Rupee’s Future and History with Bazil Shaikh
From silver coins to cryptocurrency, what is the future for financial systems?
In this episode, journalist Puja Mehra is joined by Bazil Shaikh, former RBI official and author of the book The Conjurors Trick An Interpretive History Of Paper Money In India. They discuss the history and evolution of the rupee, exploring how money has served as a medium of communication, a tool for sovereignty, and how it is a reflection of societal values. They also talk about the global reach of the Indian rupee, and the emergence of cryptocurrencies, the challenges to state monopolies on currency issuance and the transition from physical to digital money. Tune in for insights into the future of financial systems.
NOTE: This transcript is done by AI. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
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TRANSCRIPT
Puja Mehra: Hello, I'm Puja Mehra. We are starting 2025 with a very special guest, Dr. Bazil Shaikh, who has had a long career in the Reserve Bank of India. He led the team that conceived, researched and curated the Reserve Bank Monetary Museum at Mumbai, and has also worked on trade, exchange rate and reserve management.
He has written histories of currency and banknotes in India and as an RBI historian, he is naturally deeply interested in the future of money as well, especially at this point when the Reserve Bank of India has introduced pilots on a digital rupee. The money we use today derives its value from a government decree. But if the giver and the receiver believe something is money, it's money, right?
Dr. Shaikh has written that, theoretically, we don't need a government decree to say something is money. So should issuance of money be a sovereign prerogative and a state monopoly, or can private entities issue money on a competitive basis? Dr. Shaikh, thank you for coming on the show. Today, we are going to talk about the rupee story, which is the story of money, and you've written a book about it. There is so much to say here because money was used long before it took the form of the rupee and back in time, its physical form was in gold and silver. But anything can be money because as long as the giver and the receiver agree that what is being exchanged is money, then it is money, which is why we are increasingly seeing now that money is going from the physical form to the digital form.
And we're seeing that even private players have begun to issue instruments, which is as good as money, which is being called cryptocurrencies. And if enough people begin to believe as you have written that Bitcoin is money, then it can be used as a means of money. But does that mean that it should be so?
That is something that we will discuss with you. But before we come to all these new contemporary debates about money, very quickly, in brief, if you could just take us through the history of money, how did the concept of money come up? And how does what we think and understand of money today, how did it come into being?
Bazil Shaikh: Two facets to your question. One is, you know, the idea of money, its essence. And the second is the form that money has assumed over the years and its evolution and its medium.
To explain what we mean, a small digression may not be out of place. You know, in one of Charles Dickens' books, Dombey and Son, Mr. Dombey's son, Paul, asks his father, Papa, what is money? And now Mr. Dombey, a financer, in Dickens' words, is disconcerted and in a difficulty. You know, while hundreds of thoughts run through his mind about the nature of money, looking at the child, he replies, you know, pounds, shillings, pence, Paul. Now, Paul is not impressed, nor is he satisfied. And he says, well, I know these, but what is money after all?
In short, it's easier to discuss, you know, the forms and the medium money has taken and its evolution rather than the idea and its essence. Now, the idea of money is essentially rooted in the human propensity to truck, barter, and exchange. That is the human desire and the need to transact with each other.
Hence, the idea of money as a means of payment and for the settlement of debt is essentially a social invention. Going to HECO 101, it tells us, you know, money is anything that is generally acceptable as a means of payment and serves as a measure and store of value. And since it is a store of value, it can be used to repay debt.
What, you know, in technical terms, they say is the standard for deferred payments, etc. But the operative words here is anything. And the other word is generally acceptable.
So theoretically, money doesn't have to be what we know as official money. It does not have to be government-issued legal tender as we know it. It can be anything concrete or abstract, which can be used as a means of payment, serves as a unit of account, and as a store of value.
Now, while the idea of money remains largely unchanged, the forms money has taken have changed over the years, over time, you know, from everyday commodities such as, you know, salt, cowrie shells, arrowheads, beads, to precious metals, coins, notes, or the digital format. Now, at one level, it's an amazing invention. You know, it can exist either in the physical form, such as gold and silver coins in olden days, or it can just be conjured out of thin air.
You know, it's an abstract concept existing only in the minds of the giver and the receiver, and accounted for somewhere either in a computer or in a ledger, etc., in some ledger. For instance, the money that we use today, the rupee, is essentially a fiat currency. It derives its values from a government decree.
