Penniless lenders — I

• How the world of money works

To the surprise and horror of an Indian nation of more than a billion, in November 2016, many people woke up from being have to have-nots as some of the country’s wealth vanished in thin air when 500 and 100 rupee bills were demonetised by the Indian government. It was not the birth of a new reality, it was just that an absolutely forgotten reality making its way to the public in a rather rude manner: their money, Indians realised, was state owned, and that they were only using it on behalf of their government, not owning it in the classic sense of ownership. One must ask if that holds true for all modern economies.

Human societies of the past are known to have traded using barter systems. The first known use of a metal as currency, according to some historians, was by Lydians in around 6^th century BC. Since then the precious metals have been used as a store of value and as a gauge for comparative value of different commodities.

It is up to question if the money has evolved from that stage to come to a point where one of the biggest robberies in the history of mankind was facilitated in India by stripping people off their hard earned money by the mere stroke of a pen. That money might have been retrieved later but that is not good enough for many whose earnings turned into a piece of paper when they and their families needed it.

The first known use of a metal as currency, according to some historians, was by Lydians in around 6^th century BC

That should not have been so shocking had the masses known that it was actually a stroke of pen that initially created that money and that there was nothing perplexing about it disappearing in the same fashion. That is how modern money is printed. Those in charge of central banks around the world can print at will and can put as many zeroes as they like in front of a figure of their choice. That might pinch an economist and instigate him to quote a barrage of tools and procedures used before allowing printing of paper money. Yet, all the regulatory systems, procedures and economic indicators considered before printing new money are a sham if that printing leaves the money already in supply with a lesser value. The euphemism of internal debt might be used, but when someone has been borrowing at the cost of your money’s actual value being depleted, your consent must be sought, otherwise you have a right to call it a robbery and not borrowing.

Unless you are totally naïve or you want use only the flashy terms of monetary economics, inflation can be described as leaving a printing machine on at the expense of money in circulation losing its buying power. For Indians their 500 and 1,000 rupee currency notes lost all their buying power suddenly, but in common practice, the process is a slow loss of value for our money, and most of us never comprehend this rip-off. Paper based monetary system has made it possible for central banks to intervene right down to the pockets of unaware general public, to make up for the budget deficits for example.

For governments money has surely evolved as they can divert it straight from your pocket and my wallet to any project that would look great on its CV, come it the election time. Also, massive wars can be fought—next generation weapons can be piled up—and best of all, money can be made available in banking sector for those who can ‘qualify’ for astounding amounts of debts that may as well be left unpaid.

Does that mean that the masses have been lending not only to the state but to big business corporations as well? Would anyone want to fund huge businesses of parliamentarians, who find the front and the bank doors of most banks open to help them realise their lavish money making ventures? That clearly outlines the fallacy of paper money, which has taken away from us the right to refuse such benevolence towards the ones who have already racked up enough for their posterity.

Those were some of the realities of state controlled factors affecting the buying power in a paper based monetary system. For many countries, including Pakistan, there is also an additional external factor contributing to our depleting buying power, namely IMF. It was reported that on 8^th December 2017, in a meeting between Pakistani officials and IMF delegation it was concluded that money depreciation was the right choice for Pakistan. Since that fateful day of December, the Pakistani rupee has been walking on a slippery slope, suffering from continuous depreciation against the dollar. A Pakistani’s pocket, therefore, is all too vulnerable from burglars at home and abroad. It must be asked what the IMF has to say about the health of dollar, since each US citizen is under more than one million dollar of debt while, comparatively, each Pakistani has a debt of a little more than a thousand dollars. In GDP terms also America’s debt to GDP ratio is much more than that of Pakistan. Still the biggest donor to the IMF is America while Pakistan has always been at the borrowing end. The penniless donor also has the good sense of making us aware of their monetary favours in this all too crooked monetary system of their making.

France reacted in 50s and 60s to American misuse of the “dollar privilege” after the 1944 Bretton Woods Agreement gave the dollar the status of international currency. The agreement worked wonders for America while the rest of the world got pushed into economic disarray. Commenting on America’s uneven deal in Bretton Woods Agreement, Barry Eichengreen, an American economist, said, “It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one”.

A testimony to that statement is China’s predicament. Today, China has to keep manufacturing for American consumers in return for US treasury securities, which is a piece of paper or a future obligation of monetary settlement. If China ditches these securities too quickly or stops buying them, the knock-on effect on dollar would turn trillions of hours of Chinese labour into a piece of worthless paper. On the other hand, if China continues buying these securities, its citizens keep toiling for the American dream to survive at their expense. Though Chinese officials have recently signaled the intent to slow down the buying of US treasuries, it would be a much harder act to pull off than to imagine. America has improved at its game since 50s and 60s in strangling fair competition and has also made Europe reap some of the benefits of its dollar dominance, but rest of the world must face the massive inflation led by unstoppable American debt and ‘friendly’ advice from an IMF delegate.