1.4.1. Currency Component

Currency component includes coins and paper currency.

Coins refer to all metallic money. The few things to note about coins are:

♤ Coins are token money. Token money is the money the face value of which is more than the intrinsic value.

♤ The right of minting coins is the monopoly of the government.

♤ They are useful for making transactions of small value.

♤ They constitute a very small component of modern money.

Currency notes refer to paper money. The few things to note about paper currency are:

♤ In India, virtually all paper money in circulation consists of notes issued by RBI.

♤ Currency notes have a very small intrinsic value of their own.

♤ It is inconvertible, i.e., there is no compulsion for central bank to exchange it for gold. After world war I, almost all countries abandoned gold convertibility.

♤ All notes carry the legend: ‘I promise to pay the bearer the sum of ten rupees’ (signed by

the Governor of RBI).

Though the value of the paper and the metal itself is less than its net worth, yet people accept such notes and coins in exchange for goods, which are apparently more valuable than these. This is because the value of the currency notes and coins is derived from the guarantee provided by the issuing authority of these items. As every currency note bears on its face a promise from the Governor of RBI that if someone produces the note to RBI, or any other commercial bank, RBI will be responsible for giving the person purchasing power equal to the value printed on the note. The same is also true of coins. Currency notes and coins are therefore called fiat money as it is issued on the fiat (order) of the government. They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction.

However, recently the Government of India took the step to demonetize Rs. 500 and 1000 currency, which means that the legal tender of currency units was declared invalid from the specified date. Demonetization of currency means discontinuity of the said currency from circulation and replacing it with new currency.