I have a dream to end poverty in the world – Part 2

What is Money?

 Money is the assumed value of real value. Money is being used to exchange real value. In general, real value means products and facilities demanded by people. Any real value can be created by the idea and work of people with natural resources. Money makes doing transactions easier among the participators.

Money stores and saves the value in the future, except in some rare cases. Money works within the common belief system in society. Money can quickly transfer anywhere. Money does not have itself valuable to be used; only products and facilities create its value. If products and facilities finish in the market, money will become valueless like a piece of ordinary paper. Money should consist of these features to work in a society measurable, changeable, transferable, storable, hard to make duplicate, trustable and acceptable. By consisting of those features, money can work in society.

So many metals and other goods like leather, shells, horns, unique stone, etc., were used as money in history. Before using those things as money as a mediator, people were doing transactions on the barter system. After growing society and products, people had so many drawbacks, and they started to use common acceptable things that things are evolving as money from a different form like metal, coin, paper and digital money. Whatever type of money must be accepted by the society; otherwise, money cannot function on the transaction like Nepali money does not accept shop in Finland. So, we should clear that money is just the expected value of the actual value. In general, when the absolute value increases, monetary value also increases. If one person has made three sweaters and the price is 10 dollars each, then the monetary value would have 30 dollars, and if he makes five sweaters, then the monetary value will be 50 dollars. If the price is constant of product, then total money will increase with an increasing quantity of actual products, which means total money depends on price and total quantity of products.

 In history, society made money by using common acceptable things like metal. Slowly society had made country and government that government started to collect big metal from the people and issued the small coins as money based on metal weight. In general, coins are made of copper, nickel, zinc, and unique coins are also gold and silver. After practising long periods in different metal coins, the government had started to issue paper money based on gold and silver. From the beginning of economic transactions, gold has been accepted worldwide and valuable money. Question is raised why gold is being valuable and acceptable everywhere? Because it is a rare metal to find and takes labour cost to mine it.

Moreover, its price always increases due to the demand of people, and why do people demand it? Because it can be sold quickly in the market and general situation price increases in the long term, people want to invest their income in the intention of safe and liquid investment that common belief system around the world gold is being a valuable metal. Gold is a worldwide accepted metal. That is why the government of every country had issued coins and paper money based on gold quantity before the Bretton Woods Agreement in 1944. According to that agreement, the US dollar should issue based on gold backup, and other country money should be issued based on dollars. From that agreement, the US dollar is being worldwide accepted money. In 1973 that agreement was cancelled by the US government. After that, all money is converted to fiat money; there is no mandatory rule to maintain backup value for circulating money. However, in practice, without backup value circulating money will be valueless within a short period, so the central bank should be maintaining their backup value even there is no mandatory rule and regulation to maintain the backup value.

 Every country should be involved in international trade, so if other nations do not accept domestic money, the central bank must need international accepted money. So even there is no mandatory rule, it has to be necessary to back up foreign money to involve international trade. That is why the central bank should hold a minimum foreign currency balance.

 At the beginning of money practising, the government had issued money based on gold back up that money went to public, and they had been using on their transaction. Before coming commercial banks, loans and interest had also been practised by merchants. After growing so many products and transactions, commercial banks had come into the market to save public money and as well as to manage loans. After coming commercial banks, economic progress had increased rapidly because before, merchants could not give big loans for an extended period, but a vast amount and long-term loan was possible when banks had come. In the same period, commercial banks were issuing many loans in some places without measuring the risk of investment, which was lousy debt. That situation triggered the whole system to get in trouble, so the central bank was introduced to regulate the commercial banks, and the central bank had started to issue money that the government conducted in before.

 The central bank had made rules and regulations to regulate the commercial banks to minimize the chance to happen lousy situation in the economy. The central bank makes rules and regulations by observing the market situation in which area should be more investment and less. The central bank has made a rule for commercial banks to maintain a minimum cash balance in their cash counters from the total deposit of customers, and some percentage of their deposited money should deposit at the central bank. Both percentages may increase or decrease by the central bank based on cash supply and demand in the market. The central bank has issued different government bonds to collect money from the public and commercial banks if the government needs money or the market suffers from an oversupply of money. Moreover, the central bank gives loans to commercial banks by depositing that government bond if the market suffers from less money supply. Some times central bank directly gives loans to the government if the government needs a loan.

 How commercial banks can create more money should be understood through an example—supposed one person who is a Nepali citizen doing business in the USA sends 100000 Dollars in Nepal to his family. That money reaches into Nepali commercial bank, and the commercial bank who received that foreign money gives to the central bank, and the central bank gives to Nepali money to the commercial bank supposed that day exchange rate is 1 Dollar to Rs 120, so the bank gets Rs 12000000 that money should be deposited on his family bank account. In that situation, the bank has many experiences that all their customers do not come in the same day to withdraw their all money which is deposited at bank account so the bank should keep some percentage money in their cash counter, and some percentage should be deposited at central bank supposed here both percentages of together is 10% then the bank can invest 90% of Rs 12000000 equal to Rs 10800000. The supposed bank gives loans to their customers all rest of money in that situation larger part of investing money returned to the bank as a deposit. Some part of money may be left as leakage in the market. If bank service does not cover the whole citizens and citizens have no habit of using bank service and a massive percentage of the transaction are contacted through paper money, highly leakage would be possible on the contrary if we use all money on the digital form then leakage would be zero. Supposed here, bank service has covered all areas, and paper money is used in a transaction significantly less, so usually, leakage has been 5%. In that condition, 95% of Rs 10800000 equal to Rs 10260000 money will return to bank and bank can again reinvest 90% of Rs 10260000 amount equal to Rs 92340000, this process continues to go on until the end. So suppose there is no leakage on the market, and the bank can invest 90% of their deposited money. In that situation, if the bank has Rs 12000000 deposited money, the bank can invest 90% of Rs12000000 equal to Rs 10800000/0.1 = 10.8 crores. So, we can see that commercial bank plays a vital role to increase money. This situation could not be possible before banks existed in the economy. So, our economic progress has rapidly started after the bank was established in the economy. The central bank can create new domestic currency if the foreign currency reserve increases.

