Legal and Economic Environment of Business

Project Report on

Popularity of the Paper Currency in the World

Submitted to- Prepared by- Group 11

Dr. Praveen Goyal Chaitanayam 2016H149241
Maanik Goel 2016H149271
Madhurima Biswas 2016H149249
Prakarsh Kr. Agarwal 2016H149208

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Table of contents

1. Abstract ............................................................................................................................................. 3
2. Review .............................................................................................................................................. 3
2.1 Introduction of paper................................................................................................................... 3
2.2 Advantages of Paper Currency ................................................................................................... 3
2.3 What Is A Paper Currency? ........................................................................................................ 4
2.4 Valuation of the major world currencies..................................................................................... 4
2.5 Excerpts from Some Published Papers ....................................................................................... 5

3.Analysis.................................................................................................................................................6

4.Data.......................................................................................................................................................7

5.Result....................................................................................................................................................8

6.Conclusion............................................................................................................................................9

7.References...........................................................................................................................................10

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1. Abstract

Paper currency has been the quantum of transactions for almost five decades. It has made the
domestic as well as international transactions feasible and easy. The barter system, which was
previously considered the epitome of transaction measurement has been swiped away by the
portability and easy quantitative factor of the paper currency. In this report, we have focussed
on the different factors leading to the popularity of paper currency in the world. Adding to the
central idea, we have elaborated on some of the dominating currencies at present as well.
Despite advances in transactions technologies, paper currency still constitutes a notable
percentage of the money supply in most countries. It constitutes roughly 10% of the US Federal
Reserve's main monetary aggregate. Yet, it has important drawbacks. It can help facilitate
activity in the tax-evading and illegal economy. Its existence creates the artifact of the zero
bound on the nominal interest rate. On the other hand, the enduring popularity of paper currency
generates many benefits, including substantial seignior age revenue. This report includes some
of the issues associated with phasing out paper currency, especially large-denomination notes.

2. Review

2.1 Introduction
During the medieval times, as trade and commerce progressed, people found it cumbersome to
deal with coins as a mode of currency. Thus, it was the time to introduce a change. A much
better and portable way .Hence, bank notes were introduced. Initially the paper currency was
introduced by Chinese dynasty but slowly the system started getting recognition worldwide.
Although the turning point occurred when one of the major superpowers in the world that is,
Europe accepted the paper currency system in 1661.

2.2 Advantages of Paper Currency

The advantages of paper currency were numerous:
It made valuation easier by reducing the dependency on gold and silver as a trade
parameter.
Paper currency made buying on credit possible. It also enabled potential investors to
lay their money in company stocks and paper money made it easier for them to get
value back in return.
It also enabled the countries to go global in their trade and commerce methods, as there
was a unified method of valuation.
It also helps in measuring the purchasing power of a country.

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2.3 What Is A Paper Currency?
A banknote (often known as a bill, paper money, or simply a note) is a unit of valuation issued
by bank. They were originally issued by commercial banks, who were legally required to
redeem the notes for legal tender (usually gold or silver coin).
Usually bank notes are created on a nationwide basis and they can be used as
a financial obligation. Historically, banks sought to ensure that they could always pay
customers in coins when they presented banknotes for payment. This practice of "backing"
notes with something of substance is the basis for the history of central banks backing their
currencies in gold or silver.

2.4 Valuation of the major world currencies

United States dollar

US is one of the largest world economy and one of the major contributing parameter for world
trade. In the words of Robert Gilpin, in Global Political Economy: "Somewhere between 40
and 60 percent of international financial transactions are denominated in dollars. For decades
the dollar has also been the world's principal reserve currency; in 1996, the dollar accounted
for approximately two-thirds of the world's foreign exchange reserves.
Dollarization has dominated many home currencies as well. As a result, the countries such as
Ecuador, El Salvador etc. have adopted the United States Dollar.
Although gradually the Japanese Yen and Euro dollar are changing the game.
Euro
German mark DM helped in referring to Euro as one of the major world currency. However
European countries like: the Bulgarian lev, plus several West African currencies like the Cape
Verdean escudo and the CFA franc. Other European countries, while not being EU members,
have permanently adopted the euro due to currency unions with member states, or by
unilaterally superseding their own currencies: Andorra, Monaco, Kosovo, Montenegro, San
Marino, and Vatican City.
The time started to turn in favour for the Euro when in December 2016, the euro surpassed the
dollar in the combined value of cash in circulation. The value of euro notes have risen to more
than 610 billion, equivalent to US$800 billion at the exchange rates at the time (today
equivalent to circa US$664 billion).

