If Money Could Grow On Trees: Nikhil Shah, 3 Years Ll.B. - Semester - V

IF MONEY COULD GROW ON
TREES
NIKHIL SHAH, 3 YEARS LL.B. SEMESTER - V

You would have often heard people saying that if they had a tree that produced money, life
would have been very easy. They could easily pluck money and spent it on the things they
want to possess. Put it on another way, since the country is free to print any number of notes
it wants, why doesnt it produce billions of rupees and distribute it among people and end all
the poverty in one go? Have you ever wondered if everyone had a money tree or money
making machine, or the country produced unlimited money what would happen? Would life
become easy for everyone as nobody would be poor in the world?
But this is easier said than done. There would be more chaos in the world. Too much money
and too few goods could lead to only one thing: Inflation. There would be hyper inflation
everywhere because people would be having money but there would not be sufficient goods
to buy. This exactly happened in Germany way back after World War I. it borrowed heavily to
pay its war costs. And in order to pay of its debts, it suspended the standard of backing cash
with gold and started printing more and more money. This led to inflation in the economy in
1914, at the start of World War I, the dollar was worth 4.20 marks.
From then on, the German currency steadily declined, and in the fall of 1922 it went into a
freefall. By November 1923 the dollar was at 4.2 trillion marks. Millions of German people
found that their lifes savings would not even buy a postage stamp. Of late, Zimbabwe faced a
similar situation and experienced 3.5 million percent monthly inflation rate in 2008 with an
egg costing 50 billion Zimbabwean dollars. A loaf of bread then cost as much as 12 new cars
could have cost 10 years before.
It is to be noted that money doesnt have any intrinsic value of its own. It is just a proxy to
the available resources in a country. a hypothetical example would make it clear. Suppose in a
family, there are five members and it has 50 Kilograms of silver. It is decided to distribute the
silver equally among all members of the family. One member would get 10 kgs of silver.
Now suppose, instead of giving silver, it is decided to give everyone a coupon that one could
get 10 kgs of silver in exchange for. So 1 coupon = 10 kgs of silver; 5 coupons = 5*10 kgs of
silver = 50 kgs of silver.
Now, suppose each of the members marries and brings a spouse into the family. Now, there
are 10 members. However, the silver is still 50 kgs. In order to divide the silver equally
among all 10 members, the family decides to print 5 more coupons and hand them over to the
new members of the family, while informing everyone that a coupon now can only be
exchanged for 5 kg of silver. Therefore, after spouses come in: 1 coupon = 5 kgs of silver; 10
coupons = 10*5 kgs of silver = 50 kgs of silver. It should be noted that wealth of the family
has not increased: it is still 50 kgs of silver. Only more coupons have been printed. However,
if somehow the family acquires more silver, the familys wealth would increase.
A country also functions in the same manner where the currency note functions as a coupon.
Merely printing more currency notes will not make a country wealthy. The value of currency
notes increases only when the wealth of the country increases. And the wealth of the
country increases when more goods and services are produced in the country. The more
wealth a country creates and accumulates the more valuable its currency notes become.
It is to be noted that here, we are assuming that there is full employment in the country and
people spend whatever they get, while in actual situation this may not be true. If the country
is operating at less than full employment, increased money supply will lead to more
production, employment and income etc. Another assumption being made here is that
whatever money is printed by the government, it automatically reaches the common people.
However, this is not so. When the central bank prints money, it buys securities of private
sector banks and gives them money in return. This expands the base of what well call highpowered money. Now, private sector banks are required to keep a certain proportion of this
money in the form reserves and give out the rest to the borrowers etc.
This is what Indias Central Bank Reserve Bank of India (RBI) does as well. Now, the
question is that how RBI or for that matter any countrys monetary authority determines this
amount? There was a time when countries used to follow Gold Standard i.e. they based their
currency on the amount of gold reserves they had. Over a period of time, this was given up by
most of the countries. Now most of the countries have their own system of printing currency.
In India, for printing currency, the RBI considers the economic growth of the country, or
simply Indias Gross Domestic Product (GDP). Although GDP is also not the exact measure
of growth, for simplicity it is assumed that GDP is the exact measure of growth for any
country. in addition to this estimated demand due to growth in economy, the amount of
money that needs to be printed also includes replacement of damaged notes, reserve
requirements, circulation purposes, etc.
While making the decision as regard the amount to be printed, the RBI has to carefully
consider various economic and non economic variables. Depending upon the conditions in
the national and international economies, the monetary authority could have any of the goals
stable prices, gradual rise in prices or fall in prices with regard to prices in the economy.
Apart from this, the objectives of Exchange-rate Stability, Attainment of Full Employment,
Rapid Economic growth or Social Justice could become important and define or alter the
monetary decisions of the RBI.

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IF MONEY COULD GROW ON

NIKHIL SHAH, 3 YEARS LL.B. SEMESTER - V

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