Paper Currency, Principles of Banking and Trading
ALLAMA IQBAL EXPLAINS
By: Abbas Ali
In the previous chapter, it has been stated that the government can charge minting right as much as it likes. In Hindustan, our government charges five annas per rupee as minting right. However, according to economic principles, if even 15 annas per rupee are charged as a minting right, there will be no harm in buying and selling in the country because the rupee is a medium of exchange. Like other goods, the value of money is determined due to the equilibrium between supply and demand for it. In different countries, the quantity of minting rights is different. It is 5 per cent in certain places, and in certain other areas, it is 10 per cent. However, can there be any form of coin in which the quantity of minting right of the government will be cent per cent? In the case of issuing paper currency, the amount of coins the government would have issued in the absence of paper currency, would be saved. If the government papers that are in vogue in our country had not been issued, then obviously, the government had to issue coins instead. However, due to this paper, our government is relieved of issuing coins. Or, in other words, we can say that in the form of this particular coin, our government has taken a cent per cent minting right. Chinese people were the first inventors of paper currency. In the twelfth century, when the famous traveler Marco Polo visited China, he learned that there was a tree, the bark of which is used as coin, which is used like gold or silver in buying and selling. During the 13th and 14th centuries, the rulers of Persia and Japan followed China. However, the nations of Europe realized the benefits of its use after centuries. Paper currency has two forms:
- Non-transferable paper currency. A) which cannot be converted into money on demand.
- Transferable paper currency. B) or bank currency can be converted into money on demand.
In the former case, either the government issues it, or at certain times, it happens that when, due to some business or any other accident, the quantity of money in some country decreases, the government converts bank money into non-transferable money by order. In such cases, bank money cannot be converted into money on demand because, in the government exchequer, money would not be paid in its exchange. Between 1797 AD and 1821 AD in England and during 1848 AD in France, the same situation prevailed: the papers of government banks could not be transferred into money on demand because the non-transferable paper currency could not be compatible with the changing economic condition of the country. Therefore, its issuance is not very beneficial.
In the opinion of some scholars, paper currency cannot be called as money because, in their view, this specific form of money as a means of exchange is detrimental to national and business welfare. However, this argument is logically imperfect. Similarly, someone can say that because he considers wine a bad drink, wine is not a drink. The fact is that any commodity that fulfils the objectives of money is money, be it paper or stone. There is no disagreement that, like money, paper currency can be used as a means of exchange, and practically, it has been used in this capacity and is being used. As in any country, different shapes of production and business are evolved, and the necessity compels that to fulfil the objectives of money, new forms are introduced. In such circumstances, whatever the commodity is, if it meets the goals of money, it will be termed as money or a substitute for money. We do not say that paper currency is always and, in every country, treated as money. Rather, we argue that when, at some place, this shape of a coin starts fulfilling the objectives of money, it becomes money, and till it keeps on fulfilling the dreams of money, it remains money. Suppose the government of any country becomes bankrupt and does not transfer its issued papers into nontransferable legal documents. Obviously, government papers will not be accepted for buying and selling by any person. In other words, government papers will not remain as money. On the same basis, paper currency can be used as a standard of value because the commodity that acts as a medium of exchange will necessarily serve as a standard of value. According to the same theory, paper currency can also be a standard of deferred payment because it is generally legal cash, meaning that the creditors can be legally compelled to accept it. Rather, even if it is not legal cash, in daily routine use, it can probably act as a standard of deferred payment because every person has a strong tendency to interpret the prices of goods in terms of money. Therefore, like money, the value of a paper currency depends upon its supply and demand. As we have proved earlier, there is no necessary relationship between minting rights and the fluctuation of the value of money. Likewise, it can also be established that there is no essential relationship between the non-transferability of paper currency and its change. Its value can decrease only in such cases when its quantity is greater than the inscribed price of the coins, which are made common in the absence of its issuance. 1) its cheapness is the stimulus for its issuance, and the need arises when the government intends to earn benefits or when the quantity of money gets diminished due to some national calamity. Hence, paper currency can fulfil all the objectives of money. Therefore, there is no reason it cannot be money, subject to the condition that its quantity in use is not more than the country’s requirements. If its quantity exceeds the requirements, its value will decrease, and the creditor will incur a loss. Debtors will gain because its purchasing power will reduce as its value will decrease day after day, and also because it cannot be transferred to any other country ( because the people of other countries will not accept the coins of lesser value, even if the full value remains intact, its acceptance or rejection remains in their hands), due to this fact, the foreign trade of the country where the importance of paper currency is low, will suffer a huge loss.
