Currency Jumble

As many subjects keep crowding in my mind one of them is currencies of various types; and when the other day, I read a news about counterfeit currency I was confused as to what does it mean by counterfeit currency.

I should tell exactly what happened that day. I had been to my Bank to deposit some cash in my account and as usual I was standing in the queue at the counter. There were three persons before me and I had enough time to read various notices and warnings displayed around that place. One warning interested me. It said, “Below given numbered notes are counterfeit and they will not be accepted”. I carefully read the numbers and to be safe saw my notes I had brought to deposit. I was relieved that none of them bore those numbers. Then I saw the man in front of me was carrying some notes and he was holding them in such a way that I could read the numbers on them. To my shock I saw that the notes he was carrying had exactly those numbers given in that warning. I for no sensible reason began to perspire as if I was carrying them. Now I wanted to see what happens when that fellow gives them to deposit. His turn came and to my biggest surprise he could deposit those note to the clerk at the window and just got way without any difficulty. This really disturbed me because I know the style in which these banks work. I knew for certain that these same note will be given to somebody at the other counter where people are withdrawing the money and in this way these counterfeit notes will come in the circulation. I came out of the Bank thinking and worrying. That same day I happened to meet my old friend who was a retired Bank officer of a reputed Bank in Mumbai. I told him the incidence and asked about what is difference between a genuine and counterfeit currency.

He promised to tell me everything about currency management that is in practice but I have to wait till that evening since then one more friend of ours, who is a retired professor of economics, was going to meet us. And so the talk could be more enlightening. That was a good idea and so we met that evening to know more about usages of currencies.

Is Currency wealth?

No! Currency is not wealth but in a way it is a measure or medium of wealth; often mistaken for wealth. In the most ancient times people bartered for the trade and that is the most genuine form of trade but as dealing in merchandise at all the time was not practical; traders introduced a method of representation of the deal they have done and that representation was in the form of some material was to carry and store. That was called indirect barter or credit barter. How it worked is very interesting to know.

Suppose a trader is having goatskin and wants to have salt, the barter rate of these two merchandises is 6 skins to a bag of salt. He gives six skins to the salt man but salt man does not have salt at that time and so he gives the skin man some representative thing of some value say some copper pieces now these copper pieces serve as the measure of the value of those skins. After some time that skin man takes these copper pieces to other salt man and wants to barter these pieces against salt. Now that other salt man accepts the barter and gives the skin man a bag of salt. That means a currency is a via media of two barters. Theoretically all trades are barters, either direct or indirect. Currency is media for indirect barter.

In the ancient times the traders had evolved convenient methods for such indirect or credit barters and they were respected by all concerned traders in those markets since this method made trading very convenient. Later on rulers introduced their moneys to do this representation because different traders had unlike representations and they did create problems and so, may be that the traders requested the rulers to produce the currency of standards for their domain for the sake of convenience. This introduced new problems since different domains had different currencies and they were not recognized by the rulers and so the local traders. To solve this problem exchange values were introduced by the rulers of those provinces between whom the trade often took place.

We see that when a big trader had deals within his domain of marketing his currency (Hundi) was acceptable but not outside and so the exchange values of rulers became more prevalent. Another reason why ruler’s currency was accepted is that whenever there should be any dispute between two traders the matter was going to the ruler for settlements and then there only currency of that ruler was acceptable for settlements. Rulers taxed the traders and traders willingly paid them under the promise that the ruler shall protect them from marauders. Many empires were incidence out of this need of the international traders, and that is history.

Rulers were financially strong enough to introduce more stable coins (most original form of currency) made of precious metals such as copper, silver and gold. However, in China where copper coins were used in the early period traders found carrying these heavy coins not convenient sine they were doing quite big business whenever they did it and so the Emperor of China introduced paper currency (paper was an expensive material in those days) and Europeans later on accepted that currency since, Europeans had also began to do big business by the time they settled as rulers in Asia.

Primarily Gold Standard was common to decide exchange value of the currency but for that one has to barter between the currency and gold whenever the situation arises to settle the deals and END. Normally exchange is not the END but only a part of the continuation of the deal and so no need to get gold. END deal means there shall be no further dealings between the concerned nations any more! This situation often arises in case of international deals (lending and borrowing) between the two governments.

Why such extreme measure of GOLD standard was required?

History shows that, this first stage of currency, where metals were used to represent stored value, and symbols to represent commodities, formed the basis of trade in the Fertile Crescent for over 1500 years. However, the collapse of the Near Eastern trading system pointed to a flaw; in an era where there was no place that was safe to store value, the value of a circulating medium could only be as sound as the forces that defended that store. Trade could only reach as far as the credibility of that ruler. By the late Bronze Age, however, a series of international treaties had established safe passage for merchants (thanks to empire builders like Alexander and others) around the Eastern Mediterranean, spreading from Minoan Crete and Mycenae in the northwest to Elam and Bahrein in the southeast. Although it is not known what functioned as a currency to facilitate these exchanges, it is thought that ox-hide shaped ingots of copper, produced in Cyprus may have functioned as a currency.