Fiat means, let it be so, you know, and this decree makes it legal tender, which essentially means that the rupee is good enough to pay taxes, taxes to the government, and to defray debt between, you know, individuals, companies, etc. So, essentially, it's an abstract unit of account. So, money can just as well be a purely abstract, collectively believed system.
If the giver and the receiver believe something is money, it is money. And theoretically, we don't even need a government decree to say so. You know, even if people believe Bitcoin and Ether are money, and can be used as a means of payment and as a store of value, they are money.
At one level, therefore, money is a sort of a metaphysical belief system. And this concept largely remains unchanged, though it is being contested now by CBDCs. The forms of money, however, have changed over the years.
And there are contending theories, you know, about the evolution of money. How has money evolved over a period of time? You know, how did it come to be?
And the dominant narrative that we have is that of economists such as Carl Menger, who contends that money evolves spontaneously. You know, it evolved from their desire to find cost-efficient solutions to the problems of exchange. It evolved from barter in the effort to reduce transaction costs.
Now, as society has developed, they typically settled on one commodity as a means of exchange. Such commodities also served as a measure of value and a unit of account. Cattle, grain, as we have said, you know, cowries, numerous commodities have served as such commodities and numerous.
Over time, societies have gravitated to metals as the standard commodity. Now, metals can be manufactured to uniform purity, they are divisible, they are durable, they are portable. And moreover, precious metals possess scarcity value.
So metals becomes, you know, a preferred means of payment. But when an authority comes in into the picture and certifies a piece of metal for its weight and fineness, it gets transformed into a coin which can serve as a unit of value and a medium of transactions. Now, this narrative of the spontaneous evolution of money is contested.
It is contested by sociologists and anthropologists. There are the statist theories of money. They said that money was the creation of the state.
This is associated with George Knapp and others. And it even finds resonance today in arguments that money necessarily needs to be a state prerogative. You know, the idea is that the state can create and destroy value at will.
You know, it can monetise and it can demonetise when it wishes to. And then you have anthropologists, you know, such as David Graeber. They contend that money's origins lie in debt contracts.
Now, each, you know, money is essentially debt, it is credit. And each of these theories has its merits, which we don't go into. But suffice it to say that over time, metals such as silver, copper and gold have become preferred mediums of exchange as they were uniform, divisible, durable and portable.
Puja Mehra: When did we start seeing coins first in India? And the rupee, when did we start using the rupee first? What's the story of the rupee?
Bazil Shaikh: The rupee is a silver coin, weighing about one tola, has a long history. Silver tankas weighing about one tola weight were introduced by Al-Qahtmish in the 13th century. Over time, the coinage fell into disarray.
The monetary reforms of the Delhi ruler, Shershah Sur, once again standardised coinage in the mid-16th century. To be precise, in 1542, the silver coin was called a rupia or rupee, drawing from the Sanskrit root of rup or silver. It weighed one tola or about 11.6 grammes. And the usage of the term rupia is observed in sale documents dated 1592 of the common era and the term has retained continuity ever since. And it is the legal tender in India today. Now, Shershah's monetary system was consolidated under the Mughals between 1550 to 1770 and coins were struck to a highly controlled uniform standard through a large number of imperial mints and the mainstay of coinage was the silver rupia, gold coins called the muhar and copper coins called dams.
With the breakup of the Mughal empire, coinage again fell into disarray and it was the East India Company which once again standardised the rupee to a silver coin weighing 11.66 grammes of 11 by 12th fine silver in 1835 and the rupee continued to be struck to this standard till 1939. After independence, we continued with the rupee as a national currency and as per tradition, the rupee consisted of 16 annas or 64 paisa with one anna consisting of four paisa following the binary system. The new notes and coins issued by Republic India had Indian symbols.
These were issued in 1950 and coincided with the declaration of the Indian Republic and the adoption of the Indian constitution. The Indian coinage was decimalized in 1957 with the rupee consisting of 100 naya paisa and this transition to the decimal system and how an entire nation then largely illiterate, their literacy rate was about 28 percent in 1957. How it transited from the binary to the decimal system is another story altogether.
Puja Mehra: Dr. Shaikh, at which stage did sovereignty enter the picture and why and how was this happening?
