Details on Iran Toman replacement and benefits?
Iran suffering from
1) High levels of inflation. 1 box of eggs cost ~250,000 Iranian rials.
2) Weak exchange rate. $1 costs ~42,000 Iranian rials.
- So, very inconvenient to carry/count such a large quantity of paper currency.
- 2020-May: Iranian Parliament approved a new paper currency “Toman” to replace its existing paper currency “Iranian Rial” at the rate of 1 TOMAN = 10,000 Rial.
- Although it’s not an ‘instant demonetization’ of Iranian Riyal. It will be replaced with TOMAN gradually in the next 2-5 years.
- Benefit? Ease of carrying currency and making transactions.
Zimbabwe currency replacement?
- Zimbabwe: new dollar to replace old dollar (2006)
- 2006: One toilet paper roll cost 1.45 lakh (old) Zimbabwean dollars (ZWD).
- So,the Government issued “Redenomination”.
- 1000 (old) ZWD = 1 (new) ZWD currency note.