It is thought that the increase in piracy and raiding associated with the Bronze Age collapsed, possibly produced by the Peoples of the Sea, brought this trading system to an end. It was only with the recovery of Phoenician trade in the ninth and tenth centuries that saw a return to prosperity, and the appearance of real coinage, possibly first in Anatolia with Croesus of Lydia and subsequently with the Greeks and Persians. Phoenicians are credited for the invention of modern trading practices. In Africa many forms of value store have been used including beads, ingots, ivory, various forms of weapons, livestock, the manila (leather) currency, ochre and other earth oxides, and so on. The manila rings of West Africa were one of the currencies used from the 15th century onwards to buy and sell slaves. African currency is still notable for its variety, and in many places various forms of barter (direct barter) still apply. In India we had cone shells and beads as currency in rural areas even during British Raj.

British rulers insisted for Gold Standard in their dominion all over and ever since, that remained the standard practice since British Empire spread and covered almost the whole of the globe. As business grew due to industrial revolution there was not enough gold to represent the material wealth and so other methods were considered. Fiat Standard was introduced.

GOLD STANDARD is no more in practice unless in exceptional cases such as international borrowings.

What is Fiat standard?

Today, like the currency of most nations, the rupee is fiat money, un-backed by any physical asset. A holder of a Reserve Bank note has no right to demand an asset such as gold or silver from the government in exchange for a note. Consequently, proponents of the intrinsic theory of value believe that the rupee has little intrinsic value (i.e., none except for the value of the paper) and is only valuable as a medium of exchange. International Lending and borrowing amongst nations is not done in fiat value; that is done only in Gold Standards and that is the limit of utility of Fiat standard.

Around 1963 and onwards all nations accepted this Fiat Standard to represent the measure of the wealth in the country and like that in our country also rupee became a fiat currency. Internationally US Dollar became standard currency for international exchange for international trade. In this situation the fiat value of the fiat currency is decided mainly by the demand and as demand of the fiat currency of a nation increases (in international exchange market) the fiat value in relation to Dollar is decided. With this new arrangement the fiat value of our currency is decided by the demand for it in the international exchange market (Demand value) and that being manageable by government agency our government can devalue or overvalue our rupee as against Dollar to get business from US. To retain position of Dollar as the standard currency all over the world US owned multinational Companies have gripped the world in their strong clutches quite successfully.

Today even though our rupee is intrinsically very strong, is being devalued by our government just to get IT orders from US. I personally feel that we must evaluate the need for this stupid devaluation policy in the situation that the real fiat value of Dollar is now as low as 70% of what it was in 2005 (even though Demand value of Dollar is unchanged). Devaluation is easy but to upgrade the value is not that easy. We must enquire why government is doing frequent devaluation without any tangible reason. Business community seems to be at loss looking to this erratic behaviour of our government.

What we should compare is advantage of devaluation against disadvantage. How much we earn (earn Dollars) by devaluation and how much we pay extra to petrol bill due to this devaluation. To my mind devaluation is making our petrol bill larger but then my expert economist pointed to me that since the prices of petrol oil have been lowered we stand to gain from this devaluation and that is why we are not reducing the cost of fossil fuels within the country because we are paying same price as before due to this devaluation. Keeping the petrol bill almost steady! It remains to be seen how much IT business we can garner up by this devaluation. I fear present President of US will not give us much. Our policy to counter effect the strategy of the President of US may annoy that government and it may have adverse effects on our business relations with that country quite possibly.

In place of devaluation policy if our government trades in other more innovative methods to increase demand for rupee in the international market it will help us in the long run but unfortunately our government is being managed by mediocre intelligence. This government can not think of any thing dynamic.

Counterfeit currency, what to worry about?

Finally I asked about how counterfeit currency affects our countries financial stability. To my surprise the answer was negative. He told me counterfeit currency can not harm our internal economy by any ways. Today the currency has only fiat value and so it does not matter who prints it! Counterfeit currency may affect our position in the international market but the type of counterfeiting is possible by Pakistan will have no effect what so ever on our country and so he told me, please do not worry about this. Importantly, internationally rupee has little value and so any amount of counterfeiting is done that makes no difference. Counterfeiting of internationally important currencies like Dollar, Euro, and Pound could be a serious thing but not rupee! In olden days when currency was linked with Gold Standards counterfeiting was a serious crime but after acceptance of Fiat standard it is no more a serious matter. Even so governments still treat counterfeiting as a serious crime and that is because it is a prestige issue for that government. I was told that LTTE of Sri Lanka is having a full fledged security press and they print currencies of countries to purchase their arms and ammunition. I feel it is a gossip.

Today paper currency printing has become a specialized art and only if Pakistan’s own currency printing factory (called security press) takes to do this then only exact reprint of our rupee is possible and not otherwise.

Since counterfeiting is a crime, government will have to take action whenever it is found but whether any action taken or otherwise, technically counterfeit currency makes no change in the fiat value of rupee. Some innocent people may be accidentally possessing any counterfeit and if caught they will be accused but it is a matter of bad luck for them.

During Nixon’s time a lot of counterfeit of Dollar was introduced world wide but it did not make much difference for the international trade as far as India was concerned. Ever increasing demand for Dollar simply wiped out the irregularity and US also did not suffer much.

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