Principle of Duality:The Money

Principle of Duality
The Money
Sometimes it happens that a subject fascinates you to such an extent that it literally blocks your thought process. This happened with me when I came across an article about Money. Though this was not supposed to be part of Duality series, I thought of writing my views about the article before going to ‘The Society’. This does not have any direct bearings on my take on Duality, it is however an interesting topic to be covered. In order to keep the continuity of the blogs (so that I remember that I have to write on Duality again), I am including this one inside the same heading.
The article’s title simply asks “What is Money?” Though as an Engineer or from Science faculty we all had a very brief stint with Economics but we have all come across this question many a times. Recollect what we have read, interpreted and understood in all these days. Can we define Money? Do we really understand what Money is? To be honest I really do not. This is a great point of discussion many Economists, School Teachers keep talking about but never a clear idea is conveyed. The Economics session if I recollect correctly from school is like board meetings where after 5 minutes of discussion everything starts going at 150KPH and 6 ft from the ground.
Now what is Money? The Article didn’t provide any definition rather it contained explanation. Majority of people around us think the Paper Note inside our wallet, the plastic cards tugged inside the card holders is money and like in usual cases majority of us are wrong.
Money: Any Tradable asset is Money. House, car, your services everything that you can think of trading or carries market value is Money. The Paper Note carried by us is nothing but Currency.
Currency: Currency is an accounting system for Money. Since we cannot trade our Car for food grains or House for a Doctor’s Appointment we have currency for that.
Thus Currency is a Paper Accounting system for Money. Thus logically and ideally the amount of currency floating in the market should be equal to total amount of Money present in the world i.e. the currency at all time should have equivalent amount of Asset backing it.
The other explanation which I found very interesting in the article was differentiation between Value and Price.
The amount of Paper currency per asset is price. The amount of things an asset commands in trade is its Value. Value is almost a constant thing and it never changes. For a house the doors, roof, windows, floor are all it’s Value.
The Price is something which we all fear that further spans to economic terms like inflation and deflation. Like Money we all come through terms like inflation almost every day in news papers, TV Shows, Political speeches and many other insignificant places like on a tea stall with bunch of tag holders smoking cigarettes. The student preparing for Management entrance mugs up the definitions but never really understand the underlying concept. As a student I never understood the concept as well.
As per the article: The act of flooding market with Currency is Inflation.
This means if excess Currency is pumped in the market with no asset backing it up is inflation. Price is the ratio of currency and Money, so if Currency goes up while denominator remains the same the resultant price goes up. This is inflation.
Deflation: The act of draining market of currency is deflation.
Now if a large sum of currency is withdrawn from the market the denominator will go high and resultant prices will go down. This mechanism is deflation.
These are simple concepts which I thought sharing with all of you after reading this article. The other articles by the author touches issues like Sub Prime crisis, the fractional reserve banking etc. I think if I understand the topics clearly I will be writing on them pretty soon. To sum up this edition of duality I will use a quote aptly fitting in this context
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” - John Kenneth Galbraith