Money: what is it?

                                                                  

I often wonder what money is. The reason for encountering such question is obvious- all around yourself there is hardly any day which you have passed without encountering money. Whether you go out by auto, or you go for eating or you go out for shopping.  You cannot imagine life without money. So some question obviously arises- what function does money serves? Why is accepted by everyone? And what if I have a lot of money? I am neither an economist nor an expert of the field but the things which i have come to know about it some what through books, some what through observation. May be my blog or thought may be not as deep as some well informed person but your thoughts and suggestions will surely help me deepening my understanding of subject or may be help you in thinking you in different way. May be in future, this blog may help me in retrospecting my thoughts and new understanding of money which i am putting here.

If we ponder over these questions which i have posed above some answers are self-emergent. The first obvious thing which appears is that money is just like other thing which can be used as a medium of exchange. And this is the explanation which is given in the basic chapter of economics- that money smoothen exchange of goods in a barter economy. So say at a place there are two peoples one produces rice and other produces potato. At this place man producing rice requires potatoes while man growing potatoes requires rice. So, both of them can exchange their product. Now suppose that there is third person a weaver and he produces clothes. But the person producing clothes do not want potatoes he just want rice but person producing potatoes wants cloth. So here arises the problem of exchange where one person does not require something and he has to exchange his product, means there must be double coincidence of want. Now suppose there are different people with different things to exchange but a group not requiring product of some other group and thus the whole system of exchange will stuck.  So here comes the money. It acts as a medium which is accepted as a common medium of exchange which everyone accepts. This is what is taught in basic class of economics in high class of school. And this is the most obvious thing which any person can think over. This was also the explanation which was given by Adam Smith in his book” Wealth of nation” in which he wrote-

“Salt is said to be the common instrument of commerce and

exchanges in Abyssinia; a species of shells in some parts of

the coast of India; dried cod at Newfoundland; tobacco in

Virginia; sugar in some of our West India colonies; hides or

dressed leather in some other countries; and there is at this day

a village in Scotland where it is not uncommon, I am told, for

a workman to carry nails instead of money to the baker's shop

or the ale-house”

And I think this thought has continued from that time. But the thing which Adam Smith proposed from deductive reasoning, means he reached to the conclusion after some assumptions, does not exist in reality. In reality anthropologist haven’t found any society where barter system have existed. So the point is what is wrong with this thought of money- “money as a medium of exchange.”

 Actually a lot is wrong with this thought of money. Money is not a commodity for a medium of exchange, but an instrument to settle the account of debit and credit. Say you go to a shopping mall and buy some clothes now you owe a credit to shopkeeper, to settle that credit you pay him money. Now suppose you pay him not with the currency but simply by a piece of paper, will that be accepted as money, obviously reading this you will think what absurd I am talking.  But my question is why not this paper will be accepted as money. And any keen observer of note can answer this question. Every currency is backed by government of country. In other word your piece of paper is accepted because it is backed by government of your country.

Let’s take an example say there is a shopkeeper and you give him one thousand rupees instead of giving you product of worth one thousand rupees he just give you a paper on which he has written one thousand and put some seal or signature and say that whoever will bring this paper I will give him product of worth one thousand rupees (IOU). Now you take that paper and give it to second person now that second person give that paper to third person and this piece of paper start circulating and in a way it has become currency. The acceptance of currency depends how much people go to that shop or what is credibility of that shop. So in a way you can also issue your currency and the acceptance of your currency depends on your credibility. Since, in a country the government is the most credible institution, so the currency of country is backed by the government of country. So as much money you hold in your pocket that much amount of debt of government you hold. And that’s why central bank is the biggest debt holder of the government of country.

I was reading book Debt: the first 5000 years and the theme of the book is similar to above theme that from time ancient there is this inherent thinking of “debt “or “owing something to someone.” Be its Hinduism or Christianity. In Hinduism it is believed that we all own debt to our parents, from our birth we own debt to God. Similarly Christians practically say as much every time they recite the

Lord's Prayer, and ask God to "forgive us our debts, as we also forgive our debtors. So money is just an extension of a medium of paying a debt we own to someone. May be in earlier times this mode of payment might have been different but concept of debt was always present and money is a medium of clearing that account.

Another important role of money is that it is used to measure the value of something. So the number on face of currency represents the value of something means if you have someone five hundred rupees means the value of that good is five hundred. And each currency has two things written on it. If you will see the two faces of currency then on one face a number is written and on another face there is symbol of the government of country.

Recently I read the book Debt: first 5000 years and this changed my view of money. Before this also I had read another book Money: the unauthorized biography. In that book author has given very good reason why we should look money not just a medium of exchange and look it at different perspective. The author gave example of Richard Feynman example of static electricity generated by rubbing a comb against dry hair. We are not amazed when we lift a piece of paper by applying force of hand, while we are amazed when the charged comb uplifts the piece of paper. And this force of electrostatic which is invisible is fundamental force while the force applied by our hand is not fundamental. So a simple change in perspective which is counter intuitive can produce dramatic effect.

Same hold s true with money. The great temptation has always been to think that money and other currency like gold are money on top of which the system of credit and debt is constructed. The reality is exactly opposite. It is social technology of transferable credit that is fundamental. All the millions of transaction which occurs is just balance of credit and debt relationship.

The  consequence of this change of perspective of money is quite dramatic as is the consequence of change of shift from Newtonian to quantum theoretic perspective have been for our understanding of our physical reality.