The Invisible Nature of Money

Over this week I came across a very interesting book titled “Thank God for Bitcoin.” I haven’t finished it yet, but I have a strong suspicion I may not entirely agree with all of the authors’ positions. And yet the book has been quite interesting to read. The authors explore the very nature of the type of money that we use today, and questions its moral positioning. What does strike me as interesting is how often we use something without thinking about the ecosystem behind it. But here’s an interesting implication that arises from how money works in our society and why it can cause increasing disparity.

Money is symbolic value

We often assume that money is valuable. But money by itself isn’t valuable. It is only valuable because people give you valuable things in exchange for money. In fact money can be considered as an intermediary of exchange. For example, if I am hungry money by itself cannot feed me. But using money I can buy food which can in fact feed me. And so, indirectly, money becomes valuable. We all are living in a world with a complicated barter system. I say complicated because we don’t barter goods and services directly. We do so using the intermediary of money.

Inflation: When symbols are more than existing value

Let us imagine a scenario for a moment. Suppose there are a 100 rupees in circulation in a society made up of 2 people – one of them grows oranges and the other grows apples. Both the people want both the fruits. So they decide to use money to exchange their products. The orange grower buys 40 apples for 20 rupees. And the apple seller buys 60 oranges for 30 rupees. Now suppose the apple grower wants to become richer and prints an extra 100 rupees, will that make her/him richer? NO! What will happen is that the price of an apple will become 2 rupees instead of 1. Because the amount of money and the amount of value (fruits in this case) have to be equal. Merely printing more money would not help us become richer. It would just make the cost of goods and services increase. We call this inflation.

100 rupees = 200 fruits
1 rupee = 2 fruits

But if 200 rupees = 200 fruits
1 rupee = 1 fruit

When Inflation favours the rich

Let us go back to our story though. If the apple seller prints extra money and doesn’t tell the apple seller, she/he might be rich temporarily. That is, she/he may be able to buy more oranges using the extra money. Eventually though, the orange seller is bound to find out. How? The orange seller would know that there were a total of 100 rupees. And the orange seller herself/himself has 30 rupees. How did the apple seller buy more than 40 oranges from me in that case? And so by knowing that there is more money in the market, the orange seller might charge more. Or confront the apple seller.

Because there are only 2 people in our thought experiment, it is easier to find out the inflation. When there is a third person, the calculation becomes a little more difficult. With millions of people (like in a country today), it is nearly impossible. And so the first few purchases go at the old price.

Think about it now. If the first few purchases go with the old price (cheaper), then the people who printed the money would get a bit richer compared to the others (at least till the others caught up with the knowledge and adjusted the price). Over a long period of time, such inflation can lead to the printers (Government) and people close to them (who get the business deals) increasingly richer as compared to the poor.

Disclaimer

I am not very knowledgeable when it comes to Economics. I just wanted to share what I found very interesting from something I’ve been recently reading. Do feel free to comment or discuss if there are other factors I did not consider in this post.

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