Show me the money.

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The Oversimplification Of Everything

4 min readMar 30, 2020

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When was the last (or the first) time that you had a look at the writing on a currency note? Did you wonder what those few words mean, symbolically? Who promises what to whom and why?

For reference, here’s what’s written on a rupee note: I promise to pay the bearer a sum of X rupees. Undersigned: Governor, the Reserve Bank of India.

The United States Dollar: This note is legal tender for all debts, public and private. Undersigned: Treasurer of the United States.

The Pound Sterling: I promise to pay the bearer on demand the sum of X pounds. Undersigned: Chief Cashier, Bank of England.

So the heads of these financial institutions are promising to clear someone’s debt. Who’s? And what is legal tender, anyway? We might need to have a quick look at the history of currency to understand this better.

This might get a tad long but bear with me here.

We all know from high-school level history that trade was conducted initially with what was called the barter system. Exchange of goods. A hunter would give a “pound of flesh” to the farmer in exchange for a bag of grain, maybe. The hunter would then take the grains to the mill, whose owner would keep a little of the flour in exchange for crushing the grains and so on.

Now, this system presented a few practical issues, especially in cases of high-value transactions. Let’s say the hunter wants to buy a house. He’d effectively need maybe 2 fully grown deer. He’d have to lug around this cart from house to house or make multiple trips. Couldn’t have been easy. Secondly, what if the house-seller was vegan? He would have no use for the deer himself. So clearly, the value of the items being bartered wouldn’t have been the same as seen by the buyer and the seller.

Practicality and value. Two main hindrances to the barter system of trade. This was expeditiously changed with the discovery and widespread use of metals, valuable or otherwise. A pouch of coins over a cart? Any day. And one metal coin buys a set amount of goods, no matter what your food preferences. Levels the playing field greatly.

Thus, the barter system gave way to the currency system. But it still doesn’t answer why the governor would promise to pay someone else’s loan.

The human mind is always looking to improve upon things, one way or the other. So as the days passed, in the absence of having to push cartloads of grain or deer, the pouches of bags became the new reference for a heavy pocket. To make it lighter, there should have to be something lighter than metals, even! Enter paper. Instead of instantly exchanging coins, transactions — between trusted parties — began to be conducted using what was called as promissory notes. It was a parchment that effectively said that one of them promised to pay the other something in exchange for something else. It was literally written (pun intended) and sealed to ensure authenticity.

But again, a couple of issues. One, writing it for each transaction and sealing it was quite cumbersome. Second, counterfeiting. Anyone with a pen and a seal could “print money” as it were. With the advents of banks (trivia — derived from the Italian word for bench), the use of promissory notes changed. The bank would now be issuing ready-made notes for faster exchange of monies. What it did, in effect, was allow the hunter to go the farmer and say that he’s got something of value (might be a deer) based on which he wants to buy some grain. But instead of giving the actual thing, he’s asking for a loan from the farmer on the guarantee of this central figure which everyone trusts. To assure that he’s allowed by the central figure to take a loan, the hunter hands over the promissory note where the governor “promises to pay the bearer (farmer) a sum of X rupees.” These promissory notes are provided by banks and hence are called banknotes.

Almost there. What if there are multiple central figures of authority and if they all issue their promissory notes? That’s where “ legal tender” comes in. Imagine one central bank and multiple authorities of power. A king and his feuding prince, for example; or the state of Syria and ISIS, more recently. both of whom issue their own “banknotes.” Whichever of the two that the central bank accepts as legal tender becomes acceptable currency for trade in that region. It might accept one, two or neither. It might accept some other foreign country’s currency as well. For example, some of the Indian Rupee notes are legal tender in Zimbabwe, Nepal and Bhutan but the currencies of Zimbabwe, Nepal and Bhutan are not legal tender in India. All in all, the bank says that a buyer can buy what is to be bought with a particular piece of paper because it authorizes as well as guarantees the “loan” and its “repayment.”

The pen is mightier than the sword, they say. The paper is heavier than metal, in some cases.

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Originally published at https://abhikb2005.substack.com.

Show me the money.

Written by Abhilash K B