Bazil Shaikh: The issuance of money constitutes a source of power and more importantly of profit, you know, and the history of money in many ways is the story of private invasions and state appropriation. You see, you had merchant guilds may have invented coins but they were soon appropriated by the state. Similarly, when we see China, the story in China, paper money was invented by merchant guilds in China and soon appropriated by the state again.
Then we had the free banking era in which banks were free to issue banknotes which circulated as money. Now these came to an end as governments and central banks appropriated to themselves the power to issue currency and banknotes. What did these banknotes look like?
These banknotes looked very much like the banknotes we see today, we have today. They had the clause over there that we promise to pay the bearer the sum of so much. The only difference over there, when they said that they promised to pay the bearer a sum of say eight rupees or a sum of 16 rupees or a sum of 100 rupees, they actually meant that they would, that the note was incashable at the office of the bank and the bank would give them silver rupees equal to that amount.
Puja Mehra: And we still see that written on at least the rupee notes.
Bazil Shaikh: We see that written on the rupee notes. It's a vestige of the past. It's essentially a redundant vestige because it's not really meaningful and today the promise clause essentially means that the note is legal tender for 100 rupees.
You know, there is no question of, you know, if you go to what is the promise to pay, it's legal tender for 100 rupees which was not the case in the free banking era. There was real convertibility and they actually paid the coin out to the people.
Puja Mehra: Before I interrupted you, you were describing how the state appropriated power.
Bazil Shaikh: Yes, so the state took over the state and even later central banks took over monopoly of note issue and today what we are seeing today is that you have the emergence of cryptocurrencies and these are posing new challenges to central banks. When somebody is treading upon their turf, they are responding and now central banks have responded by issuing what are known as central bank digital currencies or CBDCs.
Puja Mehra: Before we fast forward to the future of money and, you know, the contemporary issues, do we want to cover the part where the rupee comes in to be? The sovereignty and the rupee comes in to be? So, what's the story of, yeah, the sovereignty and?
Bazil Shaikh: I'll show you. So, sovereignty is that, you know, looking back, going back long years ago, the coins, you know, were amongst the earliest mass-produced objects known to human civilisation and being as a means of payment, this circulated widely amongst the public, moving hand-to-hand throughout the country. So, therefore, it was no surprise that it serves as an ideal means, ideal media for mass communication.
Coins mediated no other object between the rulers and the subject. They have a semiotic, similarly a symbolic sort of reach and were perhaps the only image of political authority which people could actually see in the olden days. They could see it, they could touch it, they could feel it and that constituted in some ways a source of power and governments and authorities were very quick to realise this.
Puja Mehra: Because this is the era before the era of television and radio and broadcasting. So, it's the way of communication between the state and the subjects, as you're saying.
Bazil Shaikh: The state and the subject, because what else do you have? You just, you would have a few rebels, you would have a few soldiers that implied coercion. The transactional, the banal nationalism which was there was through the means of coins.
And coins also established the suzerainty of rulers. For instance, when the Satvahana ruler Gautami Putra, we had in the second century of the common era, you had the Satvahana ruler in central India, Gautami Putra. He defeated the western Shatrug king Nahapana.
Now, the first act they did after defeating Nahapana was to take the silver coins and over stamp the silver coins with the Satvahana symbol. Now, this was a visible assertion of the victory and suzerainty and it circulated hand to hand across the realm. That's how the coinage and sovereignty were in some ways intrinsically interlinked.
And you have the Guptas in the 4th to 6th century of the common era who recognised the power of communications and propaganda of coins like few others. You know, for a monetary vehicle to double up as instruments of communication. And they depicted the king as lion slayer, they depicted the king as a rhinoceros slayer, they depicted this king as a horseman, an archer, a musician.
And you know, these coins even to almost more than a thousand years, 1500 years later, still exercise that power today. And you know, when we talk of the glory of the past, we talk about Gupta coins and the king over there and the art of the coins. So, over time, coins became a potent symbol to exercise and legitimise power.
And indeed, one of the first acts of a ruler was to strike coins in his or her name. And many rulers are known only by the evidence of the coins that they have issued. Nobody has heard of them before.
