Currency is a very magnificent servant, but a horrible master. First of all let us know what is currency, It is defined as anything that people use to buy goods and services. In simple words currency is termed as money or cash. Money is powerful because it motivates you to have more control over life. With money we can have less financial worries. With money you can rule the materialistic world.
Evolution of Currency:
Currency is valuable merely because everyone knows and everyone else will accept it as a form of payment. Before we used the system of bartering. It means exchange of goods to goods. so, lets take a look at where it has been, how it evolved and how it is used today. From barter system to crypto currency.
We all have a common doubt in everyone’s mind that why cant government print money and distribute to its citizens. To get this doubt clear read my blog below.
Let us be clear with a example:
Imagine total goods and services produced in the country is 2 kg of wheat. Now to buy 1 kg of wheat one has to pay Rs.10 per kg. Just imagine suddenly government starts printing more money and the income rises from Rs.10 to Rs.20, but the supply of wheat remains same as 2 kg. With more cash in hand, the demand for wheat has gone up and price of 1 kg of wheat has increased from Rs.10 to Rs.20. Now apply same entire concept to economy as a whole, you will find a solution. Too much of anything is too bad, Too much of money is also too bad.
Major components to be examined while printing new currency:
It refers to sudden increase in prices of goods and services. Inflation increases your cost of living. The purchasing power of each unit can be reduced by inflation. Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of economy. In India, the ministry of statistics and program implementation measures inflation.
- High demand and low production create a demand supply gap, which leads to a hike in prices.
- Excess circulation of money leads to inflation as money loses its purchasing power.
- We need to consider business cycles
2. Gross Domestic Product:
Gross Domestic Product is the final value of the goods and services produced with in the geographic boundaries of a country. GDP is also another factor that affects the amount of money to be printed in the economy. Gross Domestic Product raises the value of money in movement for each unit of money can be traded for more goods and services which are valuable.
3. Minimum Reserve System:
Minimum Reserve System is followed since 1956 on wards under the Minimum Reserve system, the Reserve Bank of India has to keep a Minimum reserve of Rs. 200 Crores comprising of gold coin and foreign currencies. In this system, based on the economic growth of country, Reserve Bank of India decides to expand the money supply. With increase in economic growth, the amount of newly issued money increases. This remains the economy with out falling in to inflation.
Each unit of new currency issued is a liability to the RBI, as it has to pay to bearer the amount promised on the currency. To recompensate this amount there should be balance amount of assets with RBI. Therefore, RBI procures certain assets which are equal to newly issued currency. Currency issued in country is reliant up on the reserves. Here reserves means
For new issue of currency, the RBI follows Minimum Reserve system at present. The main purpose of shifting to MRS was to expand the money supply to meet the needs of increasing transactions in the economy.
4. Soiled, mutilated and Imperfect bank notes:
Soiled note means a note which has become very dirty due to its circulation in many hands and includes a two piece note pasted together, where two pieces belong to same note and form entire note.
Mutilated bank note means a portion is missing or which is composed of more than two pieces.
Imperfect notes are those notes extremely brittle or badly burnt, charred up.
Soiled, mutilated and imperfect bank notes which are not fit for circulation are with drawn from circulation after duly accounting for them in the records of the RBI. These are burnt in the incinerators provided at regional offices of RBI under strict vigilance.
All required information is taken and make it possible for RBI to engage of printing a new currency in order to replace old and burnt money. Once checking with inflation and GDP currency department issues RBI will evaluate the required currency and put demand sheet for approval of central government.
5. Co-ordination of RBI with GOI: (Government of India)
RBI discusses with GOI with respect to the denomination, designing and security features of the bank notes to be printed in country and circulated.
Basis for printing money:
several factors are taken in to consideration in printing money by RBI
- How much cash money, cheque and credits etc are used by the people.
- What amount of money is already with banks and government.
- How much money has been destroyed till.
- Majorly depends on stock market situations.
It is the RBI that determines the quantity of notes to be printed and issued in various denominations from its 18 regional offices. All the bank notes bear the signature of the Governor of the RBI during whose tenure the notes are printed. The total series of bank notes printed are always stated and published in one of top and prestigious newspapers of India.
Methodology to evaluate the need for currency:
The projected GDP figure is available from Govt, CMIE, (Center for Monitoring Indian Economy) and RBI own Research Wing (D).
(It considers the factors like Inflation and GDP)
· Consider the cash with RBI and Banks -under Note stock account (N).
· Then there is replacement demand due to the destruction of soiled and mutilated notes (R).
Total Notes to be printed = D-N +R
In India 5% extra will be added to meet the emergency. For printing denomination wise breakup is taken in order to print is given to press and is planned accordingly. The whole procedure is regulated and monitored by RBI.
Currency played a vital role in the colonizing of India by the British. Here is a question arises that why government prints more money when it is not creating any value for economy. There will be a group of literates ans qualified people advising them to keep printing of money. Printing of currency and economy conditions both should be matched, otherwise it leads to economy disasters.
say for example everyone are having more money, they were not willing to work, but all needs food, food becomes scarce what will we eat ? Can we eat money? So, Government follows certain strategies in printing currency.