Money's Worth!

Money has evolved so much from what it used to be hundreds of years ago. With gradual advancements from the traditional barter system to individual IOUs to gold and silver as the direct representative of money – money has always been a measure of one’s wealth. Somebody with over a hundred thousand in cash was termed ‘लखपति’ and considered very rich, when I was a small boy. Today, finding someone with over a million rupees is not a rare instance. Does this mean that the Nepalese society has gotten richer? Or we have reached a newer height of prosperity? No! One of the fundamentals you must learn about money is that it is only worth what it can buy. Everything else is irrelevant.

Here’s a historical reference you might find interesting:

The Incan civilization had a lot of silver mines beneath their hills. While the primitive Incan population simply considered them tears of the sun (gold) and light of the moon (silver), the Spanish conquerors in early fifteenth century mined the hills and shipped all the bullions back to Spain. With increasing supply of gold and silver in Spain, people’s value for it decreased, as people already had abundant of it. This made gold and silver less important and thus people had to pay more to buy the same values that they previously bought for lesser amount of gold or silver.

To summarize, this surplus of precious metals did not make Spain richer, they simply made prices higher as an increased quantity of money chased the same amount of goods. What the Spaniards didn’t get is that

1.       Money is only worth what other people will give in exchange for it!

2.       Even a lump of clay can have better value than gold or silver, if people have more confidence in them!

This is a basic fundamental we all know by the terms of “Supply of Money” and “Inflation” that results from over-supply of money. For more about money supply in Nepal, refer to quarterly bulletin issued by Nepal Rastra Bank for the general price index developed by NRB’s internal research division. For more on how the government plans to tackle it, make a read of the Monetary Policy issued by the same office. The Budget Plan by the Ministry of Finance should come in handy as well.

Now let’s make a simple illustration.

If you check for how much you needed to pay for a bottle of Coca Cola two decades ago, and use that amount to divide how much you pay for that amount of Coca Cola today, that is the amount of inflation you have endured in the last twenty years. That means, that is the percentage by which your money eroded out of your hands!

What makes money so abundant and makes it loose its value? The answer is simple. When everybody is rich, nobody is actually rich. And when everybody can afford to buy something, and actually want to buy it, the merchant will start charging higher, and money simply starts buying less than what it used to.

For an individual exercise, take a ratio between how much your salary is now with how much 10 grams of gold costs today. Again, take the ratio between how much 10 grams of gold cost when your dad was your age. Now compare the ratios. This is a real-value comparison of your dad’s salary at your age with what you earn right now. Which one is higher?