Case of fiat currency: history, power and denominations..

There is just so much happening that one does not not know what to read/blog and what not. The Trump event looks like another Brexit case where the pollsters failed miserably.

But the blog has to start from the shocker of a night where you realised the fickleness of fiat power money. Then you wake up to see this post topping the daily stats: Why is currency in circulation in India rising?

Endless amount of media and expert commentary has followed with each one saying the same thing. Of all , this piece by Prof JR Varma was different. He said the world runs on credit and not money. So we should be more worried about losing our source of credit than source of money.

I also wanted to take a different perspective as well.  No one has asked the following  question: How does government decide overnight that what it itself said as legal tender a few seconds ago is no more a legal tender just a few seconds later?

The answer is simple here: The government proposes and disposes. It is this single monopoly to print and manage the currency which makes governments the most powerful entities. As countries warred so often earlier, they realised the superiority of who wins the war does not depend on better war machinery but on better currency/financing machinery. Napoleon figured much later though that what gave England edge in Anglo-French wars is not superior war technique or machinery but financing facilities pioneered by Bank of England. Thus, came Banque de France in 1800 nearly 106 years after Bank of England.

Even before or without these banks, role of financiers was crucial in these war outcomes. History of Rothschild tells you the same and same is the case with our very own Jagat Seths.

One just remembers and rephrases the famous dialogue from the Hindi movie blockbuster Deewar.  Just that the dialogue is between people and the government. The people say : “Look we both started together in this journey. But I have voting power, I have consumption power, I invest and make money and so on. What is it that you have?”  The Government says “I have currency printing monopoly..” And no explanations are needed.

Apart from putting up central banks to finance wars, some other central banks basically evolved to monpolise this very currency. Before central banks, banks issued their own currency backed usually by gold or some other asset. So one could always encash the currency note with some of those assets. As some banks failed to do so, it led to concerns amidst the public (just like when bank fails to payback deposits today). This led the then governments to monopolise the currency function under one of these banks. Now, the central bank issued currency and other banks were not allowed to print their currency.

In other cases, where there was no central bank as such but governments still figured a way. It ensured that only currency printed by a government bank or a government chosen bank was considered as legal tender. Only their supporeted currency was accepted in government treasuries.So even if other banks printed their own currency, they found no takers as it was barely exchangeable. This was seen in Presidency Banks case. The Presidency Bank issued their own currency from 1823-61 but were not central banks. However, due to their legal tender monopoly, the other banks could barely compete. The other private banks especially in Bengal fought against this monopoly but to no avail. A classic fight is depicted between Union Bank promoted by Shri Dwarkanath Tagore and Presidency Bank of Bengal  in Amiya Bagchi’s history of SBI.

Infact even before we had governments coming in picture, we have stories of Maharajas and their currencies. That time we actually just had coins. So each time a new king came, he demonetised the old coins and issued coins showing his legacy. The new coins would have new shape, new design and so on. Each era of new king showed a different coin.

Later as forgers caught up with the game, attempts were made to introduce new coins to prevent fake currencies from circulating. The message was same. This is the government monopoly and it shall remain that way.

One thing which ticked the game further in favor of governments and forgers was the start of fiat currency. Earlier currencies had some backing. Now, it is just based on fiat. The government just prints whatever it wants to and then one day decide to take it away as we learnt last night. It is that simple. What had some value few seconds before is just a piece of paper now.

Then there are all these mention of black money and how it will curb black money. The question is who creates black money? We have demonetised all these high denomination notes many times in the past. Each time the reason is same – curb black money. Then why do we keep reintroducing them?

The first was when Rs1,000, Rs5,000, and Rs10,000 notes were taken out of circulation in January 1946, a year and a half before the country won independence from the British. The Rs10,000 notes were the largest currency denomination ever printed by the Reserve Bank of India, introduced for the first time in 1938. All three notes were reintroduced in 1954. 

In the early ’70s, the Wanchoo committee, a direct tax inquiry committee set up by the government, suggested demonetization as a measure to unearth and counter the spread of black money. However, the public nature of the recommendation sparked black money hoarders to act fast and rid themselves of high denominations before the government was able to clamp down on them, Mint reported.

Then, in 1977, the Janata Party coalition government came into power. A year into the government’s term, party leader Morarji Desai was more bullish about cracking down on counterfeits and black money. The High Denomination Bank Notes (Demonetisation) Act, instated by the ruling party on Jan. 16, 1978, deemed the Rs1,000, Rs5,000 and Rs10,000 notes illegal for the second time.

 At the time, then-RBI governor I.G. Patel disagreed with the measure and accused the Janata coalition government of trying to cripple the corrupt predecessor governments instead of simply eradicating black money.
 For the most part, Modi’s measure mirrors Desai’s—except this time, he has the backing of his RBI governor, Urjit Patel, who applauded Modi’s “very bold step” addressing concerns about the “growing menace of fake Indian currency notes.” But that doesn’t mean all the skeptics are off his back. Economists doubt the impact of his decision.
Given this limited history and knowing that high denomination notes lead to corruption, why keep going through circles? They are the ones which first allow all this black money to be parked and then they coolly say none of these are legal!
The Rs 1000 and were reintroduced in 2000-01(by NDA I) and Rs 500 started in 1987-88 (by Congress). After years of inflation and now this habit of carrying these notes in wallets, they are now worthless.
The government could have ended this high denom notes problem once and for all.  But all you know a new series of Rs 500 and even bigger RS 2000 notes are being introduced. The same people who laud the government for decision against black money just don’t ask why again Rs 500 and Rs 2000?
All this just leads to constant source of worry for the common people. They have no idea why these things keep happening. All of a sudden there is panic across the country. One would also need to fill a form and furnish id to get the new notes. The currency notes will be rationed initially which will make lived even tougher.
Earlier these high denom notes were held by the top income class. Now it is help by everyone. The government has specified deadlines and places where old notes will be accepted. But it also knows no one will take these notes as who wants the headache of going to the bank? Visiting bank and exchanging notes is a problem never really foreseen by the ministers or bureaucrats as they themselves never have to stand in these queues. It is easy to say things like short term pain without experiencing any pain whatsoever.
One is also wondering why note security measures were not upped in another demonetisation exercise 1-2 years back. That time we just introduced notes which had years mentioned at the back.
Then there is this hype over cashless economy. Much of this discussion comes from big cities where plastic money has taken off. Go a little deeper and cash remains the thing. We are some years away for the transition to plastic money in most parts of the country. How do we move to a cash economy so soon? Even more Ironically it will lead to more powers in the hands of governments and not people as suggested. These things should also be done taking people with you and not by force.
A free banking proponent will say told ya! Much better to link currency to gold and prevent all these government machinations trying to make the world believe that it is trying to curb illegal practices. As the government prints too much money at will, these issues were bound to crop up sooner or later…

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