The Story of Money

The Story of Money

In ancient times, people used to exchange instead of buying. This had a crucial flaw which was, that two people had to have their required products otherwise the exchange could not take place. Hence, they created the idea of buying with something precious like gold or silver. So gold became a universal way of trade. People used to buy their required products or services with gold. 

The gold has a value. But the problem is it was heavier, harder to carry and there was always a chance of getting robbed. So they invented a new way of exchange. All of the people used to deposit their gold to some renowned and trustworthy person in exchange for a letter issued by the renowned and trustworthy person. In the letter, there was a value issued like “I have the xyz amount of gold of this person”. This means that anyone with this letter can go to that trustworthy person and ask for that xyz amount of gold. As a result, the transaction becomes easier and safer. That is how the concept of the banknote arrived where a trustworthy person evolved as a bank and the letter became the banknote.

This system had a fatal flaw. The trustworthy person realised no one was coming for the gold, everyone was just using his/her issued letter and the letter was going from one hand to another hand. Then the trustworthy person issued more letters of value than what he/ she actually possessed. Because no one is coming for the gold. Even if someone comes for gold then he/has a lot of gold to give and it is not possible that everyone will come simultaneously and ask for the gold. This is how the first devaluation of currency happened.

In modern days, we have two entities one is the bank another one is the central bank. The central bank prints currency as per the system requirements, and the bank holds deposits and gives loans. 

The central bank is the trustworthy person in this new system. The government takes loans from the banks. At the time of returning the loan if the government does not have adequate money to give back then they can ask the central bank to print more money this money will be used to return the bank loans taken by the government. This is the devaluation of money.

Now, the banks, people deposit their money in banks, and banks can give the money to someone else as a loan. Let us assume, Andrew has deposited two thousand dollars. So the bank gives him a deposit not of two thousand dollars. Xian went to the same bank and asked for one thousand dollar loan, he got the loan. After taking the loan, Xian deposited the money to the same bank, subsequently, the bank gave him a deposit note of one thousand. Till now, if we take the sum of total money deposited by Andrew and Xian is three thousand, however, the money is actually two thousand which was deposited by Andrew. If Andrew and  Xian go at the same time to withdraw their money the bank would not be able to give them the money because the system has two thousand but the depositors have deposited three thousand. So this is a problem of the modern banking system. 

Let us think, In a village, all the villagers combinedly have one thousand dollar. All of the villagers wanted to buy a factory which cost around fifty thousand dollars. So all of the villagers are going to buy the factory in share. Before the buying day, a truck loaded with dollars was found in the village, so all of the villagers took the money from the truck, consequently, their combined dollars increased. Now the richest person in the city wants to buy the factory all alone because he has the money for that, so he goes to the seller and asks for that. The seller told 3 of the villagers who had asked to sell them secretly they would be paying sixty thousand for the factory. The moral of the story is when the money in the hand increased so did their buying capabilities resulting in the price hike of the product or service. This thing in terms of economic language is called inflation. Central bank controls currency rate which case inflation that is why cost of any service or product is increasing  all the time. 

To conclude, the currency system has flaws. However, the currency is an indispensable in your life. Better we understand the flaws and plan our economic growth wisely so that we can maximise our wealth.

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Photo credit: https://markets.businessinsider.com/news/currencies/dollar-dominance-reserve-currency-risk-uk-pound-russia-sanctions-debt-2022-4