Currency Debate: Metal or Paper or Internet?


Every country even the 194th nation, carved out of Sudan, has its own currencies no matter all of them are beautiful or not. Bangladesh has altogether nine banknotes and seven coins. Bangladesh Bank (BB) has the sole authority to issue banknotes. Central banks the world over change the design of banknotes from time to time. The BB has so far issued notes in the denominations Taka 1000.00, 500.00, 100.00, 50.00, 20.00, 10.00, 5.00, 2.00, 1.00 and coins of Taka 5.00,2.00 1.00, 0.50, 0.25, 0.10, 0.05, 0.01 totalling Taka 1696.91 only. All of them are not beautiful. All of them are not good-looking but the two taka note is the best among the local notes.

Beauty contest for the girls has its own ugliness and seamy side but the contest of banknotes has no such unsightly sides. In a recent online competition the two taka note has become the most beautiful banknote of the planet. Sao Tom’s dobra note of 50,000 denominations is in the second position and the third position is occupied by one dollar note of Bahama.

‘Friendship without money is worth no more than a pip’ is an English proverb and everyone knows the power of money. The more money you have the more love you will have. The more you spend for others the more you will be honoured, be it by brothers and sisters or wife or wards. From cradle to grave you need money even motherly love varies from son to son if their earnings vary. To the most of the people wealth is the parameter of wisdom. There is no debate on the necessity of money in human life but there are lots of debate on medium of exchanges.

Debate on Paper Money

Currency debate is very old. Countries across the world today have their currencies but the king among them is dollar though there is euro to challenge the dollar regime. In ancient times there was no currency. Things were then bartered. People exchanged their products. In course of time shell was used as coin. Then there came gold, silver and copper coins for selling and buying things. Now paper money is in vogue though the money has lots demerits. There is always the danger of over-issue of currency notes because the changes in money supply can be made at the will of the government. Over-issue of paper currency results in inflationary situation in the country. Paper money lacks public confidence because mostly it is not backed by metallic reserves. Paper money is less durable than metallic money. Paper money is acceptable only within the domestic economy, and not for making foreign exchange payments. Since the supply of paper money is liable to quick changes, there is lack of stability in its value. Fluctuation in the value of paper money generates an atmosphere of uncertainty in the economy which, in turn, promotes speculative activities. Paper money has no intrinsic value of its own. Thus, when paper money is demonetized, its value falls to zero.

Market and Mint Value

Everything on the planet has its own use and value by which its worth is determined. Whatever you buy has its own value and utility. Nobody buys anything valueless such as trash or leftover. But sometimes garbage or trash for its own value are collected and recycled. Have you ever bought anything which is worth of nothing? Probably not. That happens with the paper currency whose value is controlled by govt. The paper currency has no mint value because it is made of paper only. But the metal currency is quite opposite. The value of the currency lies in its mint. (The mint price refers to the price a mint would pay someone to bring gold or silver in to be melted down into coinage.)

Devaluation
Suppose you have a five taka banknote you can buy anything worth of Tk 5 but in the case of losing its face value it is nothing but a piece of paper. If ever govt devalues taka against a foreign currency with the paper currency you will buy little. But if you have a five taka coin and its mint value is five taka then you can melt the coin and get back its value. So it is safer to have Tk 5 in metal currency than Tk 5 banknote. With metal you are secured. Though devaluation has some good effects in short term but it has little good effects in long term. When one country devalues her currency to increase the exports but other countries also follow the same policy. So devaluation becomes useless. Devaluation increases the burden of foreign debts, pushes up prices of imported goods which brings the inflation. The prices of imported raw materials and machines become also high due to which goods manufactured in domestic industry also become costly. If the currency is devalued then country has to pay the large amount of money for imports. So the foreign trade is adversely affected. If the currency is devalued then goods and machines become costly. So, large amount of capital is required for starting business. Devaluation is a temporary treatment for the correction of adverse balance of payment. But it is not useful in long run. All these happen mainly because of paper currency.

Dinar and Dirham

For a long time gold and silver coins were used as the medium of exchange in Medina state which was headed by Prophet Muhammad (PBUH) and later in the whole Muslim world. This sustainable currency worked wonderfully. Inflation or stagflation was not any concern of leaders in the middle ages.