And not only rulers, even your entire history of the Indo-Greeks was reconstructed largely on the basis of numismatic evidence, you know, that these people actually existed. Now, in more recent times, coins have become an integral part of nation building. Now, the Mughals did that in a very, in a very big way, where the silver rupee struck to the one tola standard, served to unite the entire territories from over from Afghanistan to Tamil Nadu, parts of Tamil Nadu today.
And constituted, you know, they contributed to making the idea of India, binding the country together with the common monetary unit. And it contributed to no small extent to making India one of the largest economies in the world in the late 17th century. And the British used this in a big way.
And in the post-independence period, we changed motives of the coins and, you know, from imperial domination to one which linked to the people with powers, with ideas of progress with people and progress being at the centre of the motives that were put on these coins and notes.
Puja Mehra: Farmers and we see those things. But what you're saying is very interesting. What you're saying is that money, whether it takes physical form of rupees or coins, paper money or coins, we're used to thinking of it only in terms of the economic value, but it also serves very important political purposes.
Bazil Shaikh: Very true, very true. As a matter of fact, they almost sort of, the term that is used is reify the country. That means, you know, you make visible an integrative symbol which everybody can relate to.
And this becomes, that's why the motives that appear on notes and coins, you know, are much debated.
Puja Mehra: Just like you're saying, we saw this in history. We also now seeing it going forward and we will see this in the future because we see things like when governments talk about internationalising their currencies. For instance, India talks about internationalising the rupee when countries say that they want to challenge the dominance of the dollar as a currency.
Again, there is some amount of politics that comes there.
Bazil Shaikh: Because money constitutes a source of power and even the ability to issue money and the seniorage that money can draw is a source of power. When we today, when we talk of the internationalisation of the rupee, it's interesting to note that the Indian rupee served as a trade currency for many, many years, especially after the Mughals and during British India. It served as legal tender across the Middle East.
As a matter of fact, you had the Gulf states, including Kuwait, used the rupee as legal tender. It was also used as a currency in East Africa. And when the Germans had conquered East Africa, they thought of introducing the Maria Theresa Thaler as the coin.
However, the popular vote was for the continuation of the rupee. And we have the rupee issued by the German states of Tanganyika and East Africa in the early 20th century. Not only coins, but also notes denominated in the rupee as, and that time the rupee would be one tola of fine silver, 11 by 12 fine.
And it had a reach even right from East Africa, through the Middle East, down to as far as Indonesia. The Indonesian rupiah is essentially in some form a resonance of the rupee, which was in circulation in those areas before the countries came up with their own currencies. In the Gulf, right down almost up to 1970s, the rupee was deemed to be a legal tender.
And indeed, we had issued special rupees only for circulation in the Gulf. And as and how they issued their own currencies, the rupee was gradually withdrawn. So now today, we were trying to sort of move from an international role more to a domestic role, given the circumstances of the Indian economy.
Today, as the Indian economy comes into its own, we are trying to go back to the idea of internationalising the rupee.
Puja Mehra: You've written that in the first demonetisation of high denomination rupee notes that was announced in the year 1946, notes were received in reserve banks for redemption from Europe, Iraq, Egypt, and one of the largest consignment of demonetised rupee notes came from China. This spread and popularity of the rupee and its use across these diverse countries, was this because of the imperial government? Did they find it easier to use the rupee over this vast geographical area?
Is that how the rupee was used in these other countries?
Bazil Shaikh: They came to be using the rupee for two reasons. One was that the rupee served as the credibility of the rupee made it into a trade currency, in which people across countries prefer to use the rupee because they were sure of the silver content of the rupee, as against any other currency. So that is what gave the rupee its intrinsic strength.
The second aspect that gave the rupee its strength was also the reach of the British Empire, in the sense that Britain, wherever in Asia, typically tended to use the rupee rather than any other currency to serve as a medium of exchange, largely because of the capacity of the Indian mints to mint the rupee. The scale of the Indian currency was so large that it could be very easily used for trade purposes across regions, and the rupee came to acquire the status of an international currency. In those days, there were no capital restrictions, and indeed, Bombay was one of the largest markets of silver in the world.
That, in some ways, also made it, and Bombay was also positioned as an international financial centre. We had banks in Bombay which grew to be one of the largest banks in the world. For instance, you had the Orient Bank, you had the Commercial Bank, we had also things like the Bank of Agra.
