01 May 2021 · 5 min read

Money and its' wonders(Part-2)

So, In the last post we talk about History of money, barter system, commodity money, metallic money.

IOU(I owe you) slips

okay, now we have something that is universally acceptable, fungible but how to take it to different places.

The answer was "BANK"

What if we can deposit all our gold in one bank and then get an IOU slip for that and then withdraw the same gold from another bank in another city.

People started using these slips for trading instead of gold.

But these banks were not authorized by some authority or government.

Over time, there were many frauds as banks gave multiple slips for the same amount of gold and this method didn't work anymore.

Authority Money

Metals were solving many problems but with time fraudsters started mixing less precious metals with precious metals and start using that for trade.

The royal authority of those times solved this problem by minting money under themselves. This solved the problem of trade and helped trade flourished.

With time, as the king needed more money for his empire, they started decreasing the value of coins. He decides that from now 1 gold coin will carry 5gm gold instead of 7gm. you can buy the same no of vegetables but this will leave king with extra 2 gm gold.

Paper Money

Can you guess who came up with paper money(Hint - they are the factory of the World)

It doesn't look weird when we go to the shopkeeper with a 100 Rs note and purchase 1 kg rice and he happily gives us but in essence, we are getting some product that we can eat for a paper that doesn't have any intricate value.

Yes, the answer is China.

At that time, In china, people use to carry coins with holes in between but they were heavy, so people use to deposit those coins with some agent in exchange for a paper note, and whoever will return that note, will get those coins back.

But if the people were one step ahead, the Chinese emperor was two. He thought " why don't I make paper money and back them with gold and make it a legal tender. This way power will remain in my hand"

Paper coin even had a transcription "Those who are counterfeiting will be decapitated."

Legal tender is anything recognized by law as a means to settle a public or private debt or meet a financial obligation, including tax payments, contracts, and legal fines or damages

Advantages- easy to store, divisible, transportable, non-perishable

Disadvantage- inflation(that is still we are having)

After this many things happened, some areas adopted paper money and some were still with coins but now let's see what is the real deal.

Gold Standard

The gold standard was a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. 

I am not playing the guessing game again😎 but as we know the Britishers(UK) were the king of the world in the 17-18th century. So, they came up with the gold standard in 1717.

The new king(US) who is still the king in some terms also switched to the gold standard in 1834. In 1834, the United States fixed the price of gold at $20.67 per ounce, where it remained until 1933. Other major countries joined the gold standard in the 1870s.

Basically, Whatever the currency printed by countries were backed by gold

what happened after 1933?

Money Printer - Mr. President! we can't print more money.

President - Why Not?

Money Printer - we don't have enough gold to back it up.

President - What can we do economics guy?

Economic guy- Why don't you devalue gold?

President - Let's do it

Then, in 1934, the U.S. government revalued gold from $20.67/oz to $35/oz, raising the amount of paper money it took to buy one ounce to help improve its economy.

Side Note-

But many things were happening in the background. As global trade was opening up in the 20th century there we different problems like what if an Indian guy want to buy Harley Davidson from US. will he pay him in rupees or dollar?

If in Rupees, what this will be of use to US guy?

If in the dollar, How will the Indian guy get the dollars?

Of course, they can trade in gold but think this in global terms (We are not even talking in kg of gold bit in tonnes of gold?)

Bretton Woods Agreement

In 1944, for international trading, delegates from 44 countries and decided to make a system where gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value

What happened in 1973

As the financial system grew, the finance guy realized we can't peck our currency on gold. So, the Bretton woods agreement came to an end but still, dollar is the king. How?

Habits!!

Be it a good habit or a bad one. It always lurks behind. So, now the picture was something like this "All the currency were peck on the dollar but dollar was not pecked gold". 

You saw what happened in 2008 due to this. I am not trying to monstarize the US here as other countries also devalue their currency to do different shady stuff.

Why dollar is the currency king of the world?

Till today in some sense, our economy is an oil economy. Now, you are thinking(No, today it's the internet world) but your internet and device are running on electricity and most of the electricity comes from the hydrocarbon-based product( oil, coal)

So, everyone wants to be the king of the world( we are not going to the universe(alien stuff)for now). The US also did so.

Excerpt between President and Economists-

Mr. President - How can we make the dollar the currency of the world?

Economist- As all the other countries of the world, why don't we ask Arabs to ask to sell oil only in dollars for security. This was all countries would need a dollar and they have to come to us

Economist2- Why don't we give a loan to poor countries in dollars and when they will return they have to do it in dollars?

Mr. President - Let's do it.

Moral - All countries want to be the king but the US was smart, lucky enough in a position to grab the deal(focus on luck and position also)

Fiat Money

Money which we are using today is called Fiat money.

It s not made of intricate substance nor we can eat it. It is just backed by the promise of government. With those comes all the problem that is with centralize money: Inflation https://yashwatwani.com/2021/04/02/inflation-and-its-effects/

Next What:

Of course Bitcoin and the world of blockchain