Money vs Currency

What?! Are they both not the same? What do you earn?

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At the end of a long, tiresome day, all we need is a good dinner and maybe a drink. What do we work for? Money right? We all work for money… the rupee/dollar notes we get from ATMs, the numbers we see on our mobile screens as our account balances right?

We all price our labour and products, and call the notes we use to transact - Money. Hey, wait, isn’t that money? Ha! You wish!

All it is, is a piece of paper, with random identification numbers, and monuments and Gandhi’s face printed on it. It is currency, and not money. But, hey, what’s the big deal? They both are the same anyway right? No, and Here is the big deal about it - Money has value, and Currency doesn’t.

As always, let’s go the usual way… to the past, and see where it all started. Whereas normally, we’d go back a decade or so, we’d need to rewind millennia for this one. The concept of commerce itself was very simple, and easy to understand. I have something you need, and you have something I need. So, we decide to exchange them. That was the barter system. If you needed something I had more than I needed what you had, you paid me more of the goods you have, than the one’s I’d give you. For eg: If I made bread, and you made wheels, one day, my cart broke down, and I needed two wheels very urgently, because without them I wont be able to move my produce, I’d offer you much more bread in exchange for the wheel you’d give me. There it was, a very simple subjective system where everyone assigned their own values to products and services, where everyone was individually satisfied with their trades. But, then we thought why not bring a common medium of exchange to make commerce easier? Because, it might be difficult to see one with a need that you could satisfy, at the exact same time he had a need you could satisfy. So, we needed something that could store the value of our labour and product, which could be used to get what we wanted some other time. Something that could be used as a universal trading medium, with which all products and services would be valued.

And anything that was these three, was MONEY! So, naturally, over the course of time, anything that everyone wanted or had value for, became money. We had iron, then realised it was easy to get, and thus not as valuable, to measure everything else, then we went for honey, then gold, then we found that gold was difficult to get… we even used salt at times, and eventually settled for gold, or any alloy of metals. Each kingdom made sure they had their logos on them and made sure duplication was difficult to the best extent possible.

Then, as we began to produce and consume goods of far greater value than a limited quantity of metals that we cold carry, some genius had this idea… and yes this happened in Greece… and this led to what is believed to be the first banking fraud in the history of mankind.. “The idea was that, someone could hold your gold on your behalf for a fee, and instead could give you a proof evidencing your gold deposits, and you could trade that piece of paper instead of actually trading gold.” Then, over the course of time, when the general public accepted these for their normal transactions, they now preferred these papers instead of gold, and no one would come asking for their gold. So, these bankers came up with this idea… “Why not we lend gold in the form of more papers and charge interest from our borrowers?” GENIUS! But, as you would’ve guessed, this went too far. Reckless printing of those papers without backing gold led to people losing faith in the system slowly, and when they all went to ask for their gold, there simply wasn’t enough with the bank.

Then, for a brief period of time we lost faith in banks… but, as time progressed, people realised they did need a portable medium of exchange, and this time, a proper person at the helm of printing them. What is more dependable or trustworthy than the kingdom itself? So, the treasury was given this additional duty, to control the supply of these papers, which represented gold or something of value. These papers themselves never had any value, but, their value was tied to the reserve of whatever item of value that was maintained. Even during the time of colonisation, governments maintained reserves and didn’t recklessly print currency notes, as they were afraid of the rise in prices of the reserve (which was gold). To put it into perspective, the simple equation was this:

Value of all currency notes printed = Value of all the Gold Reserve

So, if one were to print too much of currency, the currency value of gold would go up proportionately to accommodate for that. There was thus a constraint to the levels of currency supply. But, after the second World War, there was a massive redistribution of wealth due to the huge costs of the two wars, and almost all countres lost much of their wealth in gold. They didn’t have much gold reserves now. Here comes USA, with their strong economy, because they were now the superpower. It is 1944, and after several years of thinking, the USA does something that would make them the ultimate economic superpower… “The Bretton Woods Conference” In the conference attended by over 44 countries, it was mutually agreed that, by virtue of having greater gold reserves, and a strong Economy, the USA would take care of global economic cooperation and growth, for which it’d start two independent institutions which would later become the World Bank, and the International Monetary Fund, and the catch was that, every currency would be pegged with the US dollar, and the US dollar would itself be pegged with gold. This meant, that USA would maintain Gold reserves for every Dollar it printed, and countries that adopted this, needn’t have Gold reserves themselves, and instead have USD reserves. Thus began the concept of Forex Reserves. USD was initially pegged at $35 per Ounce of Gold (No one knows why they can’t use the Metric System) But, as pressures of growth and welfare came into play, the USA found it difficult to maintain a stable value of gold, as there was just too much demand for the USD, whereas gold was limited, so, they couldn’t print USD either.

