Money: Myths and Misinformation

"The State Bank is obliged to pay equivalent gold in exchange for paper money," and other myths.

Money is far richer in history than we might think. The journey began with the pure barter economy, where the exchange of goods for goods took place. The history of banking is another interdependent feature, thus cannot be separated from money. Studying the former's evolution from its beginning to the present era requires extensive research. Although the author possesses a certain level of subject-matter knowledge, myth-busting would not have been possible without third-party resources. These resources include Modern Money and Banking by Miller and VanHoose, Practice and Law of Banking in Pakistan by Dr. Asrar H. Siddiqui, Casualties of Credit by Wennerlind, IMF, and Forbes.

Myths Associated with Money

The following is not an exhaustive list of the myths associated with money:

1. The State Bank is obliged to pay equivalent gold against paper money.
2. Inflation is only a hundred years old.
3. Trying to issue currencies or gold and silver coins resulted in the assassination of the heads of the state.
4. The IMF charter states that no member nation can mint gold and silver coins.

The State Bank is obliged to pay equivalent gold against paper money.

You might have noticed a line in Urdu on a Pak Rupee currency note: حاملِ ہذا کو مطالبہ پر ادا کرے گا

Some falsely assume that the State Bank is obliged to pay equivalent gold against paper money. However, this is not true at all for two reasons:

1. The Urdu phrase emphasizes an essential characteristic of money: the medium of exchange. Whenever a transaction occurs, such as buying and selling, the 'Hamil-e-Haza' (bearer) is obliged to pay the paper money to the other party on demand.
   
   
2. Money comes in several forms. One of them is fiat money. The paper money issued by the 'bank of issue' (State Bank) is fiat money. No commodity backs fiat money. Hence, one cannot redeem paper money for gold.

However, this was not always the case. When public banks were a thing, goldsmiths arrived in the financial landscape. They dealt in gold and silver. Goldsmiths issued receipts to the public in exchange for gold. These receipts served as the medium of exchange and were redeemable for gold reserves. In short, gold reserves backed these receipts.

The concept of inflation is only a hundred years old.

It implies that the concept of inflation and inflation itself was non-existent before the 1900s. However, the following excerpt from Modern Money and Banking suggests otherwise:

"History is replete with examples in which gold discoveries caused inflation. For instance, when sixteenth-century Spanish explorers plundered native civilizations in the Americas and transported gold from the Americas back to Europe, there was significant inflation."

Casualties of Credit also hints at the sixteenth-century Spanish inflation in the following words:

"... the consequences of too much money had already been exhibited by Spain's sixteenth-century experience."

As told in the author's previous blog on Understanding Monetary Policy, inflation finds its links with an oversupply (too much) of money.

The sixteenth century marks the maturity of the Renaissance Age in Europe that lasted from 14-17 c. During Renaissance, the inception of capitalism occurred.

Trying to issue currencies or gold and silver coins resulted in the assassination of the heads of the state.

The author divides this myth into two parts:

1. Issuance of currencies
2. Minting gold and silver coins.

As for the first part, every country issues its currency. For instance, Pakistan has the Pak Rupee. Hence, none got killed for issuing their currencies.

As for the latter part, gold and silver are natural resources. We know, for a fact, that natural resources are scarce, and the mining cost of gold is specifically high. However, it does not mean that the minting of gold and silver coins never takes place. Gold and silver coins are not applicable as media of exchange in the ongoing era, the reasons of which meet explanation in this eight-year-old Forbes article. Another reason Modern Money and Banking suggests is that "discovering, mining and minting gold are extremely costly activities." Even Pakistan's commemorative coin worth PKR 3000 comprises 90 percent gold and 10 percent silver.

However, there was a time when such coins served as a medium of exchange. Read the following excerpt from Practice and Law of Banking in Pakistan:

"History records that Gyges (Croesus), King of Lydia, cast electrum (a natural alloy of gold and silver) ingots of identical shape and uniform weight with a triple emblem engraved on it as an official guarantee of value in 687 B.C."

The following is an excerpt from Casualties of Credit by Wennerlind:

"Unsophisticated minting techniques and years of clipping and hammering had led to a situation where a high-quality [gold and silver] coin was often taken out of circulation to be kept as a store of value or to be used in international exchanges."

Moreover, the initial 15 pages of the chapter on The Scarcity of Money Problem and the Birth of English Political Economy in Casualties of Credit reveal the occurrence of a natural transition from silver coins toward credit as "to cope with the lack and poor quality of [the] silver coin."

The Introduction section of the book says that "When added to the continuous frustration of the lack of silver coin, it was clear to all observers that something had to be done to the nation's monetary system if England were to prosper commercially and enhance its geopolitical clout."

Hence, the author deduces that the minting of gold and silver coins did not result in assassinations.

The IMF charter states that no member nation can mint gold and silver coins.

It is utter rubbish. The 136-page charter does not even contain the three words: 'coin,' 'bullion,' and 'silver.' Moreover, the IMF Conditionality does not say so. Finally, the chapter on the Current Legal Aspects of Monetary Sovereignty by the IMF grants member countries the right to issue currency that serves as the legal tender.

A Piece of Advice

In Surah-e-Hujuraat of the Holy Qur'an, the Almighty Allah says to his people the following:

"O you who believe! If a Fasiq (unreliable) comes to you with any news, verify it, lest you should harm people in ignorance, and afterward you become regretful of what you have done."

In this era of 'Fisq' (misinformation and fake news), please research before spreading [mis]information. Doing so would not benefit you with new, authentic knowledge but will also help others.

Originally published on Substack. If you liked this or learned something new, please consider subscribing to Finesse for more financial literacy posts.