Money was a simple sack of grains in olden times when barter was used. As the economies grew larger and more complex, the need arose for something, which could provide exact value to goods and services, could be stored without any risk of perishing, could be transported easily, and could be recognised easily and accepted by the masses, while at the same time preserving its value. To perform all these functions, the currency arose as a matter of necessity, says Tarun, in the weekly column. A Different Truths exclusive.

Money has a history, and has seen great evolution through that history. And it continues to evolve even today. Let’s talk a bit about it.

Money is a medium of exchange of goods and services. Today, money is commonly understood to mean currency. Yes, the currency is the biggest denominator of money. But money is a much wider term. It can include promissory notes, letter of credit card, credit or debit cards, gold, precious stones, or any of the very modern digital systems. In other words, any medium which can be used to exchange goods and services, is money.

Money was a simple sack of grains in olden times when barter was used. As the economies grew larger and more complex, the need arose for something, which could provide exact value to goods and services, could be stored without any risk of perishing, could be transported easily, and could be recognised easily and accepted by the masses, while at the same time preserving its value. To perform all these functions, the currency arose as a matter of necessity.

The first currency was a bronze replica of weapons, introduced by the Chinese in 1180 BC. Lydia in Turkey introduced gold and silver alloy coins around 600 BC, while Indians in the Gangetic plains used punched metal as coins. Around the same time, the Chinese were already making paper currencies, with a clear warning “All counterfeiters will be decapitated”!!

The first known history of rules of debt, interest and private property came around 1800 BC, through Babylonians and Hammurabi.

Until the 16^th century AD, the currency worked well, as new conquests and colonies allowed Europeans to get more and more gold and silver to issue new coins. However, problems began to arise, as the distance between colonies and the masters made journeys, and hence, trade too long. A shortage of currency forced the French Governor in Canada to sign playing cards, to allow them to be used as currency.

As the industrial revolution gathered pace, the huge need of finance gave rise to innovative financing solutions, the most notable being the invention of stock markets. The 20^th century saw the massive upheavals, in terms of financial and human tragedies, and growth. While we saw two world wars, atomic bombs, economic depressions, famines, we also saw colonies gain independence, man putting a foot on the moon, starting of Olympics, scientific innovations, wiping off of many diseases, food self-sufficiency, and firming of democracies worldwide.

And in currency, the gold and silver peg to currencies was removed after attempts to retain them. Thus, the central banks got the power to print unlimited currencies, and create massive debts out of nowhere. This unlimited printing fastened the loss of purchasing power of money. This also made central banks do many experiments to meet their twin objectives of control of inflation and stimulation of economic growth.

Which brings me to main topic today – digitisation. The latest consensus worldwide seems to be towards negative interest rates as a means to achieve the above-mentioned twin objectives. Negative real interest rates mean that the interest rates in the banking system should be below the inflation rate in the economy. This way, the businesses can borrow at virtually next to zero interest rates, increase production of goods and services, thus making the economy more competitive, and hence goods and services cheaper, which means lower inflation. Also, the negative interest rates spur demand in the economy, since consumers tend to save less money, as keeping the money in the banks would cause them to be at a loss.

Since the negative real interest rates are the new trend, the central banks would do all to enforce them. The most effective way to do this is to force people to do more transactions through the banking channels. Cash is money which is outside the banking channel, and hence makes transmission of monetary policy difficult. Similar is the case with gold. Both cash and gold have the power to jeopardise the central bank and government policy worldwide to enforce negative interest rates. Hence, there is a push worldwide to enforce less use of cash, and promote digital money.

This policy was first promoted by the USA in 1970s, when, their economy went through a really rough phase of alternative periods of stagflation and hyperinflation, and then a short depression. They abolished currency notes above $100. This has ushered in high use of plastic cards, and also digital payment in the USA, so much so that cash constitutes less than 50% transactions there, with the digitisation increasing at 3% per annum.

The Scandinavian countries are the most advanced countries in the world in terms of cashless payment. So much so, that Sweden is set to become the first cashless country in the world. In UK one in every seventh person claims to be completely cashless. Similar attempts are being in India, to make people go more and more digital.

There is one side effect of digitisation. The banks gain a source of income, through increased usage charges, and also get remonetised in the era of bad loans. So banks stand to gain through digitisation.

Probably, as a result of this push, another trend in digital money is visible – cryptocurrency. The bitcoin is the brightest example of that, although there are others. A cryptocurrency fulfills the needs of people to be away from the prying eyes of the government on all of their expenditures. A cryptocurrency is digital money used as a medium of exchange, and is primarily a decentralised system. This is a parallel system to the one guaranteed by central bank of a country.

As we have seen, money is on the verge of increasing digitisation, whether by central banks, or through decentralised systems. What does this evolution entail for a common man?

Sooner or later, the interest rates the world over will tend towards zero. The negative interest rates are a sort of unofficial, creeping tax on the general public. The move towards digitisation will bring more productive capacities in the world, thus giving rise to bigger business entities in the world, (we are about to see the first trillionaire in the world in Jeff Bezos), while at the same time making the general public worry about a few percentage points in return on their bank deposits.

So, will digitisation be good or bad? Due to digitisation, the world will see greater productivity, and more control of the government on general finances of public, the general public will also feel the heat of digitisation, as fixed incomes on bank deposits become things of the past. In the next article, I shall write about the impact of digitisation on the way the world buys and sells goods and services.

©Tarun Gupta

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Tarun Gupta

Satyam Shivam Sundaram defines the belief and philosophy of Tarun Gupta, a Delhi-based businessman, with a passion for learning. He tries to locate the common thread in all learning – as Einstein identified energy as the base thing – and find creative, interdisciplinary solutions to problems, with special focus on economics. Behavioural economics is his special interest, which encompasses emotions as well as economic choices when identifying problems and the solutions.

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