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List of Top 10 Highest Value Currencies in the World

Rank Country Name Currency Equal to Dollars

1 Kuwait Dinar 3.54

2 Bahrain Dinar 2.63

3 Oman Rial 2.57

4 Latvia Lats 1.93

5 United Kingdom Pound 1.54

6 Gibraltar Pound 1.54

7 Jordan Dinar 1.42

8 European Union Euro 1.33

9 Azerbaijan Manat 1.31

10 Switzerland Franc 1.11

2.5 Excerpts from Some Published Papers

The Surprising Popularity of Paper Currency

The public's demand for currency is of only secondary importance from a macroeconomic
perspective, so central banks fully accommodate fluctuations in currency demand. Having
demand for currency outside banks may not be essential to the conduct of interest rate policy,
it is very important for central bank balance sheets. In both Europe and the United States,
currency accounts for roughly 95 percent of the over $650 billion supply of high-powered
money. If the demand for currency were suddenly to evaporate in the United States, the Federal
Reserve would have to part with over $600 billion in assets (mostly government bonds) to soak
up the unwanted notes and coins. Put another way, a sudden collapse in currency demand would
force governments to replace non-interest-bearing debt (paper money) with interest-bearing
debt, an expensive proposition. If paper currency is in fact used mainly by the global
underground economy, should governments be working so hard to promote its use? Are
governments penny-wise and pound-foolish to go to such lengths to ensure the popularity of
their currencies? To the extent the euro competes with the dollar in

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developing countries, it is probably a very good thing for Europe (because it can borrow interest
free); whether it is good for developing countries is a more complex question. However, most
of Europe's pre-euro currency supply was probably held within Europe and, presumably, for
some time to come, most physical euros will be held in Europe as well. If cash facilitates illegal
activities and tax evasion, it might, in theory, generate expenses and tax losses that could
significantly offset any seigniorage revenues (the money governments make from printing
money). Then again, some libertarians would argue that the underground economy functions
as a safety valve, keeping bloated welfare and tax systems in check.

There is a great deal of talk about competition between the euro and the dollar, most of which
is nonsense, because global monetary policy is not a zero-sum game. But there is some
competition in courting global underground demand for currency, and, on that score, the euro
has a distinct advantage: it comes in a 500 note (approximately $450 at January 2002
exchange rates) as opposed to the largest U.S. note, a $100 bill. In the short run, this may not
matter, but given that most currency is held in large-denomination notes, this may be quite an
advantage in the years ahead. (Anticipating the popularity of the 500 note, 29 percent of the
value of the first printing of euro notes is in 500s.) After all, $1 million worth of $100 bills can
easily fit into a standard briefcase. But $1 million worth of 500 notes can fit into a purse!
Filmmakers should take note. So, too, should, policymakers. In today's world, does it still make
sense to issue very large denomination notes when the main consumers seem to be in the global
underground economy?

Published by Kenneth S Rogoff.

Analysis

The major use of paper currency is for commerce and trade. One of the major function that
affect the use of paper money is exchange. The exchange of paper money for goods or the
exchange of paper money for bonds. Following are the prime factors that affect the demand for
paper money.

Interest Rate:

People invest in any of the two things. Either goods or bonds. Goods can be bought from money
as and when demanded. But money is invested in bonds for majorly security purposes. Bonds
provide a higher return on investment as and when compared to goods.

Inflation:

Inflation acts as a major factor in the exchange rate of a country's paper currency. If the inflation
rate is low the popularity of the paper currency goes higher and the export of the goods increase.
Thus the popularity of the currency would be benefitted and the valuation of the country's
currency would be uplifted.

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 The Speculator's View
Speculators are people who are the potential investors of a company. While an investor
analyzes the company for risk, he or she would consider many factors. One such factor
would be the country's current currency valuation. They would scrutinize the popularity
of the paper currency of a particular country for the potential profits as well.
Macroeconomic factors:

At the time of occasions such as elections, war etc the demand for the currency increases. These
situations hold the responsibility of spiking a country's currency demand or bringing it to a
steep decline. For example: At the time of war, the situation if the country would be full of
panic and thus the value of currency would be affected.

Employment Of People:

The growth factor of a country depends on its citizens. Citizens in the sense, their well being.
How they promote growth. Their employment opportunities etc. When a country has less
number of unemployed people, their value of currency increases and when the number
increases, the value of currency deteriorates.

Factors of Interest Rate and inflation coexist and affect popularity of currency

These factors are the major driving forces for the popularity of any paper currency in the world.
The demand of the paper currencies can be evaluated and thus can be studied to understand the
demand of the paper currencies in the world.

Data

After analysing certain researches and papers , we have come across a number of methods and
procedures that are useful in finding out the demand (popularity ) of paper currency of a
country. The data used for this analysis of the demand is that of retail, interest, sales etc as it is
tangible.