It is very surprising to note that the Bank of Agra was actively financing railroads in Australia, and was deemed to be one of the large banks that existed in the world. The Orient Bank was deemed to be, you know, almost east of Suez. It was as good as the Bank of England, one of the largest banks that existed, and they had their origin in Bombay.
So, Bombay was a financial centre, and a part of the reason for Bombay being a financial centre also was the strength of the rupee, in many ways.
Puja Mehra: So, those are two reinforcements.
Bazil Shaikh: They reinforce each other.
Puja Mehra: Should we now talk about the future of money? You said that two things are happening. One, money is being reimagined from the physical to the digital form, and two, there are challenges to the state monopoly of issuance of money.
So, how do you see these new trends play out, and what do you think about these two new trends?
Bazil Shaikh: There are two aspects to it. One was, you know, money has, we have seen the forms of money have changed from the physical. Those were the real.
Two, you know, banknotes, which actually were convertible. Those were symbolic. And, two fiat money banknotes, which were not convertible, which were essentially imaginary, but still rooted in paper.
So, you have put, money has seen a transition from the concrete to the abstract. From the physical coin, from the physical metal, two notes which represented their underlying commodity. Two notes which implied just a mere abstract idea of a note which assumes its value, because the government says that a rupee is a rupee, because the government says it is a rupee.
We have transited from the real through the symbolic to the imaginary. Today, what is happening is that you are having a transition of the medium. The medium of paper is being converted into a medium, into the digital medium.
Now, at one level, there are two ways of looking at it. At one level, it's just mere transition of form, from the physical to the digital. What happens the moment we move digitally, the digital era gives you, it throws open certain possibilities.
It allows for money to be programmed. It allows for various experimentations in money, which bring about change, not just in physical form, but it is also a substantive change. Now, one was the digitalisation of the legal tender in India.
That means you have money, bank money, which is there in a digital format, and you transact digitally with the legal tender. That is a natural transition along the continuum. However, there have also been disruptions.
Now, the disruptions come from a totally different point of view. Disruptions come from people who recognise the fact that money can be an abstract unit of account. If money can be an abstract unit of account, anybody can issue money.
And we had, in the 1980s and the late 70s, 80s, and 90s, what was known as the cyberpunk movement. And the cyberpunk movement sort of metamorphosed into the cypherpunk movement, which essentially had a distrust for large corporations, banks, and governments. And the quest was for individual autonomy.
And in the quest for individual autonomy, one of the building blocks of individual autonomy was the endeavour to have secure peer-to-peer anonymous payments without the intervention of a bank. It was thus that, you know, in 1989, we had something called DigiCash, which was launched by David Chalm. David Chalm is still there, but David Chalm is largely seen as one of the pioneers of digital money.
However, DigiCash, you know, was an idea before its time had come. It had to shut down. And, you know, we fast forward to 2009, wherein there was the emergence of what was known as cryptocurrencies, which were designed as digital tokens, which could be used for peer-to-peer payments.
What was interesting is that these cryptocurrencies are issued by private entities. They are not denominated in the national currency. Most of them are not based on any underlying asset.
And they possess no intrinsic value. And virtually none of them are backed by any sovereign or any other authority. Now, the question that comes to mind is, where do these derive their value from?
As we have already discussed, they are anchored in the idea that money can be an abstract unit of account. And they basically derive their value from a supply-demand dynamics, or what is known as algorithmic scarcity built into their design. In other words, their value is based on the expectation that their numbers will be limited.
The issuance will be scared, scarce, because they will follow pre-announced mathematical rules secured by encryptions. Hence, cryptos seek to replace the confidence provided by the institutional arrangement of a central bank and state backing with confidence in mathematical rules, cryptographic security, and a decentralised self-governance system based on the blockchain and the decentralised ledger, et cetera. And if people believe that these are money, it converts.
It becomes money. Now, these cryptocurrencies evoke different responses. Now, the votaries of cryptocurrency view them as instruments of innovation in the quest for privacy, in the quest for freedom, in the quest for personal autonomy, and as a means to shift power from large corporations, banks, and the state to the people.
Whether this actually works out or not is a different issue. Whether it leads to a technocracy is a different issue. But that is one of the narratives.
