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    On what basis, is currency (or money) created?


    Want to know how a country decides how much currency to produce? Searching for this information online? Check out this Ask Expert page where our experts have responded to your query.

    Let's say we have a hypothetical country X. Right at the beginning how does the government decide what amount (value) of currency would they produce?

    - How does any government "create" the currency in the first place?

    - Do the central banks just print some notes and offer it as a service? Say, Use our notes as an exchange medium. Or they lend the notes (or currency) and obtain some interest from it.

    - Or, is it something like "we own the land and other assets, we put it at a value of some X amount"? Thus we can produce 'A' amount of money. On the other hand, country Y having different amount of assets and produce 'B' amount of money.

    - Does it depend on production?

    - Is it something else?

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    Edit: Thanks for the answers.

    Some Extra doubts.

    Let's say person "A" gets a kingdom suddenly say "kingdom K". Kingdom K has 1000 people, everyone has houses, land for farming and poultry, fisheries, etc. Now, "A" though is the ruler
    doesn't own the people's land. Service sector has not come yet, nor is manufacturing sector but "kingdom K" has sufficient resources and are also willing to buy some from "kingdom J", "kingdom I", and "kingdom H" to set up those sectors. Also they are willing to export their fish, eggs, etc to the other kingdoms. They decided not to use barter system or use any other kingdom's currency. They need their own.

    - How many notes would "kingdom J" print?

    - What will be the value of each note?

    - When they buy steel from "kingdom H", would they pay using their own currency or using kingdom H's currency?

    Kindly edit the existing answers by emphasising on this example.
  • Answers

    6 Answers found.
  • All money is just what it is a medium of exchange. Every country has it's own rules governing how money will be created or shared amongst the masses. The value is usually pegged to gold or some natural commodity of that area. Increasingly money or cash in today's world is created by debt. And all nations try to increase or decrease this value by influencing the world market

  • Currency printed will be based on the reserves, The reserves of the following will be taken into account by Reserve Bank of India.
    1. Foreign Exchange
    2. Bullion reserves
    3. Receivables.
    The RBI follows Minimum Reserve System at present. This system is in implementation from1956. As per this MRS, the RBI has to keep a minimum reserve of Rs 200 crore. This should be either in gold bullion and gold coin and foreign currencies. R.s115/- crores out of this Rs.200 crore. should be in the form of gold bullion or gold coins.

    drrao
    always confident

  • The currency is printed by RBI under certain guidelines. The main factors which decide for printing currency are - to meet the demand of banks for cash for circulation purposes, replacement of the soiled notes, to meet the minimum reserve requirement. Based on these factors and the past historical data the RBI decides for the quantum of currency notes to be printed in a particular year. If emergency need is there RBI can print more currency also with approval of Govt.

    One interesting thing to note in this matter is that if RBI prints currency notes without any basis then there is a danger of currency getting quick devaluation and hence it is imperative that RBI has to be very cautious and alert on this front as it has to provide sufficient currency to the banks but at the same time it has to keep the guidelines in sight. The printing of currency is a balancing act - it should be sufficient for growth of the economy but it should be restricted in order to keep it at its value in the market.

    RBI follows Minimum Reserve System for this and as per that it has to maintain an asset of 200 crore all the time and this asset comprises of two parts that is 115 crore in shape of physical Gold and 85 crore in foreign currency. The idea of keeping gold is basically to assure the people that the currency is having a value and Govt stands to honour it anytime in any situation. Keeping Gold gives indirectly that guarantee.

    Knowledge is power.

  • In India RBI is responsible to print new currency notes at the behest of the government. But producing new currency is subject to the value of the rupee in international market. Government can't voluntarily ask the RBI to print new currency notes. Two countries namely Germany and Zimbabwe had done this mistake in past. After the first world war, Germany wasn't in a position to return the debt of other countries, so the then government got new currency printed to pay the foreign debt but the value of German currency had fallen on ground and it faced a big financial crises. Likewise Zimbabwe had also committed this mistake to create new currency against the low value of their currency in international market. Their situation got so much deteriorated that 25 million Zimbabwean dollar was equal to 1 US$.

    How the value of currency is determined is bound to some factors. Basically, there are two methods whereby value is defined (1) fixed (2) flexible. The former is related to government and it remained in practice till 1991 and latter is related to market. Now only flexible method is in practice to define the value of Indian currency. If the demand of our currency goes up the value of ouroo currency will also go up correspondingly. Basically following factors define the value of currency of any country:

    1: Foreign reserves: If any country has foreign reserves the value of currency of that country will go up. e.g. the countries which have oil the value of theirs
    is high, like Dinar is more valuable than US dollar. Because other countries which don't have large quantity of oil give foreign reserves to these oil producing countries.

