DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY, LUCKNOW


(FINAL DRAFT)
MONEY EVOLUTION AND INDIAN CURRENCY SYSTEM

SUBMITTED BY: SUBMITTED TO:
Sumit Gehlot Dr. Mitali Tiwari
Ist Sem (Section B) Asst. Professor
Roll no. : 145 Economics





ACKNOWLEDGEMENT
Firstly, I would like to thank respected ASSISTANT PROFESSOR (Economics) Dr.
MITALI TIWARI, for giving me such a golden opportunity to show my skills and
capability through this project. This project is the result of the extensive ultrapure
study, hard work and labor, put into to make it worth reading. It is my pleasure to be
indebted to various people, who directly or indirectly contributed in the development of
this work and who influenced my thinking, behavior, and acts during the course of
study. Lastly, I would like to thank the almighty and my parents for their moral
support and my friends with whom I shared my day-to-day experience and
received lots of suggestions that improved my quality of work.



















TABLE OF CONTENTS
Introduction..4
Background..4
Research problem....4
Objective.4
Research Methodology5
Analysis5
Conclusion5

Barter system.5
Coinage .5
The era of hard and credit money.6
Advantage of paper currency6
Disadvantage of paper currency6
Legal tender era6
Paper money era7
Indian currency.8
The role of RBI in Indian currency management..8
The role of Indian Government in Indian currency management........................8
Convertibility of Indian currency.9
Devaluation of Indian Currency9
Fluctuating of Indian Currency...10
Capital Account Convertibility...11
Tarapore Committee11
Refferences.13









INTRODUCTION
Money, in some form, has been part of human history for at least the last 3,000 years.
Before that time, it is assumed that a system of bartering was likely used.Money is defined
in various ways, some say, Money is what money does
1
. In the other words, anything
that performs money is money. In the widest sense, the term money includes all media of
exchange- gold, silver, etc. But this definition is too wide. The most commonly agreed
view about money is that, Anything which widely accepted in payment for goods, or in
discharge of other kinds of obligation
2
.

BACKGROUND OF CURRENCY
The origin of currency is the creation of a circulating medium of exchange based on a
store of value. Currency evolved from two basic innovations: the use of counters to
assure that shipments arrived with the same goods that were shipped, and the use of
silver ingots to represent stored value in the form of grain. Both of these developments
had occurred by 2000 BC. This first stage of currency, where metals were used to
represent stored value, and symbols to represent commodities, formed the basis of trade in
the Fertile Crescent forever 1500 years.

RESEARCH PROBLEM
To study the BACKGROUND OF MONEY
To understand the BARTER SYSTEM
To study THE ROLE OF INDIAN GOVERNMENT AND RBI IN INDIAN
CURRENCY
To understand THE CONCEPT OF DEVALUATION

OBJECTIVE
To study THE IMPORTANCE OF MONEY

1
According to Walzker in K.K. Dewett pg 563
2
According to Robertson in K.K Dewett pg 563
To study INDIAN CURRENCY SYSTEM
To study the background of INDIAN CURRENCY

RESEARCH METHODOLOGY
The project is completed by using doctrinal method of Research using both primary and
secondary sources.
ANALYSIS
This project analyzed the convertibility system of Indian currency and also, it helps in
understanding the concept of devaluation of any currency. How Devaluation of currency
help in any countrys economy? It also analysis that old currency system like Barter
system, Paper money currency etc. gone away with time and the new currency system is
adopted by all countries itself.
CONCLUSION
The main conclusion of the project is to find out how devaluation of money help in any
countrys economy. Devaluation in the short run would be to worsen the balance of
payment position and raise the burden of India's foreign debt and debt service liability and
foreign loans repayment would break the back of the budget, which would in turn
increases the trade gap. It will upset all the cost price relationships in the economy, lead to
galloping inflation, and will stall many ongoing projects due to rising costs.
It also explain how Indian government and RBI plays a dominant role in
Indian currency system and it also explain convertibility of the Indian currency.

