Paper Currency and the Mystery of the Dollar
Representative money was
convertible and that made valuations and control on supply tricky and complex. The bank-notes
were more difficult to control and led to large scale inflation.
18th and 19th century, saw dual currency both bank-notes and
specie backed money. This led to bouts of depression and inflation in an economy, that the need for a comfortable legal tender became ‘urgent’.

Fiat Money
Representative money has now been replaced by fiat money.
During the American Civil War, the Government issued United
Stats Notes- the first form of fiat paper currency called ‘greenbacks’. Even now, dollar is called so. Fiat is the Latin word for let it be done". This is money declared by a country as legal tender. A currency is given value by a government fiat or decree, in other words enforceable legal tender laws were made. Currency acquires value because the Government of a country accepts as money for all payments of taxes, debts etc. By law the refusal of "legal tender" money in favour of some other form of payment is illegal. That explains why money has a promise and a signature on it. While specie-backed representative money entails the legal requirement that the bank of issue redeem it in fixed weights of specie, fiat money's value is unrelated to any physical quantity. Even a coin containing valuable metal may be considered fiat currency and its face value is higher than its market value as metal. Fiat money relates to types of currency or money whose usefulness results, not from any intrinsic value or guarantee that it can be converted into gold or another currency, but instead from a government's order (fiat) that it must be accepted as a means of payment.

Distribution of Currency
One may wonder how this money/currency issued by the Central Bank reaches the public. Generally the Central Bank uses it in payment of wages, salaries and loans to commercial banks that it controls. Sometimes, to increase the supply of currency, Government of a country orders a number of infrastructure projects/welfare measures which create a spending spree of money by the Government either directly or indirectly.

When a country issues fiat currency, it should also keep a tab on how much of it is in circulation. There can neither be an excess nor a shortfall. This is done by openmarket operations by which currency in an economy is either pulled back or issued as and when required. Example: When Reserve Bank of India finds excess currency, it issues promissory notes or bonds at high rates of interest so that the money will be called back and when currency is in short supply, it redeems or buys it back.