2.3 Issuing of Currency
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| Issuing Currency |
The price
is the society’s estimate of the value of goods and the wage is the society’s
estimate of the value of services. Money is the medium by which this estimate
is expressed. It is the medium which enables us to measure various goods and
services and refer them to one common basis, thus facilitating the process of
making a comparison between various goods and between various services by
referring them to one general unit which serves as the general standard. Prices
are paid for goods and wages are paid for workers on the basis of this unit.
The value
of money is estimated by its purchasing power i.e. by how much a person could
acquire with it in terms of goods or services. Therefore, the medium by which
the society estimates the value of goods and services must have a purchasing
power in order to qualify as money i.e. a power with which any person could
acquire goods and services. This medium must originally have an intrinsic
power, or be dependent on an intrinsic power i.e. it should itself have a value
recognized by the public, in order to be considered as money. However, in
reality the issuing of money differs among the various countries of the world.
Some countries have made their money an intrinsic power or dependent on an
intrinsic power, while others have made their money a conventional money
(inconvertible) i.e. they have agreed upon a medium to be considered as money
and they gave it a buying power.
When
issuing money, countries may either adopt the gold and silver standard, or the
non-exchangeable paper money. As for the countries which operate the gold and
silver standard, they follow two methods of issuing: the metallic money method,
i.e. either the single/dual metallic standard or the paper money method. The
metallic method is where gold and silver coins are issued by minting pieces of
gold or silver to represent various values, but based on one monetary unit to
which all the various values of money and goods would be referred. Each piece
would be coined to be based on this unit, and these pieces would be circulated
as the country’s currency. The paper method used in the countries which operate
the gold and silver standard means simply that a country would use paper money
i.e. paper currency that can be exchanged to gold and silver upon demand. Two
methods can be used in operating such a standard; the first method is when a
country makes the paper money represent a certain amount of gold and silver
deposited in a specific place as money or bullion. In this case, this amount
would have a metallic value equal to the nominal value which the paper money
holds and the notes can be exchanged on demand. This is known as intrinsic
paper money. As for the second way, this would be used when a country decides
that the paper money should represent a document in which the undersigned,
promises to pay the bearer on demand a certain amount of money. This paper
money would not in this case represent the amount of gold and silver which has
a metallic value equal to the issued nominal value; the issuing house, be it a
bank or a government treasury, would however maintain a lesser amount of gold
and silver than its nominal value, for example, three-quarters of the value,
two thirds, one third, a quarter or any other percentage of the nominal value.
For instance, a bank or the State’s treasury would issue paper money worth 500
million Dinars and maintain in its safes 200 million Dinars worth of gold and
silver only. This type of paper money is known as fiduciary paper money. The
metallic reserves are known as gold reserves or gold cover. In any case, a
country which issues money under these conditions would in fact be operating
the gold standard.
This
demonstrates that the media which possess an intrinsic power i.e. gold and silver,
are in themselves money and are the basis upon which money is based. However
each country chooses her own specific method, shape, weight, mint, etc. so that
she can distinguish it from other money. A country may also agree on an
intrinsic paper currency based on gold and silver either circulating in the
country and abroad, or used only in foreign exchanges. A country could also
agree upon fiduciary paper money, backed by gold for a certain amount of its
nominal value i.e. it would have a gold reserve less than its value in gold.
These papers would have a specific shape and print so that they become the
currency of the issuing country and so that they are distinguished from other
currencies. As for the countries that operate a non-exchangeable paper money
standard, they issue bills which are not exchangeable to gold or silver or any
precious metal with a fixed rate. Therefore, the institution which issues these
bills is not liable to exchange these bank notes for gold at a specific price
on demand. Gold in such countries is treated just like any other commodity
whose price fluctuates from time to time according to supply and demand. These
bank notes are not backed by a metallic reserve, nor are they exchangeable to
metallic money. They only hold a legal value and do not possess an intrinsic
power, nor do they depend on an intrinsic power. They merely represent a unit
that has been agreed upon as a means of circulation, and it is the law that
gives it the power to become a means of circulation, with which a person may
acquire goods and services. Its power is derived from the power of the State
who issues it and who uses it as her currency.
Since
money is issued in the above mentioned ways, any country could therefore agree
upon something which expresses the society’s estimate of goods and services, as
long as this thing has purchasing power with which a person could acquire goods
and services from that country. Therefore, any country could issue a currency
that has a fixed and a distinguished quality, which expresses the society’s
estimation of the value of goods and services i.e. a money with which any
person could acquire goods and services in the issuing country, according to
the value given to that money. It is the issuing country which forces other countries
to recognize her currency so that these countries could acquire from her goods
and services.
A country
would not need to depend on the International Monetary Fund, the World Bank, a
central bank or any other institution. The strength of the unit in obtaining
goods and services would be sufficient to turn it into a currency either by
itself, such as gold and silver, or by its dependence on gold and silver e.g.
intrinsic paper money which represents its nominal value in gold and silver, or
through having a certain amount of gold and silver held in reserve, as is the
case with fiduciary paper money. This may also be due to it being a legal
tender with enforced acceptability which allows a person to acquire with it
goods and services, such as the non-exchangeable paper money i.e. the banknote.
Countries in the past used to deal in gold and silver, whereby each country
would agree upon a specific fixed character for her gold and silver in order to
distinguish her money from other countries’ money. Each country would then
issue alongside the gold and silver paper money with a fixed distinguished
character. Then the country would agree upon the issuing of paper money while
maintaining gold and silver reserves. There were therefore three types of money
in the world: metallic money made of gold and silver, intrinsic paper money and
non-exchangeable banknotes.
Since the
end of the Second World War and until 1971, the whole world used to operate two
main types of money, the metallic and the paper money with its three types.
However, since 1971 the whole world began operating exclusively the
non-exchangeable paper money standard i.e. the legal tender with enforced
acceptability, until the U.S. president Nixon declared the Bretton Woods
Declaration null and void, thus severing the link between the dollar and gold.
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