Back to metallic currency
A journey in retrospect
By Prof S. SABIR A.
Sep 03 - 09, 2001
The author is a veteran banker convert professor
teaching MBAs at HIMS. In him, we find a rare combination of academics
Payments system has been evolving over centuries, and
with it the form of money. In primitive age, commodities like grain,
hides and skins, and shells were used, one after another, as a means of
payment, that is, as a medium of exchange and a measure of value. Then
came the age of precious metals, i.e. silver and gold.
Later, for multiple reasons, base metals such as
copper, zinc, alloy, etc. replaced precious metals as money commodity,
particularly for low denomination coins.
Metal coins, which were considered to be a lasting
substitute till some time back, became increasingly unpopular due to
their being deficient in one of the basic qualities of money, i.e. portability.
As a result of this, metallic coins soon yielded in favour of paper
currency. However, low denomination metal coins continued to operate as
legal tender simultaneously with paper currency.
Replacement cost of paper currency once again posed a
threat to the concept of perpetual money commodity. This cost
becomes exorbitant in countries with humid climate where life span of
paper notes is reduced considerably, as also in the societies where
paper notes change hands too often. Hence, cost of paper currency
emerged as a severe problem that concerns the entire world these days.
Confronted with this situation, countries of the
advanced world once again resorted to intensive search to find out some
lasting solution to this problem. For small denomination currency units,
and for sub-divided units, metal coins were still considered suitable,
particularly if the climate was humid and the cash circulation was
meager. The real problem was that of the large denomination notes, the
replacement cost of which had become quite prohibitive.
One workable alternative that first surfaced in late
80s in Australia was in the form of the currency notes made of plastic
film pioneered by the Reserve Bank of Australia. These notes even
survive the washing machine. In other words, these plastic notes are
capable to be laundered — washed and ironed —, and thus expose the
infallible economic dogma commonly known Grasham's Law — bad money
drives good money out of circulation — to the risk of gradual
The experiment did not augur well in the early years
of the innovation. The ink rubbed off the surface; the superimposed
portrait smeared; the notes jammed while passing through the counting
machines, and often did not fold, or developed cracks when folded.
However, the drawbacks were soon remedied.
After getting over with all these ordeals, the bank
made plastic currency notes legal tender in 1992 with a programme of
gradual replacement of paper currency. Ultimately, in the year 1996, the
last lot of the paper currency was withdrawn out of circulation.
With this successful experiment, the Bank started
making on order plastic notes for other countries also. Foreseeing world
wide demand for plastic notes in future, companies engaged in plastic
manufacturing processes also started taking interest in this
"lucrative" product on their future sale list.
The plastic currency notes have manifold advantages
over paper currency. For example, these are difficult to forge and
harder to tear. They are also cost-effective. According to a report
published in The Economist, London, although a plastic currency note
costs almost twice as much as a paper note does, it lasts up to four
times as long. The difference is much greater in countries with humid
climate where life span of paper notes is too short, or where
circulation of cash is too fast. Worn-out plastic notes can also be
recycled and made into commercial products of high demand.
There was a lesson in it for Pakistan also, which we
refused to pay heed to. We are also not feeling comfortable with the
replacement cost of our paper currency notes. Ours being a cash-based
society, circulation of currency notes in our country is faster than
average, thereby reducing their life span substantially. In order to
overcome this problem, we like an impatient child acted in haste,
ignoring even the basic principles of decision making. We jumped to the
decision that was neat at hand, without caring to evaluate its
We reversed the wheel of the time to recede to the
metal age when the world had already leapt forward from paper currency
to the cheque currency, and was fast moving ahead from the cheque
currency to the plastic currency.
In 1997, the Government of Pakistan took the decision
to issue new one-rupee coin while the existing coin and the paper note
would continue, to introduce a 2-rupee coin and stop fresh printing of
Rs. 2 paper note, and to issue, at a later stage, a 5-rupee coin. Since
then two different one-rupee coins, one-rupee paper note, newly
introduced two-rupee coin, and two-rupee paper note are all in
circulation simultaneously. The 5-rupee coin is intended to be issued by
the end of this year ( in September 2001).
In less than three years time, these metal coins have
touched the height of unpopularity. Vendors do not return the change
since they do not have any coins. Instead, they offer toffees as a
substitute. Buyers do not like to have them either. Hence, in most
transactions, the balance amount of less than rupees five is forsaken by
either of the two. The wallets can not afford to keep them; the jackets
can not pocket them but with a feeling of consistent discomfort for one
who wears them. The only refuge for them is the children's treasure
pots. What else is the Grasham's Law?
This disgraceful non-acceptability of metallic coins
is a common sight, it is any body's every day experience. Still the
decision-makers are adamant to implement their decision about launching
the 5-rupee coin. This is nothing short of pampering a false ego at the
cost of rational interest. Hold any body walking across the road and ask
him how many 5-rupee coins would he prefer to carry? The answer should
be an eye opener for those who are willing to see trough.
A realistic and workable suggestion is offered here
in the hope that the authorities might find it thought provoking. It is
a five-fold phenomenon based on a two-fold premise as under:
(i) Coins of low denomination have already
been thrown out of circulation as a consequence of hyperinflation; and
(ii) Coins of higher denomination are inconvenient to carry and
are therefore bound to disappear with the passage of time.
The five facets of the suggestion are as given below
1. Demonetize and withdraw out of circulation
1,000-rupee, 500-rupee, 10-rupee, and 2-rupee notes and coins.
2. Issue a new note of 20-rupee denomination made of plastic
3. Next, l-rupee, 5-rupee, and 20-rupee notes made of plastic
films should be made legal tender. Fresh printing of paper notes of
these denominations should be banned.
4. In the next phase, 50 and 100 rupee notes made of plastic film
should be made legal tender, and fresh printing of paper notes of these
denominations be stopped.
5. In the final stage, the entire paper currency should be
withdrawn out of circulation, and only plastic notes should remain legal
To start with, plastic notes may be imported from
some foreign supplier. At a later stage, on acquiring the necessary
technology, we ourselves should be able to manufacture plastic notes of