Monetary standards of trading countries play a crucial role in international economic transactions and it is helpful to be familiar with the concept of a monetary standard and some related aspects.
1. Standard Monetary Unit
Monetary system of every country has a standard monetary unit and all other monetary denominations are expressed either as its fractions or as its multiples.
All financial claims by creditors upon debtors are also expressed in standard monetary units. In India, for example, the standard monetary unit is known as a rupee which is divided into 100 units of one paisa each. That is to say, in India, monetary values are expressed in terms of multiples and fractions of a rupee.
i.ytimg.com
2. Defining the Standard Monetary Unit
Further, the standard monetary unit of a country is officially defined in terms of some equivalent. Thus, if this equivalent is a specified weight and purity of gold and if the authorities are ready to buy and sell unlimited quantities of official currency and gold against each other, the currency of that country is said to be on gold standard.
ADVERTISEMENTS:
US dollar was on gold standard for a pretty long time and its official value used to be loss of an ounce of gold of purity 0.999. Similarly, there was time when the Indian rupee was on silver standard and each rupee was equivalent to one of silver (purity 11/12).
However, these days, almost all currencies are on paper standard. Under this system, the standard monetary unit of a currency is that piece of paper which is duly authenticated to that effect by the monetary authorities.
For convenience of use, however, the currency system may contain some denominations in the form of coins as well. Also, in each country, currency issued by the monetary authorities is “legal tender”, which means that creditors cannot refuse to accept it in discharge of their financial claims.
3. Position in India
Currently, the Indian Rupee is on a paper standard; and the monetary authorities are the Reserve Bank of India and the Government of India. The GOI can mint coins of specified denominations (including the fractions of a rupee) and print paper notes of denominations not exceeding one rupee.
ADVERTISEMENTS:
The RBI cannot mint coins. It can only print paper notes bearing denominations of multiples of rupees, as permitted by law.
However, all currency (including the GOI currency) can be “issued” (that is put in circulation) only by the RBI. Also, the task of regulating monetary and credit system lies with the RBI.