Question

Distinguish between 'convertible paper money and inconvertible money'.

Answer 1

Convertible Paper Money:

For a long time, paper money remained a convertible paper money. Under this, money is convertible into standard coins made of gold or silver. Under it the paper cur­rency issued by the Central Bank was fully backed by the reserves of gold and silver of equal value kept by it.

But with the passage of time it was thought that a cent per cent reserve against paper currency issued was not needed and instead only proportion of 30 to 50 per cent was enough to convert the notes presented for conversion into gold.

Inconvertible Money:

Thus, now-a-days paper money is of inconvertible type. Under the inconvertible paper money system, money is not convertible into gold or other precious metals. Thus, when paper money is inconvertible, the issuing authority is not responsible to convert the paper notes into gold or gold coins. The currency notes that are issued by Reserve Bank of India are ‘fiat’ paper money, that is, they are issued by the fiat i.e. order) of the Government.