BARTER SYSTEM
The act of trading goods and services between two or more parties without the use of
money. Bartering benefits individuals, companies and countries that see a mutual benefit
in exchanging goods and services rather than cash, and it enables those who are lacking
hard currency to obtain goods and services.
COINAGE
Coins were supposed as store of value being the metal itself, the face value of a coin
was the same as its intrinsic value: at first silver, then both silver and gold. Metals were
mined, weighed, and stamped into coins. Coins could be counterfeited, but they also
created a new unit of account, which helped lead to banking. In most major economies
using coinage, copper, silver and gold formed three tiers of coins. Gold coins were used
for large purchases, payment of the military and backing of state activities. Silver coins
were used for large, but common, transactions, and as a unit of account for taxes, dues,
contracts and fealty, while copper coins represented the coinage of common transaction.

THE ERA OF HARD AND CREDIT MONEY
Paper money was, in one sense, a return to the oldest form of currency: it represented a
store of value backed by the credibility of the issuing authority. Drafts and checks issued
privately had been in intermittent use for centuries, however, it was with the rise of global
trade that paper money would find a permanent place in currency.

ADVANTAGE OF PAPER CURRENCY:-
It reduced transport of gold and silver, and thus lowered the risks; it made loaning gold or
silver at interest easier, since the specie (gold or silver) never left the possession of the
lender until someone else redeemed the note; and it allowed for a division of currency into
credit and specie backed forms. It enabled the sale of stock in joint stock companies, and
the redemption of those shares in paper.

DISAVANTAGE OF PAPER CURRENCY:-
A note has no intrinsic value; there was nothing to stop issuing authorities from printing
more of it than they had specie to back it with. Because it created money that did not exist,
it was subject to Gresham's Law: people would exchange money rather than coins of
the same value, and this increased the velocity of money and therefore increased
inflationary pressures, a fact observed by David Hume in the 18th century. The result is
that paper money would often lead to an inflationary bubble, which would then collapse
when the demand for paper notes fell to zero, and people began demanding hard money.
The printing of paper money was also associated with wars, and financing of wars, and
therefore regarded as part of maintaining a standing army. For these reasons, paper
currency was held in suspicion and hostility.

LEGAL TENDER ERA
With the creation of central banks, currency underwent several significant changes.
During both the coinage and credit money eras the number of entities which had the
ability to coin or print money was quite large. One could, literally, have "a license to print
money"; many nobles had the right of coinage. Royal colonial companies, such as the
Massachusetts Bay Company or the British East India Company could issue notes of
creditmoney backed by the promise to pay later, or exchangeable for payments owed to
the company itself. This led to continual instability of the value of money. The
exposure of coins to debasement and shaving, however, presented the same problem
in another form: with each pair of hands a coin passed through, its value grew less.
By 1900, most of the industrializing nations were on some form of gold
standard, with paper notes and silver coins constituting the circulating medium.
Governments too followed Gresham's Law keeping gold and silver paid, but paying out
in notes.

THE PAPER MONEY ERA
Banknote is a kind of currency, and under many jurisdictions is used as legal tender. With
coins, banknotes make up the cash forms of all modern money. With the exception of non-
circulating high-value or precious metal commemorative issues, coins are generally used
for lower valued monetary units, Banknote is a kind of currency, and under many
jurisdictions is used as legal while banknotes are utilized for higher values. Paper money is
Chinese Origin.
Originally, the value of money was determined by the intrinsic value of the material the
money was made of, such as silver or gold. However, carrying around a lot of precious
metal was cumbersome and often dangerous. As an alternative, banknotes would be
issued. In financial terms, a note is a promise to pay someone money. Banknotes were
originally a promise to pay the bearer an amount of precious metal stored in a vault
somewhere. In this way the stored value (usually in gold or silver coins) backing the
banknote could transfer ownership in exchange for goods or services.
Paper money originated in two forms: Drafts, that is receipts for value held on account,
and "Bills", which were issued with a promise to convert at a later date. However the
use of paper money as a circulating medium is intimately related to shortages of metal for
coins. In the 600s there were local issues of paper currency in China and by 960 the Tang
and Song Dynasty, short of copper for striking coins, issued the first generally circulating
notes.
The first polymer banknote, the 1988 Australian $10 note(Propylene).


INDIAN CURRENCY

Rupee is the name of Indian coin and currency. It was derived from a Sanskrit language
word Rupya. Rupya literally means the wrought silver used as coins of trade or
currency during 600-400 BCE (Before Common Era)
3
.

