The Hindu Business Line : On the currency trail

What is common to the words dollar, pound, dirham, rial, peso, gourde, ouguiya and ariary? If you thought: “Hey, these are all funny sounding words that appear right at the beginning of a humour article in a major Indian business daily,” then, technically, you think right, but I sincerely hope you are not involved in a business function.

In fact, these words are names of currencies of various countries. In today’s column we will learn a little about the concept of ‘currency’, how it evolved and how currency, in theory, and money supply, in practice, is critical to the functioning of our economy and even more so in mine.

Let us start with the basics. Currency is defined as a ‘unit of exchange that facilitates the transfer of goods and services’. Or, as humour columnists put it, “That wonderful thing that people with regular jobs seem to have a lot of and which is why we make friends with people in banking and investments circles who have expense accounts.”

Currency or money, in paper and metal form, has become such an integral part of our daily lives that we tend to take it for granted. Then, one dark and gloomy night, while travelling home in a cab, we suddenly remember that we haven’t carried our wallet. In fact, we don’t have a wallet. We tell the cabbie to stop under a tree a few minutes from our home in order to relieve ourselves in peace. We then walk a few steps before breaking into a mad dash for our building. We just about manage to escape.

The above was a fictional incident made up for the express purpose of this column. But it brings out the huge role that currency plays in our lives.

Now, before the advent of the concept of currency, man had a tough time buying and selling stuff. A typical conversation between a shopkeeper and a customer would be as follows:

Customer: “Two apricots please.”

Shopkeeper: “Here you go! That will be four dollars!”

Customer: “But this is before the advent of the concept of currency, dude…”

Shopkeeper: “Dammit!”

Of course, I am exaggerating here. In reality, that period saw the adoption of the barter system whereby people exchanged things with each other. For instance, you might get two horses for 40 chickens. But this led to several problems.

First, sometimes you never found someone who had horses to exchange for your chickens. But you found someone who had pineapples and wanted chickens. So all you needed was a guy who wanted pineapples in return for horses. Alas, then you found someone who loved pineapples but had only, say, primitive table lamps to offer. So a lot of people ended up hanging around for hours at the market. This alone slowed human progress by several thousands of years.

Secondly, you could never store your goods for use later. So, while the other guy had horses that he could keep for months you had to barter potatoes that, after a week, began developing fungus colonies. This led to tremendous business rivalry and even industrial espionage. Finally, after years of lost trades and bad produce, tradesmen struck upon the concept of the credit period.

“Thanks for the bananas, man! Your cheque will be here in three days,” the evil trader would say. “Sure! No problems boss,” his counterpart would reply confidently, “I am sure you are a man of your word!” The trader would than ride to a safe distance before letting out a loud evil laugh (Muahahaha) because, ironically, banking was still several centuries away.

Thankfully, before long, the people of ancient Egypt came up with the idea of currency to help in all financial transactions. They used silver ingots to represent an equivalent value of stored grain. This way, the value of the silver and the ingot itself was standardised.

Egyptian paymaster: “Here take this silver ingot you builder!”

Builder: “Wait a minute! Is this some sort of pyramid scheme?”

The rest, as they say, is monetary policy.

Later on, the Chinese decided to substitute the coins with paper money. Before long, wallets became an essential part of men’s fashion and people were circulating banknotes with little poems on them.

Today, currency plays a less visible but an all the more important role in our lives. Sure, we have debit and credit cards that have done away with the need for coins or paper money. But without a well managed currency system, an economy is in a shambles. For instance, if the currency is easy to counterfeit the market could be flooded with copies. When people use the fake money to buy things, it could push up demand and, therefore, prices. The same thing happens if the people in the Government indiscriminately print notes and mint coins, take this currency into the market, walk past the junction, behind the post office and into their homes where they spend it at leisure!

Exchange rates are another interesting outcome of national currencies. Because the value of a currency is stable at least for short periods of time, the concept of an exchange rate took shape. This kind of stable currency system is essential for world trade.

Lastly, the currency system led to the development of banking, which has played a vital role in the development of human society. It helped businessmen, traders, consumers like you and me and, most of all, investment bankers like the guy who has invited me to lunch at a new five-star hotel here in Mumbai. He has been after me for weeks now and waxes his eyebrows. But, what the heck!

So I must run. I hope you enjoyed this recap of currencies and how they help make our lives better. So the next time you pick up a thousand rupee note and spend it on an insignificant thing like dinner or clothes, or life-saving drugs, pause for a moment. Think about the many millennia of evolution that that particular note has been through. Wonder at the ingenuity of the human mind. And then send the note to my address.

(The writer, an alumnus of IIM-A, was a management consultant before quitting to work as a freelance writer, author and general handyman. He blogs at www.whatay.com)

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