“Goddess Laxmi showers prosperity upon those who are honest and hardworking.”
In the Indian culture money is worshipped. Laxmi, the Goddess of wealth is revered. When someone accidentally touches money with their foot, an apology is asked by touching the money notes or coins, manifestation of the Goddess herself, with the finger tips followed by touching the fingers to the forehead and chest. Such is the respect for money which is considered synonymous with prosperity Goddess Laxmi showers upon those who are honest and hardworking.
The question I am going to raise here is – Is the modern ‘money’ deserving of this respect? Is it really a representation of honesty and hard work that culture glorifies it to be? What value does money possess for it to command any respect?
“Money is what Money does.”
Money is defined by the the function it plays. Most text books give three functions of Money. As a medium of exchange, as a unit of account and as a store of value. There is another important role which we normally forget to consider – Money as a ‘standard of deferred payment’. The meaning is simple, it means, money is an accepted way to settle a debt. Now, the problem is not in these functions of money. But what laws are enacted by governments to exploit these roles of money. Especially in relation to money as a way to settle debt. There are two main concepts of the modern monetary system which I am surprised are completely ignored in basic economic courses in universities.
1) “Money as Legal Tender”
To ensure that money can be used a way to settle debts and pay taxes, Legal Tender laws are enacted by the government (all governments of all countries practically). These laws give value to the currency notes and coins we use today which, has no intrinsic value. Who prints this money? The reserve bank of the country. What is this money backed by? Nothing. Absolutely nothing except a ‘legal tender’ law which says that the money can be used to settle debts and pay your taxes.
In earlier days, several countries used to have currencies backed by gold or silver. i.e. if you had 100 Rs, you could exchange it for an equivalent amount of gold. I was not able to get exact information on when RBI abandoned gold standard, but starting 1971 when Bretton Woods agreement collapsed, US abandoned Gold Standard and eventually entire international monetary system became free from reference to any gold.
2)”Money as Debt”
How is money created and pumped into the financial system? When the government wants to money for public expenditure, it issues government bonds – which is basically a promise that . Central banks buy these government bonds – how do they get money to buy these bonds ? Simple, they print it. Most of the times it is not even printed, just electronically transferred to the government account. So essentially the central banks just print money and loan it to the government. Yes, the government doesn’t produce any money. It loans money from the central bank! Money is created in the form of debt. The process of Money Creation is so simple that it is shocking.
Another way money is created is through the Fractional Reserve Banking system. Banks are required to maintain only a small fraction of the money deposited to them as a reserve and give out the rest as loan. This can often lead to creation of money that is several times more than the actual reserve available. This means that if everyone of us wanted their deposits back from the bank at the same time, there simply isnt so much money in the system to pay back everyone! Banking thrives on the idea that not everyone will come to ask for their money at the same time. As a corollary to this, everyone who has been loaned money cannot repay back their debts at the same time, again because there is simply not enough money in the system for everyone to repay off their debts!
When I was a kid, I used to ask around – Why does the government not print all of the money it needs for development works to help poor? The answer I used to get is – We need to deposit an equivalent amount in Gold before we print some money, so we just cannot print the money we need!” Only since the past few years, have I realised how flawed and outdated this explanation was! Firstly, this has got nothing to do with any gold. Secondly, the existence of money itself means there is a debt. If there is no debt, then there is no money! All debts simply cannot be repaid!
As much as I would like to go on harping about these problems, that is not the purpose of this post. To learn more about Money As Debt, see this wonderful documentary. And let me come back to the meaning of money and respect for it.
“The essential meaning of Money is ‘Debt’ “
So is Money a reward for your hardwork and honesty as Indian culture tells us? Is it a reward even for your intelligence? The essential meaning of money is ‘Debt’. If you have ‘Money’ it means you have a debt owed by someone to someone. In an interconnect economic system, it is hard to tell where this debt comes from and who owes which debt to whom. But one thing you can be completely sure of is that – All money is Debt. The farmer kid dying of hunger, is an indirect result of the money you have in your bank account! The ‘Debt’ owed by some poor farmer is promised to you in the form of ‘Money’ in your bank account. Is this the reward you want for your hardowork and intelligence?