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Inflation to drive away low currency denominations

Finance Minister AMA Muhith has emphasised continuation of both coins and notes of taka 1 and 2 in the market as before, on 19 January, 2015. He has thus revised his earlier statement of withdrawal of these two denominations from circulation. Possibly, he thought the withdrawal of such denomination of coins and currencies as appropriate considering their poor purchasing power prevailing at present. The rate of inflation and high prices of commodities have possibly made these currencies incompatible, compelling them to be obsolete. It is true nowadays that even beggars become unhappy if they receive alms of metal coins in Tk. 1, or notes of Tk. 2. In reality, notes and coins of small denominations are not visible in the market. Despite this, Muhith’s earlier comments to withdraw these denominations created repercussions among people and the business community in particular. Some economists observed that the step to withdraw such denominations of currency would be irrational, since it might create troubles in various sphere in terms of small transactions. It might compel the general public to buy goods at a higher prices for lack of change. Presently, coinage of Tk. 1 and currency of Tk. 2, known as government notes are available in the market. Bangladesh Bank circulates all other notes from Tk. 5 to Tk. 1,000 denominations.

In my childhood during the fifties, we saw one paisa coins, two paisa coins, and one rupee coins et cetera. In fact, our mode of transaction was mostly with coins, and currency notes were most valuable and not widely seen denominations for the most of us. We used to sell rice at the rate of 4 anaa (four paisa constitutes one anaa) per seer, and salt one anaa. I remember selling some vegetables in our local market at rates of anaa and paisa only; not in takas. At that time, the one paisa coin was peculiar with a hole in the middle, and many of our friends used to wear it as ring, and this sometimes invited much trouble. But one anaa was enough to buy four eggs, dozens of mangoes, and other fishes and fruits fishes.

Most of the poor and housewives preferred coinage over paper money. They had the tendency to save small coins in the hollow inside bamboo, or under the earth in their houses for long periods, considering it precious and necessitating safety and security.

This might be due to the economic principle of good and bad money. The maxim “Bad money drives good money out of circulation,” is popularly known as Gresham’s law. The law was named in 1858 by Henry Dunning Macleod after Sir Thomas Gresham (1519-1579) who was an English financier during the Tudor period. Good money is one that shows little difference between nominal value (face value of the coin) and its commodity value if it is made of precious metals like nickel or copper or silver. Metal coinage is freely exchangeable, sometimes above market value. The price spread between face value and commodity value of its production, is called seigniorage. Some coins do not circulate much since collectors like to keep it in possession, thereby increasing the demand for coinage. Gresham’s law has been cited as “Silver currency will inevitably force gold currency out of circulation. Bullion coins like Canadian Gold Maple Leaf, the South African Krugerrand, and the American Gold Eagle were gradually found to be in short supply in the market because of high demand for preservation.

In Bangladesh, even at present, coins of Tk. 5 are not easily available in the market. During the British regime, there were gold coins, popularly known as Mohr. Villagers used to buy it for storage and consider its possession as prestigious.

The science of minting money from an economic viewpoint is a critical issue and should be carefully examined from the point of economic impact, its value and public perception. Face value of money fluctuates with inflation and purchasing power for the people. Printing more money drives inflation and high-valued currency notes make money laundering easier.

In 2008, when Tk. 1000 denominations were issued in Bangladesh, there was debate on how it might facilitate money laundering, but through the passage of time and increased rate of inflation, it was found more convenient for traders to deal in.

Purely in an economic sense, inflation refers to the general increase in price levels due to increase in the quantity of money, and where the growth of money stock increases faster than the level of productivity in the economy. Economists generally believe that high rates of inflation and hyperinflation are caused by excessive growth of money supply. However, money supply growth does not necessarily cause inflation. Low and steady inflation sometimes reduces the severity of economic recessions.

In Bangladesh, the rate of inflation is not high enough to require restriction in the stock of money. Therefore, the denomination of taka 1 and 2 issued by the Finance Division does not necessitate being withdrawn right at this moment. Thus, this quick retraction by the Finance Minister, by his own comments and decision, was found to be wise and prudent for the moment. Even now in rural areas, coinage is preferred for different reasons, and thus its sudden withdrawal might generate misgivings and confusion.

In 1973, there were coins of 5 and 10 paisa in aluminium, and 25 and 50 paisa in steel, widely in circulation. With the passage of time and rapid decline in purchasing power, those coins went away from the market automatically. Similarly, market mechanisms might take its course and the necessity of taka 1 and 2 might go out of use and become antiquated. Thus, the decision revisited by the Finance Minister is timely and appropriate. Since the rate of inflation in Bangladesh was only 6.99% in December 2014, and 7.53 % in December 2013, it might not call for withdrawal of certain coinage at present.

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