Absurd monetary system

MUBASHIR HASSAN
The present economic system, which is the upshot of long chain of measures and changes, is
inherently faulty and unstable. To begin with, we had barter system which evolved into a
more feasible system in which precious metals like gold and silver were used as currency,
followed by the paper currency and now we are on the path to electronic money. Initially
Money lenders used to issue receipts for the gold which were used in the marketplace as
currency in lieu of the gold which was held, in safe custody, by the money lender. With the
passage of time money lenders began issuing receipts for far more amounts of gold deposited
with them and charged interest on the said receipts (as the said receipts were being used as
currency) and as people began to use these receipts as currency, it morphed into monetary
system based on paper currency.
In 1944 foundation was laid for the Bretton Woods which was to govern the
international monetary relations. As per this system the various countries of the world were
now to settle their international accounts in Dollars that could be converted to gold at fixed
exchange rate of $35 per ounce which was redeemable by the US government or in other
words the US government was committed to back every dollar overseas with gold and the
other currencies were fixed to dollar which in turn was pegged to gold. As the dollars were
now to be acceptable and required in the international market, gold (real wealth) was
transferred to US.
Then in 1971, USA cancelled unilaterally the convertibility of the dollar into gold and
so began the era of fiat money a form of currency which is not backed by anything nor has
it any intrinsic value. The USA and the other economies of the world were now free to print
out as much money as they wanted. It is just the assurance of the issuing agency that lends it
value. To make things worse the banks multiply the money available with them through the
process of Fractional Reserve Ratio. In simple words it means that banks loan out the
deposited amount many times over.
The impact of the digitalization of the economy is far more profound. The
introduction of internet technology in banking has brought in its wake new instruments like ebanking, Mobile banking, various cards like credit, debit cards, virtual cards e-wallets and ecommerce etc. One can transfer money, pay bills, perform online shopping and so on. We can

buy and sell shares while sitting at our homes. Then there is e-gold: you can have deposits of
Gold in the electronic form and the quantity simply mentioned in your accounts while the
actual gold is held somewhere else and so are your investments and bank balances. We cant
foresee the new financial instruments and gadgets we are going to have in future. However,
one thing appears as certain that in future there would be no currency, just electronic money.
Credit, debit cards, e-banking etc.
This type of economy or the Digital economy appears as thrilling, time and money
saving. Currently we are familiar with e-banking, credit and debit cards but in future we
would have biometric money transfer systems. No doubt it is advantageous, but not so
simple. It heralds a completely new economic system which may not be as pleasing as it
appears. Firstly there would be no actual use of physical currency, only the net based
transactions. We do not have to pay for anything in physical terms. The impact on money
generation by the banks and the resulting inflation can only be imagined.
The impact of demonetization of Rs 500 and Rs1000 notes is before us. Same can be
visualized for failure of digital Economic system, for instance breakdown of internet or
technical fault with the system. Or in extreme cases deliberate invalidation of the digital
account of the account holder and in that case, it would be really very hard upon the person
concerned. You will be completely under the control. May be in future all your cards,
accounts and your identity may be integrated in one card and all your bills, like electricity
bill, water supply bill, gas bill may be deducted from that card and in case of default, your
supplies would be stopped automatically.
The savings too would be in e-form and mentioned in your accounts, as there would
be no way to keep it anywhere else. Since there is no need of cash or physical money, the
supply of money can grow enormously. The consequences are excessive money supply or
inflation. There is nothing to cheer about all this. We cant foresee where all this process is
leading us to. One can only imagine. Not just inflation, since there is nothing on the back of
this system, it might collapse any time. Anyway the fiat system creates so much credit, which
is not repayable in aggregate and as the system is continuously issuing money, the system is
bound to collapse at some point. Some of the prominent economists have already issued the
warning signals that this system of fiat currency is going to collapse any time.
In recent years, there has been an increasing emphasis on the re-introduction of
gold/silver based or backed currencies. Its proponents argue that such a return is panacea for

all the current economic woes, because the present monetary system appears to be the root
cause of all present day economic problems like inflation, instability and huge disparity in
wealth.
However, a return to gold standard is not easier either. It does not allow government
control on the monetary policy, so the governments would be unable to control economic
downturns or sudden inflations. The supply of gold being finite, there is danger of deflation.
From what has been stated above it appears that the present Economic system,
particularly the monetary system of the world is not proper and just. Something is amiss. It
gives an impression of economic prosperity, when there is none. We need to think alternatives
and to apply breaks on the system and not to allow it to go down further. Anyway, the
technological advancements which may appear as blessings may prove to be our harsh
nightmare for us, these might keep us snared while we might think them to be the source of
convenience.
Email: mubashir_07@rediffmail.com
Mubashir Hassan Dar
S/o Manzoor Ahmad Dar
R/o Zirpora Bijbehara
Mb: 9419924672