In some cases, like the economic crisis, the central bank should give loans or free money to the government by creating new money; even the central bank has not got foreign currency. So, we should clarify that the central bank issues new domestic money in the market based on foreign currency and that issued money will continue increasing through investing in a commercial bank. Another major point should be understood that if the central bank has given the government free money without foreign currency, that triggers higher inflation because the government will spend money. Finally, that money reaches people; then people will buy products that increase importing. However, we will not have enough foreign currency to bring importing because the central bank has given money to the government without foreign currency that condition triggers the awful situation mild inflation already would start. Higher inflation will start if we devalue our money or shortage the goods in the market by delaying importing due to a lack of foreign currency. So it is always a high risk to issue domestic money without foreign currency reserve.

 Money is the assumed value of the actual value, like Ram produces 10 kg of potato and gives to Hari by taking some small ten sticks for remembering this transaction. 2 months later, Hari gives 10 kg rice to Ram by returning the same ten sticks. Here these ten sticks played a role as money that is just assumed value. The actual values are potato and rice. Here if they both want more economic growth, they should produce more potato and rice to exchange more rice and potato with each other. Here sticks (Money) are just assumed; they assume ten sticks. It is just a mutual agreement. To conduct a transaction with each other, they might assume one stick or 20 sticks or any number of sticks that depends on their mutual understanding. Either they assumed more sticks or fewer sticks on a transaction that does not affect the increasing quantity of potato and rice. So, if Ram and Hari want to be more prosperous, they should increase potato and rice production, not the assumed sticks (Money). Here they assumed ten sticks on their transaction, so we can say that one stick should be paid to buy 1 kg potato or 1 kg rice if they assumed 20 sticks on their transaction, then we can say that two sticks should be paid to buy 1 kg potato or 1 kg rice. If they assumed 100 sticks on their transaction, we can say that ten sticks should be paid to buy 1 kg potato and 1 kg rice.

In the same way of different assumption, South Korea Money should be paid around 1200 Won to buy 1 kg potato, but 1 US Dollar can buy same 1 kg potato. Here, two major factors play a vital role: assumption and productivity. That is why the money of some countries is more powerful, and some are less powerful. One big question has been raised: they are both ready to exchange 10 kg potato for 10 kg rice. Nobody knows precisely how many potatoes should be exchanged with 10 kg rice, but they both agreed to be exchanged with 10 kg potato to 10 kg rice. The main two factors play a vital role in coming in agreement: cost of production and demand and supply of particular product. Cost of production fixes the cost of the product, which means that 10 kg potato or 10 kg rice should have been paid an equal cost. Again, the question is raised what does mean by cost? If they used ten sticks on their transaction, then the cost of 1 kg rice or 1 kg potato would be one stick, and if they used 100 sticks on their transaction, then the cost of 1 kg rice or 1 kg potato would be ten sticks. So, we should clear that current money is just like sticks, so money never can fix the price of products; money can measure and express the price of products. In general, the price includes rent of land and building, labour cost, the interest of the loan, and profit of capital but the in-depth price includes only labour cost. We should clear that all necessary resources are available on free of cost like we should not pay any price to jungle while we are bringing timber, herbal, fruits, grass, vegetable etc. from there, we should not pay any price to sea while we are bringing fish from there, we should not pay any price to land while we using land for agriculture, factories, housing etc. So, all money goes to people. Differently, that means all price only includes human labour. That is why labour is the main factor that can create the price of any product. For example, they both agreed to exchange 10kg of potato for 10 kg of rice because they believed that to produce both quantities of products take the same labour hours, this agreement may write from the perspective of cost of production, which is related to labour cost but in reality, the world is running with crazy demand and supply. One simple painting can be created within a day by one person, and another person comes and is ready to buy millions of dollars for that simple painting. How can we say how much of the exact cost of that painting is in this situation? So sometimes the price of some products may be fixed by crazy demand. In general, price is fixed by the market based on demand and supply or cost. Demand is created by the needs, interests and desires of people.

Moreover, supply comes in the market, motivating to gain profit due to demand on the market, cost should be paid to bring supply in the market that the exact cost creates the demand of that product. Here it should be more apparent that price is money. If one person brings 10 kg fruits from the jungle and sells it for 20 dollars, he gets 20 dollars. If he sells it for 40 dollars, he gets 40 dollars. He wants to sell at a higher price, and buyers want to buy lower price according to his needs, interests and desires; then, both are agreed to do transactions at the same price; that transaction price is called money. To know the details you have to wait for part 3.