And on the other hand, policymakers, international regulators such as the Bank of International Settlements, central banks such as the Reserve Bank of India, they view cryptocurrencies with disfavour. They're not quite happy with them. And the concerns they have is that their decentralised design and anonymity allows them to sidestep the purview of central banks.
It allows them to sidestep national jurisdictions, regulations, as well as state surveillance. They make possible illegal transactions, tax evasion, money laundering. And there are concerns.
But the concerns essentially express in the risks associated with private money, that people need to be protected against price volatility. You see, bitcoins can assume any value. The values keep fluctuating.
And to protect people against total loss, as happened in cases like the Mt. Gox collapse and the FTX collapse, in which people lost whatever they had invested in that. So, consumer protection becomes one of the themes on which governments, central banks, and international regulators frown upon cryptocurrencies.
Puja Mehra: Dr. Shaikh, what are the debates that get triggered now with the popularisation of cryptocurrencies? Surely it's throwing up newer questions.
Bazil Shaikh: You see, the debates triggered by the emergence of cryptocurrencies centre around four broad questions. The first question is whether issuance of money is the sovereign prerogative. In other words, whether money should be a state monopoly, or could private entities issue money on a competitive basis?
That is, again, in other words, can there be multiple issues of money, and people have the choice to use whichever money they want? The second set of issues is whether money needs to be backed by some underlying asset if there is no state backing. The third set of questions is that does money have to necessarily be issued and denominated in the national currency or in the legal tender?
Can money be anything other than legal tender? For instance, cryptocurrencies can have their own exchange rate against the national currency. So, how acceptable is such a situation?
And today, the issuance of central bank digital currencies, as they are known, add a fourth and a more fundamental dimension to these debates. And what is being contested is whether the government has the right to programme. Essentially, whether the government has the right to control how we spend the money, when we spend the money, and where we spend the money.
Till recently, the general understanding was that money is a generally acceptable means of payment. Indeed, that was the defining characteristic of money. CBDCs challenged this.
Implicit in their issuance is the assumption that the government has the prerogative, if it so wishes, to programme the money to be given to the individual. In such instances, CBDCs could be used only for food or medicine, or for that matter, expire after a certain length of time. The specific purpose money envisaged by the digital rupee can make policy implementation very efficient, but has the concerns that it can severely degrade human agency and freedoms.
Puja Mehra: Do you see a future where there will be no paper money, because then these issues that you have raised will get even more aggravated?
Bazil Shaikh: In all probability, in the near future, paper will be retained just to ensure as a disaster aversion mechanism in case of systems failures, in case of war, etc. So you have recourse rather than remove it entirely. However, the digital medium will be the predominant form of transaction.
Puja Mehra: My last question is, what you're saying, I can see it. Are we seeing any signs of something like this? Or how far off do we think we are from a situation where this becomes a real risk?
Bazil Shaikh: You see, these are dystopian scenarios. But the idea is, when we undertake any matter in public policy, there should be a discussion around these matters. And the discussion should be, well, what are the advantages?
And what are the risks? And are the risks acceptable? So it all boils down to the idea of acceptable risk.
And it's based upon the concept of acceptable risk to civil society, that conversations on public policy should move.
Puja Mehra: But is it too late now? Are CBDCs close to reality and the way forward? And is this inevitable?
Bazil Shaikh: CBDCs have already been launched. It's launched in China, it's been launched in India, it's launched in multiple countries, a multiple number of countries. However, you see, the word inevitable, inevitable is a word which we should use with caution.
There is always hope that, you know, we live in a dynamic world. Many countries, central banks are rethinking the purpose of the design of CBDCs and its implications for human agency and for human privacy. And perhaps in those conversations and in those deliberations, we have the possibility of designing a more, you know, a less riskier world and a world which sort of enhances our freedoms and gives us more agency.
Puja Mehra: Now I see your point, but when we say design, are we talking about legal design or technical design?
Bazil Shaikh: Look, technical as well as legal.
Puja Mehra: Legal will be amended.
Bazil Shaikh: Technical designs also, how do you protect privacies? You have software which can certify and to what extent, how is that built into the designs? These are issues which the central banks are looking into and actively debating.
Conversations around these are not as many as we need to see.
Puja Mehra: Thank you. Thank you so much.
Bazil Shaikh: Okay. Thank you so much.
