Evolution of Money - Currency

To overcome the disadvantages of Coinage, there was a desire to shift from heavier currency to lighter currency. Banking became prominent in trade. This small step is a giant leap as the money in the form of paper now can be used to transact with ease and the denominations has made any trade value possible

Modernization in Paper Money:

Paper money was introduced in Tsong dynasty of china in 11th century.

In 13th century, paper money was introduced in europe through travellers like Marcopolo and William Ruberick. Because of insecurity and impracticality of transporting large sums of money over long distances, traders started using Promissary notes.

Paper money was backed by physical asset like gold and silver. i.e, You can exchange one rupee to "X" grams of silver. This was true until world war-II.

44 countries along with India(even if it was under british raj) were invited to meet at place called bretton woods in USA, to sign an agreement for fixed exchange rate. According to this agreement, all the currency will be backed by the dollar and dollar will be backed up by the gold.

Dollar became the world reserve money and this required US to hold same amount of gold. But by 1966, non-US central banks held $14 billion, while US only had only $13.2 billion in gold reserve. Of those reserves, only $3.2 billion was able to cover foreign holdings as the rest was covering domestic holdings.

France doubted if US holds the same amount of gold as the amount of dollars and hence started to exchange dollars for gold and soon all the other nations followed the "Gold Rush".

In 1971, the then president of US,Nixon, took off the gold standard.This implies that dollar bills couldnt be converted to gold. Hence, there was birth of Forex Market(Foreign Exchange).

Money was no longer money. It was not backed by physical asset. It had value because everyone(governement and individuals) thinks it has value. Indians knew this harsh reality during demonitisation.