India has been one of the earliest issuers of coins in the world (circa 6th Century BC).
The original Rupaya was a silver coin weighing 178 grams. The coin has been used
since then, even during the times of British India.

Formerly the rupee was divided into 16 annas, 64 paise, or 192 pies. Decimalization
occurred in Ceylon (Sri Lanka) in 1869, India in 1957 and in Pakistan in 1961. Each Anna
was subdivided into either 4 paise, or 12 pies. Among the earliest issues of paper rupees
were those by the Bank of Hindustan (1770-1832), the General Bank of Bengal and Bihar
(1773-75, established by Warren Hastings), the Bengal Bank (1784-91), amongst others.
In 1957, decimalization occurred and the rupee was now divided into 100 Naye Paise.

The Indian currency is called the Indian Rupee (INR) and the coins are called paise. One
Rupee consists of 100 paise. The symbol of the Indian Rupee is `. The design resembles
both the Devanagari letter "`" (ra) and the Latin capital letter "R", with a double horizontal
line at the top.
4


ROLE OF RESERVE BANK OF INDIA IN CURRENCY
MANAGEMENT
The Reserve Bank derives its role in currency management from the Reserve Bank of
India Act, 1934.The Reserve Bank manages currency in India. The Government, on the
advice of the Reserve Bank, decides on various denominations of banknotes to be issued.

3
Retrieved from http://en.wikipedia.org/wiki/Indian_rupee
4
Retrieved from http://www.rbi.org.in/
The Reserve Bank also co-ordinates with the Government in the designing of banknotes,
including the security features. The Reserve Bank estimates the quantity of banknotes that
are likely to be needed denomination-wise and accordingly, places indent with the various
printing presses. The aim of the Reserve Bank is to provide good quality notes to members
of public. Towards this aim, the banknotes received back from circulation are examined
and those fit for circulation are reissued and the others (soiled and mutilated) are destroyed
so as to maintain the quality of banknotes in circulation.
THE ROLE OF GOVERNMENT OF INDIA IN CURRENCY
MANAGEMENT
The design of banknotes is required to be approved by the Central Government on the
recommendations of the Central Board of the Reserve Bank of India
5
. The responsibility
for coinage vests with the Government of India on the basis of the Coinage Act, 2011 as
amended from time to time. The Government of India is also responsible for the designing
and minting of coins in various denominations
CONVERTIBILITY OF INDIAN CURRENCY
Officially, the Indian rupee has a market-determined exchange rate. However, the RBI
trades actively in the USD/INR currency market to impact effective exchange rates. Thus,
the currency regime in place for the Indian rupee with respect to the US dollar is a de
facto controlled exchange rate.
For almost a century since the Great Recoinage of 1816 until the outbreak of World War I,
the Indian Rupee sustained parity with the US Dollar while pegged to the Pound Sterling
that was exchanged at 4.80 (or 50 old pence per Rupee).
Thereafter, both the Rupee and the Sterling gradually declined in worth against the US
Dollar due to deficits in trade, capital and budget. In 1966, the Rupee was devalued and
pegged to the US Dollar. The peg to the pound was at INR 13.33 to a Pound which itself
was pegged to USD 4.03. That means officially speaking the USD to INR rate would be
closer to Rs 4. In 1966, India changed the peg to dollar at INR 7.50.


5
Section 25 of RBI Act, 1934

DEVALUATION OF INDIAN CURRENCY
Devaluation means decreasing the value of nation's currency relative to gold or the
currencies of other nations
6
. Devaluation occurs in terms of all other currencies, but it is
best illustrated in the case of only one other currency. Devaluation is usually undertaken as
a means of correcting a deficit in the balance of payments. Some analyst are of the view
that weakening the value of currency could actually be good for the economy since a
weaker currency will boost manufacturing production, which in turn will lift employment
and all this will set in motion economic growth and keep the economy going. But the
dangers of a falling rupee too quickly, would be that the foreigners will stop investing in
the country, which would make it impossible to finance the current account (trade) deficit.
It will then be forced to push interest rates up to defend the rupee (crashing rupee stock
and bond markets is supposed to make the rupee more valuable), and that could create
recession.
The obvious consequence of devaluation in the short run would be to worsen the balance
of payment position and raise the burden of India's foreign debt and debt service liability
and foreign loans repayment would break the back of the budget, which would in turn
increases the trade gap. It will upset all the costprice relationships in the economy, lead to
galloping inflation, and will stall many ongoing projects due to rising costs.