Rendezvous with Gold

While gold has fascinated humankind for 5,000 years, it hasn’t always been a guarantee of wealth. A true international gold standard existed for less than 50 years (1871 to 1914) – in a time of world peace and prosperity that coincided with a dramatic increase in the supply of gold. But the gold standard was the symptom and not the cause of this peace and prosperity.

The events of the Great War changed the political, financial and social fabric of the world – the international gold standard would be no more. While a gold standard continued in a lesser form until 1971, the death of it had started centuries before with the introduction of paper money – a much more flexible instrument for our complex financial world.

In one scene in the James Bond film “Goldfinger”, the gold-intoxicated villain – the film’s namesake – watches delightedly as a laser inches closer to a gold-topped table to which Bond is tied at the ankles and wrists. Before bidding farewell, Goldfinger leaves Bond with this thought: “This is gold Mr. Bond. All my life I have been in love with its colour, its brilliance, its divine eminence.” Movies like this epitomize the human fascination with this precious metal and the greed that it sometimes inspires. Contrary to what Goldfinger thought, gold may not be the most valuable investment in the world – it may be nothing more than a form of insurance.

The biggest factor influencing gold’s price is the staggering amount of it held by central banks around the world. This is a legacy from the days of the gold standard, which existed in one form or another between 1821 and 1971. During this period, US and European central banks hoarded massive amounts of gold.

According to the World Gold Council, in 2003 this stockpile consisting of 33,000 metric tons accounted for nearly 25% of all the gold ever mined. In that same year, a total of only 3,200 metric tons of gold was supplied to the marketplace through mining and scrap – this means the central banks’ stockpile of 33,000 tons could overwhelm the market if it were sold. In other words, there is enough gold in the vaults of central banks to satisfy world demand for 10 years without another ounce being mined! What other commodity has this kind of demand/supply imbalance?

Furthermore, without a gold standard, this precious metal has limited strategic use for these central banks. Because gold does not earn any investment interest, some central banks – like that of Canada during 1980-2003 – have already eliminated their gold stock. The potential for gold supply to dwarf its demand poses a hindrance to the metal’s potential return well into the future.

Gold also may be helpful during periods of hyperinflation as it can hold its purchasing power much better than paper money during these periods. However, this is true for most commodities. Hyperinflation has never occurred in the US, but some countries are all too familiar with it. Argentina, for example, saw one of its worst periods of hyperinflation from 1989-90, when inflation reached a staggering 186% in one month alone. In such situations, gold has the capacity to protect the investor from the ill effects of hyperinflation.

Silver

Silver and gold have shared a common history over the past five millennia. Prior to the 20th century, silver was also a monetary standard, but it has long since faded from this monetary scene and from the vaults of central banks around the world. According to the Economist article “Goldbears” (May 30, 2002), silver’s elimination from the central banks’ reserves may help explain why its return has not exceeded inflation rates over the past 200 years. If the current stockpile of gold were to be sold off, the downward pressure on its price could result in it having the same fate as silver.

Perhaps history demonstrates that it is just too difficult for the world to work under a monetary standard based on a commodity because the demand for these metals depends on more than monetary needs. When these metals were used as monetary standards, the divergence of the market price and mint price for these metals seemed to be in continual flux. And continual arbitrage opportunities between market and mint prices created havoc on economies. The rise and fall of the silver standard – which just happened to be the first victim – perhaps demonstrates how gold’s price as a commodity cannot absorb the demand/supply distortions created by its past position as a monetary standard.

Shell

In the course of history of human transaction shell got its place for some time. Though it had little value of its own, but it was probably better than that of paper currency.

Money in the Future

Everything new is fine. Although the paper bills we carry around now have high-tech watermarks and security threads, the future of money is moving toward cards and chips. One day, a chip in your wallet may register purchases just by waving it over a product you want to walk out with – no clerk, no smile, no “hi my name is” badge. Internet currencies, such as the Paypal system, are also contenders for the next generation of money as the world becomes more interconnected. Many nations are still worried about cash they can’t track or tax, but an internet economy is as inevitable as a free-trading America was. Money has changed a lot since the days of shells and skins, but its main function hasn’t changed at all. Regardless of what form it takes, money offers us a medium of exchange for goods and services and allows the economy to grow as transactions can be completed at greater speeds.

