Money is often described as a medium of exchange of goods and services. At the same time, money is also considered as an asset. Whether it is in paper currency form, bank deposits or other form of financial asset, it is indeed an asset by definition.
All other assets that we intend to possess are creation of someone through some process or invention or intervention. Given this background, who creates money, caters to its growth or circulation and who causes itâs death is very relevant to understand the role it plays in determining our well being.
Everything that we do or produce or hold is expressed in the form of money or in units of money. When the values of assets is always expressed in another form of asset, how do we value the very asset that we freely use to quantify the value of other assets. Who creates this money is for all of us to understand.
You pose this question to any of your friends or acquaintances and you will probably have blank faces in return or answers ranging from, Reserve bank prints money or Government or even Politicians. Land in this planet is limited and so are the natural resources. Humans have no control on them except to the extent of conversion of some of them into different form to create wealth for some individuals.
Contrary to majority opinion that printing of money is equal to birth of money, money printed in currency or coins form forms a miniscule of total money supply in any country. It might not form more than 10% of total money in circulation. Then, who is creating the balance 90% is a moot question that we should learn to appreciate the relevance of money in our lives.
Money changes hands in return to a good or service sold or rendered by one party to other. In a sense, someoneâs pocket is emptied to fill the pockets of others. Strictly going by that definition, money cannot grow in itâs total supply numbers. This concept of limited supply or controlled supply appeared to have prevailed over a very long time till 1970s.
Money used to be in the form of precious metals like Gold and silver for a number of generations. Since man cannot produce the gold and silver, itâs supply was always limited and because the rulers had right on all new finds of mines money was never in excessive supply across people.
Since the form of money was in precious metals hoarding large amounts of money was always considered risky. Ensuring safety of wealth accumulated became less luring to people who had all the abilities to become rich. To bring ease into operations, paper form of currency was introduced. An incentive to work hard was to be brought in so that the entire community will also benefit, if a wise person allowed to earn much more than what he otherwise thought difficult to hold.
The concept of banking took shape allowing all people to park their excess wealth with state owned banker. State began to guarantee the deposits by itâs citizens. Since the state is expected to take care of welfare of itâs people and had the power to collect taxes from people living in itâs boundaries, ability of state to repay savings of public was hardly questioned.
As the days went by, savings from public began getting pooled with state and the state was to pay some return on the savings from its own citizens. To be able to pay them, state must either collect more taxes or reduce the rates of interest on savings. If the interest rates were reduced, savings would drop and incentive to earn more may be checked. Only when people realize that their savings will protect their future, they will work that much harder with a hope to have safe future ahead.
They had to strike balance between lowering interest rates and yet leave enough incentive to earn more than what they needed to live in their times.
When people of state saved with it, state passed on the public savings to needy businessmen for promotion of trade and industry, which in turn will provide employment and help state collect more in taxes. The burden of paying interest to savers could be met out of interest payable by borrowers and increased taxes. If the mood of public is not healthy and they stop spending, businesses would suffer and will not be able to pay back the money they borrowed from state. To promote their business interest, state will have to ensure people feel safe under their rule. If you imagine consumers and producers of goods and services on either side of see-saw table, balance of power is bound to slide one side or other due to natureâs interventions.
This needed states to have that magical wand to deal with natureâs fury and keep their people happy at most times. By making sure that every person is now fully committed and used to deal in money brought in by state as official currency, State started looking for alternatives to deal with nature and stand firm against the godâs wishes. The intelligent contingent began breaking their heads to find a lasting solution.
Then came the new generation of financial engineers called bankers. They realized that people save with state since their money is guaranteed but will seldom require all their savings back with them at the same time. This led to generation of new age banking system where fractional banking system developed.
Treating it as natureâs dictat, governments of democracies too followed the same wisdom but converted the form by bringing in paper currency, yet linking it to physical gold being held by the governments as collateral to the money supply. Orderliness prevailed and distribution of natural resources among living population remained orderly.
Though widely regarded as acceptable, some began questioning the prudence of life less metals dictating the human order. Abilities of human race and itâs ability to invent new stuff that would help ease the troubles of many cannot be limited by lifeless form of assets.
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