MONEY MATTERS

Neelesh Tripathi You have seen it on the news. You have read about it in the newspapers. Its driving everybody crazy the government is trying to control it the best it can. Is it a monster?? No. Is it some sort of disease?? Well technically not but it can be seen as one. It is inflation. The government of India has been trying its very best in the past few months to control this problem. As we at curiosity believe in finding out the knowhow and working of everything because thats what curious people do and thats what curiosity is all about.. here is an attempt to explain in a laymans view what is economy and how it works. Before we even start with inflation I must explain to you how money works and who has the right to make it. Before there was money there was the barter system where people used to exchange something they had in place for something that they did not. Like cattle for food or land for gemstones and gold. Soon a problem developed; there was no way for exact measurement of the value of something. This also created a problem bargaining as goods were often quantized. Imagine selling half a cow for a bag of wheat. So the concept of money evolved. When was the first transaction of money carried out we cannot say but what we can say is that people mutually agreed that something (a coin, a piece of paper) would represent value and the more valuable the thing the more money needed to exchange for it or as we say to buy it. Remember that money represents something. Money in itself is a very weak thing. If you thought that money was always in coins and notes. You would be surprised to know that at a certain point of time tobacco was a mode of exchange in America. People used to treat sea shells or (cowrie as it was known then) as a monetary unit. In short what money did was act as a representative of some value. Now there is a question. If let us say in the older days when people used to treat objects like cowry shell for money if a person had a good day at the seashore or river bed where he could find these cowries he couldnt he make himself a fortune??? The truth is yes but eventually what happened is that people forgot that money is just a representative of value. What value it depicts is?? The answer to this question changes with time and with the conditions of the people using it. As was the case in America the tobacco currency increased with a good season and when a disease would affect the crop there would be scarcity of it. People began storing it but as it was and still is a perishable item (it decomposes with time) this problem was becoming hard to solve. There are two lessons to learn from this incident that currency should be of an imperishable form and like metal of plastic so that it cannot be destroyed and that currency should represent something valuable. For some time the definition of valuable was something we even consider valuable today . GOLD. This marks the time of the gold standard days. What happened was that currency was made redeemable in gold. Also note that this was not followed everywhere only in some countries like America, Canada, United Kingdom to name a few and that this article is economics related, it is not a history article so the mentioning of exact dates and periods is avoided. Anyways what do you mean by redeemable in gold. This meant that lets say if you were in America when the gold standard was in effect you could go to a bank with a hundred dollar bill and get

gold worth its value in return. Even though this may seem like a fair deal but we must remember that gold is also just a representative of value. You cannot run you car on gold or just like Midas you cannot eat gold when you are hungry. The gold standard was later removed because of fear of massive withdrawals from banks in America during the great depression. What replaced the gold standard is something truly cunning. It was redeemability in bonds. What this means is that if you take a hundred rupee note to the reserve bank they will give you five twenty rupee notes if you come again with the twenty rupee notes they will give you ten ten rupee notes, then twenty five rupee coins and then hundred one rupee coins and you would be kicked out of the place if you went there with hundred one rupee coins or they might give you a hundred rupee note. Melting those coins is against the law but if you do and try to sell them for their metal value you will earn less than hundred rupees. Take a ten rupee note and read what it is written above the governors signature.. Yeah do it. Thats right it is just a promise. What these notes represent now is the governments credibility. So it is only the governments right to make the notes. By the way these notes are manufactured in a printing press like a book. Now for inflation lets say there is an imaginary country with 100 people in it. These people only eat one thing eggs and the number of hens in this country is also constant. Now lets say there are 10 very rich ruling class people in this country 40 middle class working people and the remaining 50 are poor and unemployed. The government introduces some scheme to give employment to 20 poor people with wages comparable to the middle class people paying them with the notes it manufactured from its printing press. Eggs initially were sold at for one rupee a piece but suddenly the cost of starts to increase. Why so??? Lets look closer earlier there were only fifty people who could afford eggs but after the scheme seventy people could afford eggs. The number of hens did not increase neither did the number of eggs they laid daily. So the guy who is selling eggs had to increase his cost to maximize his profit. Now this is a very rudimentary example in a real world scenario there are a large number of factors and variables. There is a large school of people who could question the morality of the egg vendor calling him a capitalist etc. but that discussion is beyond the scope of this article and this author. This is how inflation works, an increase in the amount of currency without a corresponding increase in production and services causes the rise of prices. The causes of this can be many. So what does currency represent now?? Its not gold. It is the commodities and output of the various industries that are established in the country or to put it more simpler words the stuff that people produce. Finally one last question .. What do you think is the wealth of a nation?? How does a nation become rich?? The answer is really simple, the people of the nation and their capacity to produce goods an d services that are good in quality.