Do you believe that the words “ھامل ھٰذا کو مطالبے پرادا کریگا” written on the Pakistani currency notes means that the State Bank Of Pakistan (SBP) will give you GOLD equivalent to the face value of currency note?
Well here is a reality check. The answer is a big NO.
Let’s say if you have a Rs. 1000 currency note. It simply means that the SBP or the Government of Pakistan (GoP) will give you another currency note of Rs. 1000 of multiple notes valuing total of Rs. 1000.
Typically, currency notes are a type of promissory note that is payable on demand by the holder just like a demand promissory note whereby the issuer or the promiser unconditionally promise to pay, on demand, a sum certain in money to a specified person or to bearer.
Actually, these words on currency notes dates back to the origin of currency notes when they used to be actually backed by gold under the Gold Standard system. Initially the issuing authority used to exchange any currency note with gold of the same value. However, this is no longer the case as the majority of countries had abandoned the gold standard, during the World War 1 and Great Depression.
In fact, the United States Dollar (USD) was the last currency which was backed by Gold. The USD currency notes have not been redeemable in gold since January 30, 1934. Under the Bretton Woods agreement in 1944, the US and allies agreed to redeem their currencies in USD. Resultantly, currencies of other countries were pegged with USD while the USD itself was pegged with the price of gold. This initiative became the strength and reason for dominance of USD across the globe. Later on, in August 1971, the US President Richard Nixon removed pegging of the USD to gold. Therefore, you have the words “this note is legal tender for all debts public and private” written on the USD.
The primary reason for abandoning Gold Standard was due to that the fact that countries could print the currency needed to pay for their war costs and with the expansion of economic activities more and more banknotes were needed to execute and settle transactions. Since gold was limited in quantity, further issuance of banknote was not possible under the gold standard system. Hence, a new currency system called fiat money was introduced.
So if the currency notes are no longer backed by Gold then what are they backed by?
Well, currency notes these days are backed by various assets / collateral including Gold, Foreign Exchange, Government Securities etc.
In Pakistan, the banknotes held by public are considered liability of the SBP and eligible assets / collateral such as Gold, Special Drawing Rights (SDR) held with IMF, Foreign Exchange or Government Securities are kept against this liability.
As on April 17, 2020, a total of Rs. 6.2 trillion Pakistani Rupees are in circulation. The asset composition of these banknotes are Government Securities valuing Rs. 5.4 trillion (87%) while only Rs. 557 billion (9%) is in form of Gold. Other assets include foreign exchange worth Rs. 188 billion (3%) and IMF`s SDR amounting to Rs. 34 billion (1%).
