Money is one of the most controversial and yet the most important concept of our human existence .Yet your parents will never give you a lesson on this extraordinary concept. And I bet you must have heard everything on the religious issues, gods and mythical stories that are yet to proved. Most of the parents don’t know a dime about it and rest think it is the root of all evil, so they don’t discuss it. Unfortunately I was one of them. But fortunately I was inquisitive enough to find out myself most about it. I am writing this because of the basic misunderstanding among people, even people with extraordinary intelligence. This makes me sad.
So let’s clarify few notions, which many know and those who don’t know will have an enlightening experience.What exactly is money? Money is just a means to exchange goods and services. Goods and services that you can use in your daily life. What is the value of money? It is its capacity to buy goods and not how much you have. By money we refer to paper currency also called fiat currency but they are not the same thing, I will tell you about that later. Fiat is a legal binding command. The value of the currency is not a magic and certainly not arbitrary. Its value is legal binding command behind it. If the legal command behind it is weak and incompetent then the currency will be weak because a paper currency has no intrinsic value unlike gold. Legal command forces more and more people to use it thus giving it a status of an instrument of exchange. That is its value.Let’s suppose you are shipwrecked at an island with two friends. Now one friend has 50 breads, you have a million rupees and the third person has lighter. Who is the worst-off? You will be worst off since they can just start exchanging goods with each other. Why they need your money, they can light a fire out of wooden logs rather than from your paper currency. So what I am trying to say is never just go on the amount of money someone has. But how much goods that amount can buy. This is a simple concept but this concept lies at the heart of inflation, foreign exchanges, investments etc. Many people just don’t understand why some countries have 1, 00,000 unit currency notes and some have only 100. It is just because overtime higher unit currency went through the shipwreck type conditions more than the other currency. Thus value of currency dropped and they have to increase the denominations of currency as it is awkward to give 100 hundred unit notes to buy bread. This is called inflation in modern terms. Inflation is just a process where too much currency is chasing few goods. That is the growth of currency is higher than the growth of the production of goods. This is what happened at the island (of course that is an extreme condition and something which we call hyperinflation, where the faith over currency just vanishes). Limited goods and increasing money supply. What happens to the value of the money? It takes a dip. That is Inflation for you.
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So let’s clarify few notions, which many know and those who don’t know will have an enlightening experience.What exactly is money? Money is just a means to exchange goods and services. Goods and services that you can use in your daily life. What is the value of money? It is its capacity to buy goods and not how much you have. By money we refer to paper currency also called fiat currency but they are not the same thing, I will tell you about that later. Fiat is a legal binding command. The value of the currency is not a magic and certainly not arbitrary. Its value is legal binding command behind it. If the legal command behind it is weak and incompetent then the currency will be weak because a paper currency has no intrinsic value unlike gold. Legal command forces more and more people to use it thus giving it a status of an instrument of exchange. That is its value.Let’s suppose you are shipwrecked at an island with two friends. Now one friend has 50 breads, you have a million rupees and the third person has lighter. Who is the worst-off? You will be worst off since they can just start exchanging goods with each other. Why they need your money, they can light a fire out of wooden logs rather than from your paper currency. So what I am trying to say is never just go on the amount of money someone has. But how much goods that amount can buy. This is a simple concept but this concept lies at the heart of inflation, foreign exchanges, investments etc. Many people just don’t understand why some countries have 1, 00,000 unit currency notes and some have only 100. It is just because overtime higher unit currency went through the shipwreck type conditions more than the other currency. Thus value of currency dropped and they have to increase the denominations of currency as it is awkward to give 100 hundred unit notes to buy bread. This is called inflation in modern terms. Inflation is just a process where too much currency is chasing few goods. That is the growth of currency is higher than the growth of the production of goods. This is what happened at the island (of course that is an extreme condition and something which we call hyperinflation, where the faith over currency just vanishes). Limited goods and increasing money supply. What happens to the value of the money? It takes a dip. That is Inflation for you.
read more | digg story
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2 comments:
in very primitive times when our ancestors were dont have so many sources and choices barter system was best option, because it is simple exchange of goods but when variety,choices and quality concept comes into the picture the money introduced....
Good brief and this enter helped me alot in my college assignement. Say thank you you seeking your information.
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