2) Bank money is the name of that paper currency that can be transferred into money on demand. The government, through her bank or some people, can collaborate and issue permission from the government. However, in both cases, the smooth functioning of the banks depends upon the bankers’ trust. If the people have no faith and trust in them, no one will accept their issued papers and keep their money in their custody. Because the commonality of paper currency is based upon trust/ reputation, it is obvious that every bank must have enough money so that when a person wants to transfer the bank’s papers into money, he can do it immediately. If it does not happen, the bank will lose its trust. Therefore, considering the fear, all the banks keep a specific quantity of minted money. Yes, the bank issues papers much more than the quantity of money with the bank. Otherwise, the bank will not have any benefit. This phenomenon can be based on the strength of trust. Otherwise, it is not possible.
Some people understand that bankers borrow at a lesser rate of interest from one person and lend it to another person at a higher rate of interest, and in this way, earn profit. However, the reality is that the bank does not lend money; rather, based on trust, it issues papers that are worth more than the quantity of money with them or, by creating other forms of trust, earns profits. In other words, a bank is a shop where trust is sold. People bring their money, business contracts, and other forms of rights, and the bank gives an equal amount of trust against them. In other words, the bank provides its customers with the request that when they want, they can receive their money or entrust this right to some other person, and in case of non-payment, they can prosecute him and get the payment.
Because the rights the bank gives its customers are not material, they cannot be transferred. Hence, it is necessary that for the said purpose, they must be kept in the written form. Therefore, the bank either issues its papers, meaning that the client or the possessor of the bank papers would be provided a specific amount of money on demand. Or, the client can write a letter to the bank that an exact amount may be paid to a particular person on request. This type of letter is known as a cheque. However, we should remember that the money a bank receives from others against the bank’s trust is not just a commodity of faith to be kept by the bank, but it is the bank’s property that the bank invests in for business purposes and earns profits. On the strength of this money, the bank buys other rights against the trust, and the amount of the faith against which it buys other rights is many times more than the amount of money in the bank’s possession. This great extent of trust is the basis for the bank’s profit. Therefore, the person who says he has so much money in the bank uses correct words according to common terminology; however, according to banking principles, this use of words is incorrect. Because the amount of money with the bank is the bank’s property and not of the people from whom the bank has received it. However, these people have a discrete right, i.e., they have the right to receive their money when and where they want. Therefore, it is obvious that the bank’s capital is its trust. With the mediation of this trust, it buys money, business debt, litigation rights, and other discrete rights in the same way as we buy some commodity with the mediation of money and receive the price of its trust as if it were money. As a businessperson buys an item at a lower price and earns profit by selling it at a higher price, similarly, a bank buys its commodities, i.e., trusts, debts, litigation rights, etc., from a person, i.e., from its clients and sells to another person, i.e., debtor at some price. Because of the debt the bank buys, its price increases until it is paid back. Due to this buying and selling, the basis of which is personal trust, the bank earns profit. Therefore, the personal faith of the bank is its capital, which is more than its present quantity of money, which in turn increases the national capital many folds.
Some scholars think that if the bank money is easily convertible into cash, then in all situations, the same thing will happen as in the case of gold and silver, which is the interpretation. Therefore, there will be no difference between the two forms of the money. However, for this purpose, in every situation, the bank money must remain like the coins of gold and silver whose interpretation it is. The management of the banks must be according to the highly correct principles. In economics terminology, this opinion is known as the principle of banking. Some scholars oppose this opinion. They think that if all the country’s banks are allowed to issue bank papers, keeping in view their profit and loss, then there is the apprehension that bank papers might be given more than the country’s requirements. Therefore, legal restrictions must be imposed on the issuance of bank papers. This principle, which in the economics terminology is known as the trading principle, was initially framed in China. On the same principle, the Banking Act was passed in England in 1844 AD. The conditions of which are as follows:
- The Bank of England will not have permission to issue banknotes of more than one crore and fifty lac pounds. For issuing more than the prescribed amount, it must have a quantity of minted money present with it.
- The said bank would have separate departments for issuing bank papers and a department of the bank.
- No other bank of London or any such bank whose term starts from 1844AD can issue papers. The banks that began before 1844 AD could not increase the quantity of their bank papers more than the quantity during the said year.
There has been a long discussion between supporters of the abovementioned opinions, and in our opinion, the arguments of both sides carry equal weight. Therefore, it isn’t easy to decide which of the two statements is preferable.
Ilm-ul-Iqtisad
Part-3 Chapter-5
Zar-e-Kagzi
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