“We have gold because we cannot trust governments.” President Herbert Hoover’s statement in 1933 to Franklin D. Roosevelt foresaw one of the most draconian events in US financial history: the Emergency Banking Act occurred that same year, forcing all Americans to convert their gold coins, bullion and certificates into US dollars. While the Act successfully stopped the outflow of gold during the Great Depression, it did not change the conviction of gold bugs, those who are forever confident in gold’s stability as a source of wealth.

Before investing in gold, one must understand its history – a history that, like that of no asset class, has a unique influence on its own demand and supply today. Gold bugs still cling to a past when gold was king. But gold’s past includes also a fall, which must be understood to properly assess its future.

Currency War: US vs. UK

Money has played a very important role in every war since its creation. Ancient kings played with the percentages of precious metals in their coins to create more money to raise armies, feudal lords tried to undermine each other’s treasuries and counterfeiters have run rampant throughout history. The most famous currency war, however, took place between the British Empire and its colony in America.

In the 17th century, England was determined to keep control of both the American colonies and the natural resources they controlled. To do this, the English limited the money supply and made it illegal for the colonies to mint coins of their own. Instead, the colonies were forced to trade using English bills of exchange that could only be redeemed for English goods. Colonists were paid for their goods with these same bills, effectively cutting them off from trading with other countries.

Tensions between America and Britain continued to mount until the Revolutionary War broke out in 1775. The colonial leaders declared independence and created a new currency called “continentals” to finance their side of the war. Unfortunately, each government printed as much as it needed without backing it to any standard or asset, so the continentals experienced rapid inflation and became utter worthlessness. This discouraged the government from using paper money for almost a century.

It took 50 years to get all the foreign coins and competing state currencies out of circulation, but by the early 1800s, the US was ready to try the paper money experiment again. Bank notes had been in circulation all the while, but because banks issued more notes than they had coin to cover, these notes often traded at less than face value.

In the 1860s, the US created more than $400 million in legal tender to finance the Civil War. These were called greenbacks simply because the backs were printed in green. The government backed this currency and stated that it could be used to pay back public and private debts. The value did, however, fluctuate according to the North’s success or failure at certain stages in the war. Confederate dollars, also issued during the 1800s, followed the fate of the confederacy and were worthless by the end of the war.
Currency War: Developed vs. Developing Countries

Following the US vs. UK currency war it entered the second phase with dollar dominating the world. Gold standard was abolished, throwing the countries with no gold backing into vulnerable position. It became clear that those who will have no gold in store will be loser and certainly have no future. Present paper or future internet currency may fall any time with the fall present-day powerful regimes. The developing countries particularly the currencies of Muslim countries are soft or weak because it is experienced that value of these currencies that fluctuates as a result of the country’s political or economic uncertainty. In other words currencies from most developing countries are considered to be soft currencies. Often, governments from these developing countries will set unrealistically high exchange rates, pegging their currencies to a currency such as the US dollar.
Why does this uncertainty hover over the developing countries? Why the currencies are made soft whereas dollar and euro are considered hard. Initially Federal Reserve Bank of US and then World Bank, IMF and even the UN were used to keep the currencies of Muslim countries soft or weak. May be there is conspiracy. As a result of the of this currency’s instability, foreign exchange dealers tend to avoid it.

Conclusion

In the Barter age probably there was no cheating. In the age of Gold and Silver currency there was no or least cheating. But in the age of paper currency or Banknote looting of common people’s wealth can be done anytime by the authorities concerned — central banks and govts. Under this Bretton Woods system — IMF, World Bank — controls the currency system. The International Monetary Fund with its 44000 billion euro reserve not only manages the world monetary system and dictates the developing country economies but also undercover helps the western hegemony along with multinational corporate to rule the world and loot the common people’s wealth. So people want a rational currency which leaves least scope to loot and cheat five billion poor people out of seven billion.

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