FLUCTUATING OF CURRENCY
To better understand the fluctuating dollar value against the rupee, let us get to know some
basics:
Exchange Rate - The rate at which a currency can be exchanged. It is the rate at which
one currency is sold to buy another.
Foreign Exchange Market - Also known as "Forex" or "FX". It is a market to trade
currencies
Indian Foreign Exchange Rate System - India FX rate system was on the fixed rate
model till the 90s, when it was switched to floating rate model. Fixed FX rate is the rate
fixed by the central bank against major world currencies like US dollar, Euro, GBP, etc.

6
Agarwal, Sumit.(2012). Effect of devaluation of Indian currency in Indian economy.
Like 1USD = Rs. 40. Floating FX rate is the rate determined by market forces based on
demand and supply of a currency. If supply exceeds demand of a currency its value
decreases, as is happening in the case of the US dollar against the rupee, since there is
huge inflow of foreign capital into India in US dollar.
Impact of Dollar Fluctuating on Indian Economy-
Possible impacts of the devaluation on the economy could be the stimulation of
merchandise exports, discouraging merchandise imports and thus improving terms of
trade, increase revenue collection and savings in repatriation of profits and royalties by
existing foreign investors, bringing illegal foreign exchange leakages into official channels
and putting an end to gold smuggling. Inflow of foreign capital can be improved by
devaluation only if prices do not rise. It is supposed to provide an escape from vexation
import controls that prevent utilisation of full industrial capacity, stifle export drive,
bestow monopoly profits on a few, inefficient market regulation and pressure on budget
and domestic prices will sky rocket.

CAPITAL ACCOUNT CONVERTABILITY (CAC)
Capital account convertibility is a feature of a nation's financial regime that centers on
the ability to conduct transactions of local financial assets into foreign financial assets
freely and at country determined exchange rates.
CAC was first coined as a theory by the Reserve Bank of India in 1997 by the Tarapore
Committee, in an effort to find fiscal and economic policies that would enable developing
Third World countries transition to globalized market economies.

TARAPORE COMMITTEE
A committee on capital account convertibility was setup by the Reserve Bank of India
(RBI) under the chairmanship of former RBI deputy governor S.S. Tarapore to "lay the
road map" to capital account convertibility. In 1997, the Tarapore Committee had
indicated the preconditions for Capital Account Convertibility. The three crucial
preconditions were fiscal consolidation a mandated inflation target and strengthening of
the financial system.
The five-member committee has recommended a three-year time frame for complete
convertibility by 1999-2000. The highlights of the report including the preconditions to be
achieved for the full float of money are as follows:-
Pre Condition Suggested By Tarapore Committee
Gross fiscal deficit to GDP ratio has to come down from a budgeted 4.5 per cent in
1997-98 to 3.5% in 1999-2000.
A consolidated sinking fund has to be set up to meet government's debt repayment
needs; to be financed by increased in RBI's profit transfer to the govt. and
disinvestment proceeds.
Inflation rate should remain between an average 3-5 per cent for the 3-year period
1997-2000.
Gross NPAs of the public sector banking system needs to be brought down from the
present 13.7% to 5% by 2000. At the same time, average effective CRR needs to be
brought down from the current 9.3% to 3%.
External sector policies should be designed to increase current receipts to GDP ratio
and bring down the debt servicing ratio from 25% to 20%
7
.












7
Retrieved from http://www.banknetindia.com/banking/tarapore.htm
REFFERENCE
http://en.wikipedia.org/wiki/Indian_rupee
http://www.banknetindia.com/banking/tarapore.htm
Agarwal, Sumit.(2012). Effect of devaluation of Indian currency in Indian
economy.
http://www.rbi.org.in/
Dewett, K.K . Modern Economic Theory, S. Chand Publishing
N.C.E.R.T