Page 146 - DECO402_Macro Economics

Unit-16 Money Supply: Definition and Importance of Money

(1) Currency Notes

The purport from currency is the coins and notes in circulation.
(i) Coins: Now a days the coins are released in every country by the government, though in old
era private institutions were also using to release the coins. Government used to restrict the
private institution coins in the matters of weight of coins and purity of metal used in coins
so that people could save from the fraud. There were two types of coins under the value of
gold and silver—Full-bodied Standard Coins and Token Coins. But prevalent now a days
under the Managed Currency System, there is no importance of Full-bodied Standard Coins.
So those are not in circumstances now. Indian Rupee is neither a full-bodied Standard Coins
nor a Token Coin. The 50-paisa, 25 paisa, 10 paisa, 5 paisa, 2 paisa and 1 paisa coins are the
Token Coins. The Token coins are not important components of money. Though a large
quantity of small coins are in circulation because of poverty in India then also this is only
3.5 % part of total money supply. In the developed countries like America, Token coins are
lesser than 2 % of total money supply.
(ii) Currency Notes: An important part of money supply are the currency notes. Now a days
currency notes are released by either Reserve Bank of country or Government itself. The One
Rupee note by Indian Government and the all other notes are released by Reserve Bank of
India. There can be many ways to release (issue) the note; as, representation, proportional,
minimum fund, variable, constant, etc. In the era of metal value, paper money was the
representative. In other words, the metallic base was kept beside these notes. If Central Bank
was releasing the notes of one crore then it had to keep the gold or silver valued one crore
in the treasure. The two main objectives to release the currency representation letter was
such – (i) Saving of the cost of minting coins, (ii) protection from the loss from rubbing the
metal. But this system of note release was inflexible because the supply of currency letter was
dependent on metal stock. It could not be more than metal stock. For removing the weaknesses
of currency representation letter Proportional Method was adopted. Reserve Bank was
releasing the Notes on the base of Proportional Reserve System, till 1956 A.D. According to
this system the 40 % of the value of Entire Notes was kept in gold, silver, foreign assets and
foreign currencies. After 1956 A.D., Minimum Reserve System was adopted. According to
this method, it is compulsory that Reserve Bank has to keep the minimum fund of 200 crores
in reserves, in which the gold should be of 115 crores. There on the base of minimum fund
of 200 crores Reserve Bank can release the notes until any limit. This system is very flexible
but the fear of expansion of many notes occurs. Currency notes can be variable or constant.
Under the variable currery exchange monetary authorities have to change the currency note
with metal. Under the constant currency paper, Reserve bank (Monetary Authorities) gives
the guarantee to change the paper notes into token coins or other notes, but not to change in
gold or silver. Currently, the unchangeable method to release the notes is circulated in all
the countries of the world. Notes are actually promissory notes. Monetary authority promises
to give coins or other notes in exchange of it. In resulting of this method the importance of
Monetary paper policy and Monetary management has very increased. Now note release
does not depend upon the stock of gold or silver. The monetary authority on keeping in the
mind the needs of economy does the supply or determination.

(2) Demand Deposits
The people in all the countries deposit their money in banks. Bank Deposits are of two types—
(i) Fixed Deposits and (ii) Demand or Current Deposits. Fixed Deposits are of a definite time period. The
cheque cannot withdraw these Deposits. But the amount of Demand Deposits can ever be withdrawn
by the depositor. So the cash in demand deposit form is as liquid as money. In western countries, 90 %

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