The currency data for various countries is mentioned below:

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Result

As the analysis of the data concluded, we could note the following results:

Consumers tend to have a set value of purchases to make with paper money. They
tended to have segregated the commodities for paper money and the rest desirable
goods were purchased by cards.
The purchasing power of the people also affect the currency denomination they deal
with. When the retail sales data was scrutinized , we found that as the bill amount went
up the consumers tended to pay by cashless means rather than hard cash.
The popularity of paper currency also gets a hit as people show an increase in
purchasing power. The higher the purchasing power, the higher the bill and the
tendency is thus more to pay by cashless transactions.

After a thorough analysis of the results we do begin to realise that the people now a days are
getting inclined towards plastic money and not paper money. There maybe a lot of factors
leading to this tendency and we have listed some of the major ones below:

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1. The value of printing currencies

The studies say that RBI spends 2500 cores or so on merely printing seventeen billion
currencies of varied denominations, this range is just set to rise, which suggests that if the
printing of currencies rises, the value of printing will certainly rise. Printing one single Rs one
thousand note charges the govt with nearly three rupee per note. There is plenty of cash the
govt is defrayment precisely in printing currency for the individuals of Asian nation.

2.The value of disposing currency

The banknotes that you simply use as your currency is created of composed cotton, cotton rags
and paper. This material is fragile to be used and besides you need acumen and skill to.
Sometime the currency can tear and lose its price. These currencies got to be disposed. RBI not
only bares the value of printing currencies but it additionally bares the value of disposing them.
The disposing price is or so 210000 on each day. this suggests the regulator prints the currency
and disposes currency daily and additionally spends cash on each the activities.

3.Go green

By exploitation technology and plastic cash we will save plenty of trees. Printing of currencies,
accounting and alternative dealings reports can cut back cutting of trees which is able to save
trees and save America from the weather disasters that it would world be facing because of
development and havoc stricken nature. Some effort when placed in by you, would be an
extremely important matter in protective and saving America from any destruction.

4. Anytime anyplace banking at minimum price and energy

Online banking doesn't limit you in any method. It offers you a full flexibility of banking from
any location at any hour of the day with no fuss or further price or charges. You needn't invest
time and energy to jaunt the branch and back, you needn't wait in long queues to get
transactions processed, you needn't find an associate authority to book your investments and
your mounted deposits, altogether you need not depend upon a branch or a bank worker to
bank or method to tend to your banking and investment connected dealings. You'll be able to
handle all by yourself and at your ease.

5.Keep a track on your account and pay your bills on time

You need to not attend the bank or your service supplier to pay your bills. You'll be able to
perform the necessary amenities right at your convenience on the time appropriate to you.
Banks use technology that sends you alerts on every dealings that takes place on your account.

Conclusion:

The popularity of paper money is surely declining in the present time. As more and more people
are facing the dilemmas of hard cash, they are more inclined towards swiping their cards and
get the payments done. Now it may be too soon to judge if the use of paper money would be
totally vanquished or not but it is going to lose its dominance soon enough.

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As quoted by the famous historians,

Edmund Randolph of Virginia still had doubts, for he said that notwithstanding his antipathy
to paper money, [he] could not agree to strike out the words, as he could not foresee all the
occasions which might arise.

James Wilson of Pennsylvania favored removing the power: It will have a most salutary
influence on the credit of the United States to remove the possibility of paper money. This
expedient can never succeed whilst its mischief are remembered, and as long as it can be re
sorted to, it will be a bar to other resources.

Pierce Butler remarked that paper was a legal tender in no country in Europe. He was urgent
for disarming the Government of such a power.

Though the use of paper money may subside in the following times but it can never be let out
of our economy.

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References

1. The Constitution and paper money ,Clarence Carson

2. E. H. Scott, ed., Journal of the Federal Convention Kept by James Madison(Chicago:

Albert, Scott and Co., 1893), p. 47.

3. Ibid., p. 60.

4. Charles E. Tansill, ed., Formation of the Union of the American States(Washington:

Government Printing Office, 1927), p. 306.

5. Merrill Jensen, The New Nation (New York: Vintage Books, 1950), p. 324.

6. Andrew C. McLaughlin, The Confederation and the Constitution (New York: Collier Books,
1962), pp. 107-08.

7.Brian Doyle, 2000, "'Here Dollars, Dollars . . .': Estimating Currency Demand and
Worldwide Currency Substitution," International Finance Discussion Paper 657 (Board of
Governors of the Federal Reserve System).

8. Mathias Drehmann, Charles Goodhart, and Malte Krueger, forthcoming, "The Challenges
Facing Foreign Currency Usage: Will Traditional Transactions Medium Be Able to Resist
Competition from New Technologies?" Economic Policy.

9.Kenneth Rogoff, 1998, "Foreign and Underground Demand for Euro Notes: Blessing or
Curse?" Economic Policy, Vol. 26 (April), pp.

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