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Back to metallic currency

A journey in retrospect

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 and professionalism.

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 extinction.

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 viability.

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 film.
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 tender.

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 our requirement.