PAPER CURRENCY STANDARD
It is unlikely that. after the experiences of the inter war period, gold standard would be established in the conventional sense by any country. of the world. Gold standard worked more or less automatically under the pre-1914 conditions of trade and finance. The experience of inter-war period, however, showed that the gold standard required quite a fair degree of management and still greater degree of co-operation of the gold standard countries for its smooth working. “The gold standard will work if cvery nation is content to march in step with every other.” Unless the rules of the gold standard arc observed, it cannot function successfully. Also, the digitizes of the economic system stand in the way of proper adjustment of price levels and costs necessary for its successful working.The International Monetary Fund, which was set up, after the Second World War, is supposed to achieve all the advantages of a gold standard without its disadvantage s by international co-operation. Gold still plays a role but not such a dominant role as it did under the gold standard. We shall discuss the .M.F. (International Monetary Fund) in a later chapter,” where the position of gold in the present international monetary sy. tern will be indicated. Thus we can confidently assert that the gold standard of the old type has no future.
Paper money is not wholly backed by specie (i.e., precious metal) now. Only proportional reserves are maintained and a good deal of the paper money rests on people’s confidence in the word of the issuing authority, be it the Government or the Central Bankof the country. Such a currency is called fiduciary sue (i.e., depending on trust or confidence). The total notes in circulation in India at the end of March 1982 amounted to Rs. 14,752 crores nearly. This amount was backed by nearly Rs. 226 crores worth of gold,supplemented by foreign securities and securities of the Government of India. Thus, currency is of a fiduciary issue.
Paper money can be convertible or in convertible. If the issuing authority promises to convert notes into standard money on demand it is called ‘convertibility paper Kinney. ‘ But sometimes after an over issue of paper money in an emergency like war, the authority feels unable to convert its notes into coins. Then it breaks its promise of converting notes into standard money and thereby makes the money ‘In convertible’ or fiat mullet (money by order). When the link with metal is broken. there is a tendency to over-issue paper money. Its value then depreciates. Prices shoot up, which results in suffering for the people with fixed incomes.
Indian notes are convertible into the standard money of the country-rupees-as and when desired by holders. But it should be clearly noted that the rupee coins in India were themselves only token coins. The Indian rupee was a note printed on silver and later nickel. Even these rupee coins of nickel are also no longer in circulation. One-rupee notes are not legally convertible into rupee coins-they are treated as rupees. They are issued by the Government of India while’ all other notes are issued by the Reserve Bank of India.