The power of currency

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If you've been wondering why the government really unleashed the demonetisation drive, and what impact it may have on a society, eavesdrop on the following conversation as X and Y think out loud for you...

When you control printing of currency, you control the economy. That's power.

 

Ever wondered why the government is so powerful?

Um, not really. But that’s not hard to figure.

Oh, is it? What do you think is the reason?

They’ve got the police!

You’re forgetting the army!

Oh yeah, that too. But we don’t even need to go there. The police is scary enough.

Why don’t you have a police and army of your own?

Haha.

No, seriously.

How can I have a police and army of my own? Is that even a question?

Come on, think about it.

Well, because I have no interest, and even if I did I couldn’t afford it.

Exactly! You can’t afford a police and army of your own.

Yeah, Captain Obvious. What’s your point?

How do you think the government can afford it?

Because they take away MY money as taxes, those corrupt cheats! The income tax is so high and on top of that...

Hey hey, we need to stick to the topic. Why do you think you’re not as rich as the government?

Well, no individual is, and no one can be.

True. But do you think there’s a way to be that rich?

Well, being Escobar would help, but even he couldn’t counter the government forces for too long, so no. Maybe, if I could print my own money, haha.

Don’t laugh it off. Have you ever tried doing that? Printing your own money?

What have you smoked today?

Why haven’t you tried printing money?

You’re testing my patience now.

Play along. You will soon understand why the government is so powerful. Let me tell you the answer is not because they have the police and the army.

Well, if I printed my own money the government would put me in jail.

I think you mean counterfeit currency. What if you printed your own currency that was different from the government’s?

 

Haha, then no one would take it. So, I’d still be poor.

Exactly, so your currency needs to be legal tender accepted by everyone within a country. Now, do you see what makes the government so powerful?

Umm yeah… makes sense. They have monopoly over printing currency that’s acceptable to people. Damn, I always knew this but never thought of it this way. But wait, this demonetisation thing… didn’t they invalidate 85% of their own currency? How’s that possible through just an announcement?

Why do you think it’s not?

It’s currency, not some piece of paper that you can trash at will!

Haha, currency is trash-turned-money through government backing.

What? If it’s just trash then why don’t I have a currency of my own?

Would you accept any currency other than the government’s?

Well, no.

Why?

Because I don’t trust anyone other than the government.

But you just called them “corrupt cheats”!

Yeah, but… Ok forget this, how does government give currency its backing?

Simple, they just tell you it’s backed by them.

I know that, but I mean how do they back it?

Their word is the only backing.

What? Just their word?

Yeah. It used to be backed by proportionate gold reserves till a few decades back. Now it’s just their word.

So why isn’t money backed by gold now?

Well, the government say it’s for people’s welfare.

The government always says that. I don’t buy it. Tell me more about why it happened.

Too much detail to go into. But I would suggest you read about it carefully for your own sake.

So, tell me. In the absence of gold, how do they determine how much to print?

They can print as much as they want. Most countries won't do that willy nilly, because that would result in hyperinflation . But for all practical purposes, they can.

Oh, so they will simply replace all the demonetised trash with new trash that has their backing?

Aren’t they doing that already?

Hmm. Speaking of trust, there’s complete trust amongst the members of the society I live in. So, we can print a currency of our own. In fact, why bother printing at all? We can just tear bits of paper from notebooks and use those for transactions within the society!

What an idea, sir- ji ! But how much paper are you going to tear?

Ummm… maybe a single piece of paper could be equated with one Rupee, or something like that. Details can be worked out.

Great! But what will happen when prices go up?

Well, then we’ll just tear more paper.

Haha, isn’t that what hyperinflation is all about? If each society member produced his own currency, prices will keep going up until you need to carry a few kilograms of paper to buy a banana.

Wait, why will the prices go up? It’s a small society, not a nation-wide economy.

Well, prices of things outside your society — fuel, labour, etc. — will go up, and that will raise prices within your society.

Yeah, true. Um. Well, in that case we’ll have a singular authority that keeps control on currency printing. Problem solved!

Wait, I thought you’d read Animal Farm ? I gifted it to you. It’s one of the best books out there for a reason. Do you remember what happens in it?

Oh, those who control currency printing will become like the government!

Yes. That’s exactly how government came to control currency printing.

Damn, this is scary. But, I have heard about people using IOUs as substitutes for cash all over the country. So, why can't we do that?

Well, those can be used because they can later be redeemed for cash.

Yeah, that’s what I’m saying. Redeem them later for cash.

You don’t get it, do you? They can be redeemed for cash only because they have government backing, which is why people accept them.

Ugh. But how about if we go cashless? Then, there would be no printing and hence no governmental control!

Well, in such a scenario the government would control all digital transactions. And they could shut it down at any time.

Shut it down anytime? No, they can’t do that!

Of course they can. Just like they did with cash.

What? That would be like demonetising ALL notes at once. You’re scaring me. I will make sure to always store some cash from now on.

You probably should. Ever heard of bitcoin ?

Yeah, that hi-fi currency thing ?

Please don’t trivialize it. It’s the most potent tool to end government monopoly over currency.

What? How? You mean anyone can print bitcoins?

No, you don’t have to print bitcoins at all. That's the whole point. They’re virtual records of transactions, digitally traded.

But that sounds similar to cashless. Can’t the government ban that too at any time?

Well, it’s not that simple. Which is why they’re coming down hard on everyone who uses bitcoins.

Damn, this is interesting. Tell me more!

I wish I could, but I have to run now. Need to draft a letter explaining my delayed bank deposit of Rs.5,000 in old currency.

Hey, but aren't you KYC-compliant ?

... Oh yes. That's right ! Well, the mentor seems to have become the mentee!

 

 

 

 

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