    2: Current account deficit: The main factor is the difference of export and import. If a country export more than what it imports from other countries the value of currency will rise because in this situation the country gets more foreign reserves.

    3: Demand & Supply: If the demand of currency is more than supply the value will rise. If demand goes down the currency will be devalued. Why the value of US $ is more than Indian rupee, reason is demand of dollor. Almost 80% business transactions are done in dollor in international market whereas India's share is only 1.1% e.g. if India buys oil from Saudi Arab. India will not pay them in Indian rupee/Saudi riyal rather India will exchange its currency into dollors to pay the bill to Saudi Arabia.

    4: Inflation: It also affects the value of currency. It means what is purchasing power of our rupee in the market. If the inflation occurs the value of rupee will fall because purchasing power of Indian rupee has declined.

    5: Foreign investment: If the foreign countries invest their money in Indian market foreign currency will come in India and it will boost our economy. Therefore, value of currency will also go up. If the interest rates are attractive to foreign investors and they find themselves comfortable to invest their money in Indian market, foreign currency will pour into India.

    6: Export & Import: If the country exports its goods in international market more than what it imports, value of currency will rise. But India purchases more than what it sells in global market. If the demand of Indian goods increases in international market then value of rupee will automatically rise.

    7: Exploiting natural resources: If a country has large quantity of natural resources and it exploit them on large scale, it will affect its GDP and thus economy of that country goes up and good economy is correlated with value of currency. e.g. those countries which have gold mines when the rate of gold rises their currency value also rises up.

    8: Employbility and employment: If the country is able to change employbility into employment it will improve its economy. As unemployment is a burden on a country. it directly affects GDP of a country.

    9: Stable government: Stability of government is also a factor to define value of currency. Since it attracts foreign investment which results in inflow of foreign cuurency as well as employment opportunity for the local people

  • The entire responsibility rests with the Reserve Bank of India taking the final decision of printing of notes after working out certain home exercises such as existing volume of the running currencies, replacement of torn notes etc. This is done on the basis of forecasting model taking into account of the parameters like expected growth, gross domestic product, seasonal factors, likely replacement of demand and growth non cash payments such as cheques, card, electronic payments etc.
    Inflation is the foremost factor for considering the quantum of currencies to be printed . If inflation increases physical money would increase proportionately. Hence in such a situation RBI has to print more according to the percentage of inflation. So RBI adopts various calculations to determine the extent of money to be printed.
    Another important factor affecting the amount of money to be printed is the existing gross domestic product. The government would undertake the exercises of printing considering its GDP level. The point worth to be noted is the government gives people the same amount of physical currency as a medium of exchange as the value it is getting in return from GDP and inflation.
    We cannot print money arbitrarily. An uncontrolled printing of currency would lead to disaster for the economy since it will further push up inflation.

  • Notes are to be printed in any country, it is decided according to the government, central bank, GDP, fiscal deficit, and growth rate of that country. In our country, the Reserve Bank decides when and how many notes to print. The Reserve Bank of India is expected to print more notes to reduce the fiscal deficit. But the central bank has no plans to print more notes to meet the growing fiscal deficit.
    The printing of notes is decided based on the minimum reserve system. According to this, RBI has the right to keep assets worth at least Rs 200 crore in RBI funds at all times. After possessing so much property, RBI can print notes according to the need with the consent of the government.
    In India, notes are printed in four presses. The notes are printed in Nashik in Maharashtra and Dewas Press in Madhya Pradesh. Note printing is done here under the supervision of the Security Printing and Minting Corporation of India Limited. Apart from these, two other presses are located in Mysore, Karnataka, and Salboni in West Bengal. Owned by RBI Note Printing Private Limited, note printing is done here. Apart from this, minting is done in Mumbai, Kolkata, Hyderabad, and Noida. There is a security paper mill run by the government in Hoshangabad, Madhya Pradesh. From here, special currency paper used for making notes for all 4 presses of India is supplied. Apart from this, a large amount of these papers are also imported from other countries. Offset ink is manufactured at Banknote Press in Dewas, Madhya Pradesh for printing notes. While the embossed printing on the note is seen, its ink is made in the unit SICPA of the Swiss firm based in Sikkim.

    Swati Sharma

    Keep your Face to the SunShine


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