Banks saw a possible advantage here. If the government could print USD without any limits, automatically, the financial sector would be benefitted the most, and a cartel of banks made sure Republican “Richard Nixon” became the president of the USA, and the first thing he did was to abolish the gold standard, allowing the USA to print USD out of thin air, with no one to ask why. Nixon did it through a series of agreements with Saudi, which meant, USA would supply Military and technological assistance in return for which, Saudi would trade only in USD for its oil exports which were bought by almost every country, forcing them to maintain USD (thereby creating a perpetual demand for USD)

This era saw the great boom and development everywhere, as now, USDs were printed crazily, and given to countries which needed it, and so, countries had healthy Forex reserves to value their currencies at, and as far as the USA was concerned, it didn’t need any valuation of its currency, as it was guaranteed by its constitution, in the words every dollar had. These words are the ones every currency note in the world bears today… every note is guaranteed by the government of the issuing country.

From, “This is payable on demand” which was earlier printed on every currency, it changed to a common line which more or less meant “I promise to pay the bearer the sum of …..” or “This is legal tender” which is more of an imposition on people to use a piece of paper printed without any backing security, in return for actual fruitful labour they did.

Remember, There are three points that define Money. - Medium of Exchange, measure of value, and store of value. Well, currency is everything but the third one.

A rupee 10 years ago could buy you at least twice as much as it can buy you today. Where is the store of value here? Money doesn’t require value to rise, but, it requires, value doesn’t fall.

So, am I saying the currency system is crooked and we need to use Gold? In a society that accepts real money like a metal for transactions, due to the severe limitation in its availability, beyond a point, its value would start appreciating. Let’s just wait here. This blog isn’t about saying bad things about whatever is there. So, let’s see why we actually needed free currency. Taking a theoretical case where everyone uses gold for exchange, due to the restraint on its availability, the value of gold would appreciate over time, and people would see good earning oppurtunity on just investing and holding gold than working. This would cause a severe shortfall in its supply, which would only lead to a greater price appreciation of gold. This is just a vicious cycle.

At the end, we’d all have gold. But, no one would want it, as, no matter what, we can’t eat, or drink, or wear or live in gold. (These 4 are the basic necessities for human existence.. none which can be satisfied by gold, but, rather, only by its purchasing power.)

Due to real value being in gold, people who would be required to use it as a medium of exchange, would start to see more appreciation of value in gold, and start hoarding it, causing the economic system to collapse The present system is crooked, but, it is the closest to agreeable we have in place. Reckless printing of currency to meet political aspirations must be controlled all around the globe, as this is the reason the system is crooked. This system is designed to go on without any problem unless there is doubt, unless there is a fear that what it is based on, isn’t valuable.

Right now, we’re in a not so good position, as China, or even India, have too much of USD reserves, and if we decide to release these in the market, there’d be excess supply of USD, causing the USD to become just another piece of paper. This would collapse the entire world, and all its economic assumptions. It would be a suicide bomb. Unless we have sufficient gold, to backup all our currency notes. (Which no one has. But, China has been steadily accumulating gold reserves, which is a cause for concern to all)

To wrap up,

Yes, this system is screwed, but, any other, with a limit on the supply of the currency, would do more harm than good, and reduce growth. It is the ever increasing demand for more, that drives economic growth and innovation.

Only as long as people feel that they lose value if they keep their money idle, do they invest it or work for more.

This was more practically seen in the Japanese example, where they faced deflation (continuous reduction in the prices of everything!!!) for over a decade, and their growth stalled.