Monday, February 4, 2008


Money is one of the most controversial and yet the most important concept of our human existence .Yet your parents will never give you a lesson on this extraordinary concept. And I bet you must have heard everything on the religious issues, gods and mythical stories that are yet to proved. Most of the parents don’t know a dime about it and rest think it is the root of all evil, so they don’t discuss it. Unfortunately I was one of them. But fortunately I was inquisitive enough to find out myself most about it. I am writing this because of the basic misunderstanding among people, even people with extraordinary intelligence. This makes me sad. So let’s clarify few notions, which many know and those who don’t know will have an enlightening experience.
What exactly is money? Money is just a means to exchange goods and services. Goods and services that you can use in your daily life. What is the value of money? It is its capacity to buy goods and not how much you have. By money we refer to paper currency also called fiat currency but they are not the same thing, I will tell you about that later. Fiat is a legal binding command. The value of the currency is not a magic and certainly not arbitrary. Its value is legal binding command behind it. If the legal command behind it is weak and incompetent then the currency will be weak because a paper currency has no intrinsic value unlike gold. Legal command forces more and more people to use it thus giving it a status of an instrument of exchange. That is its value.
Let’s suppose you are shipwrecked at an island with two friends. Now one friend has 50 breads, you have a million rupees and the third person has lighter. Who is the worst-off? You will be worst off since they can just start exchanging goods with each other. Why they need your money, they can light a fire out of wooden logs rather than from your paper currency. So what I am trying to say is never just go on the amount of money someone has. But how much goods that amount can buy. This is a simple concept but this concept lies at the heart of inflation, foreign exchanges, investments etc. Many people just don’t understand why some countries have 1, 00,000 unit currency notes and some have only 100. It is just because overtime higher unit currency went through the shipwreck type conditions more than the other currency. Thus value of currency dropped and they have to increase the denominations of currency as it is awkward to give 100 hundred unit notes to buy bread. This is called inflation in modern terms. Inflation is just a process where too much currency is chasing few goods. That is the growth of currency is higher than the growth of the production of goods. This is what happened at the island (of course that is an extreme condition and something which we call hyperinflation, where the faith over currency just vanishes). Limited goods and increasing money supply. What happens to the value of the money? It takes a dip. That is Inflation for you.
Don’t think this is simple. This is just the start. When I was in my fourth year I was shocked to learn that one intelligent friend of mine mocked me. Why because I said that money is created and not produced, currency is produced. Yeah I know many people would have mocked me over this but hey am I writing. Since he was intelligent, he quickly understood my logic. Why this is so important? Creation or production. Production is manufacturing. You take input (paper and ink) and through machines produce the output (currency). That is manufacturing. Right. That is what we call printing money. Now I think it is simpler. Of course money is not printed. Confused? Bring back the shipwreck condition. If you had a money printing machine there, could you say that you are producing money? No, you are not producing money even if you are literally producing it. That’s what I am saying. So now what is the analogy of creation of money? Let’s assume that you have 1 million rupees with you at the island but your friends are not accepting it. So you don’t have money even if you have 1 million rupees. Right. So what if you start climbing the trees and bring coconuts. When their breads will run out you will propose an idea. To divide the 1 million rupees among one another equally. They are anyways useless. And start using it as instrument of exchange. So if they have to buy coconut they will have to give him rupees and take rupees to allow him to buy fire and whatever the other man has to offer. So they will think that they are getting 333 thousand rupees that can buy free coconuts without breaking a sweat. So they agree. Now what happened? You price your one Coconut as 1 lakh rupees and he priced his fire something. Suddenly you have money that can buy you fire. Did you produce money or created money? Creation is an act of bringing something into existence. Yes you just brought money into existence yet you never printed or produce money itself . How? By working hard, climbing trees and bringing the coconut and then using your brains to convert your useless 1 million rupees into money, an instrument of exchange. So what is money, is it the 1 million rupees or your hard work and your intelligence? Of course the latter. Phew! I think if you had any confusion, it is gone. So now you are poised to assimilate better and more complex issues relating money.
To be continued.....MONEY 2


siddharth said...

real good attempt to redefine the vision of money. goody

siddharth said...

on second thought this article disperses the cloud that encircles the concept of money arising out umpteen technicalities and interpretations. putting it simply - if you understand it you would create it and not earn.

Ady said...

:))). putting it simply was better.

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