System of Money
System of money
By the system of money, we refer to all the arrangements, rules, regulations and practices which govern the issue of coins, currencies and paper notes of all types. There are several standards, and each, has got rules of its own relating to the issue, control and management of the medium of exchange. The well-known systems are gold standard with three variations, or silver standard, bi-metallism, sterling exchange standard and managed paper currency standard. If we have got a gold standard with gold currency, gold coins must be unlimited legal tender, subject to free coinage and have metallic value equal to face value. The weight and the fineness of all the coins and their respective ratios to one another must also be fixed by law. In the case of a managed paper currency standard, the monetary authority of the country should so regulate the total quantity of money in circulation that the purchasing power of money should remain reasonably stable besides meeting adequately requirements of trade and industry.
A good system of money should have the following characteristics:
1. It must be simple, so that people can easily understand it. Currency has to be used by all people. If it is complicated, the people will not understand it and will not be able to work it well.
2. It must maintain a reasonable stability of the prices in the country. This means that the internal value or purchasing power of that money in terms of goods and services in the country must not fluctuate too violently. Rapid price-changes are harmful to trade, industry and the people at large.
3. It must also maintain the external value of the currency. If the ratio of a country's currency with the foreign currencies is maintained stable, its foreign trade would flourish.
Economists have, however, come to hold now that the stability of internal prices is to be preferred to the stability of the foreign exchange ratio.
4. It must be a cheap system. The gold standard is a very costly standard. That is one of the reasons why it had to be given up. A paper currency system in which the people of the country have full confidence is an ideal system.
5. It must be elastic and automatic, so that the currency expands or contracts in response to the requirements of trade and industry. When, as a result of rapid economic development trade expands, currency must expand sufficiently.
6. It should be definite. Nothing should be left vague in the system. All rules and regulations should be well defined Privileges of the people as well as the obligations of the currency authority should be laid down in unmistakable terms so that there is no possibility of any misunderstanding.
7. Finally, the currency system must inspire confidence. If the people have no faith in it, they will not accept it.