Money and basic economics

Money, We all want it, think about it, try to find out ways to get it and work for it. This is one of the most important part of our lives. As It is so crucial, It becomes necessary to understand it. So let’s start with the basic thing.

What is Money?

Pieces of papers you have in your pocket? No, that is currency. Just a system of money. That paper is just a promise to you given by your government. Tomorrow if your government comes and says that from now on these papers have zero value then what? You are done. You can not go and sell it as the intrinsic value of that paper is nothing.

So, what is money? Something which has intrinsic value? Gold? Yes, Gold has intrinsic value, recognised all over the world. But what is the use of gold apart from ornaments? Gold has very little industrial applications. So If tomorrow some other metal comes into picture and gold becomes unpopular for ornaments then? It becomes similar to that piece of paper, no one needs it.

There is something more than these above things when it comes to the definition of money. So if you say that money is basically that promise given by the government? Yes, may be. But promises are dependent on something. Some random person comes to you and tells you, “give me 100 rupees, I promise I will return it back to you after 2 years”. Would you take that promise? Obviously not. But if that person is your close friend then you might take it. Why? Because you trust him. You know him for long and believe him. So at the end, everything comes to that trust.

You trust your government that it will fulfil its promise of giving you the value of 100 rupees with that piece of paper. This concept also goes with gold or any other thing be it a stock, fund or company. So now we know that money is trust. You trust people, you give them your money.

Money is religion, a belief, a trust. When people stop trusting in something, the value of that goes down. This is how the market works. People trust some company, they buy the stocks of that company, demand goes high, price increases. As soon as people lose that trust, they sell stocks, less demand, price decreases. Now, why and how this trust establishes and what factors affect it? This is completely a different story. But if you think money as trust, It will explain you lots of things which sometimes become difficult to understand. For example, You can transfer your money to family members without any tax conditions, why? Same reason as it is considered that family(parents and spouse) members can be trusted. Inflation can also be explained in the same way. People lose trust in that currency. You need more notes of that currency to buy the same amount of goods.

I hope this gave you a different perspective on money and helped you in understanding it better. I came across this concept recently, let’s see how it helps me in understanding other fundamentals of economics apart from inflation. Will keep posting updates if I get something new on the same.

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