ChintaMany and worries are inseparable, like light and shadow. He is unique as he would be searching for a shadow even in darkness. It all started, once again, when he read the "I promise to pay the bearer...."
Whether all the denomination of currency notes come with this promise? What happens, if the promise is broken? What about the minted coins? These were his initial set of worries that started off his thought train.
Then the next stop was to know, how this promise came about in the first place. Are we alone or other national currencies also have this type of sovereign guarantee printed on them? Along the way, he was sure, that he would onboard many other worries. Is it necessary to be a scholar in numismatics or at least a hobbyist as a numismatist? ChintaMany quietly blamed his unwanted interests and worries. Why could not he do as others do - just use the currencies and forget the worries?
Ignoring these worries, his thought train chugged along, on its own steam, till it hit a red signal - paper currency is just a ‘fiat’ money. Resuming the journey, his thought train crossed the level crossing, to understand what this meant.
ChintaMany hissed like a pneumatic brake, in relief, when he understood that most modern currencies are fiat money, and aren’t backed by a physical asset like gold or silver and hence have no intrinsic value. His thought train screeched to a halt at another red signal to understand that the issuing government and its central bank guarantee the value of the currency note for acceptance within the country in all transactions. In effect, the currency is backed by people’s trust reposed on the guarantor!
The central bank of a country fixes the value of its currency with respect to another currency or to a basket of currencies. The bank manages to maintain value and stability with a set of monetary policy - administering fixed exchange rate and supporting it with forex reserves. The exchange rates vary due to market forces of supply and demand. At these instances, the bank may still intervene occasionally to keep the exchange rate within a reasonable band to give the nation greater autonomy over its economic policy.
It also influences currency value through managing interest rates, money supply and inflation control. The central bank can utilise its forex reserves to support own currency by selling or buying foreign currencies, to prevent appreciation in value, and reduce volatility across the board, encourage trade and promote economic stability of the nation.
The next question popped in his mind “Why at all a fiat money?” ChintaMany had to go back in time to get the answer for this. “Prior to WWII, many currencies were backed by gold but was found to be inflexible during economic crises. The Bretton Woods System was devised to overcome this difficulty and the U.S. dollar was linked to gold, and in turn other currencies were linked to the dollar.
In the year 1971, this system also had to change. Thus, a currency guaranteed combining a legal mandate, credibility of a government and its central bank came into existence. Now, the strength of the currency depended on the effectiveness of monetary policies, efficient management of supply and demand, and economic stability of that nation.
Thus, the modern fiat money became the liability of the central bank of the issuing country. The central bank (or government) of that country promised to “pay the bearer the value” indicated on the note. Immediately, he made sure of this guarantee on a currency note in his possession at that instant. Then a childhood memory came back to him. At that age, he had asked his father about this "I promise to pay the bearer the sum of [amount] rupees" under the signature of the Governor of Reserve Bank of India. That hundred-rupee note was at least one and half times larger than the present one! Conservation of printing paper or economic stress?
The next thought the train carried along was,
“How the other countries promised their citizens?
“The British chose the Chief Cashier of the Bank of England Bank to state the promise. The U.S. chose not to have this explicit "promise to pay” on the note itself, instead implied its backing of full faith, credit and the strength of the economy of the U.S. government.
The value of the Euro currency issued by the Eurosystem (European Central Bank and national central banks) is guaranteed, under the signature of the President of the ECB, backed by the Eurosystem’s commitment to maintaining price stability. Many other countries use "legal tender" as the text on the note to generally indicate the central bank’s guarantees for its value within the national economy.”
“The currency note is a fiat money, and it is the government's order that gives the currency its value. Not backed by a physical assets like gold or silver but on the public trust in the issuing government.” It is the say so of the government that troubled him. Unlike older forms of money, backed by valuable gold or silver, fiat money has no intrinsic value. This sobering thought stopped his thought train, like a deer caught in the headlights.
The thought train cried for some stimulant. Travelling on an imaginary train what else he could do? Just to amuse himself he waited for a vendor to order a cup of hot, watery syrup sold as coffee. ChintaMany had other worries to fret about other than the imaginary coffee.
Could he trust a Central Bank? ChintaMany started his worried focus on the Central Bank’s other functions.
It regulates and supervises but doesn't directly stand guarantee for solvency of other banks but ensures their sound functioning. This intervening ‘but’ worried him more. The central bank in all its benevolence operates a subsidiary - Deposit Insurance and Credit Guarantee Corporation to insures all deposits in commercial banks up to a certain limit, but not the banks themselves!
As his dealings with a commercial bank is limited, he was worried to know how as a depositor and user, his interests are being protected.
His bank can issue bank guarantees on behalf of its customers to other entities, essentially promising to pay if that client defaults. In case his bank fails or goes under, the limited insurance cover given by the central bank offers to bail out customers like him returning a portion of the deposited money. Is it not amounting to back stabbing a depositor? And is the central bank saving that portion of the money to enable him to open another account in another bank?
ChintaMany got little agitated by this act of banks in general and his bank in particular - on behalf of the customers by issuing guarantees to other banks promising to pay if its client’s default. But why, for no fault of him, his deposit is not guaranteed by it? Is my bank’s guarantee to other banks is more valuable than the trust of its depositors?
ChintaMany's thought train stopped at yet another red signal - the central bank gives limited insurance cover for depositors. For the remaining portion, where should the depositor run for cover?" He could not understand this logic - when his money is deposited and it is loaned out, do the central bank and the government hold the “promise to pay" in abeyance? Should not the central bank be more prudent in money matters, which they print and proclaim to protect its value?
Why the above promise to pay does not cover the deposits which are nothing, but the fiat money printed by it? Why not replace the lost deposits with a special edition of ‘fiat money’ to save the depositors from financial ruin?”
ChintaMany's defiant thought train came to a halt at a junction. Lucky it so happened as at the exact time a weighty question confronted him. The central banks keep buying gold and when every one of them try to sell it, what will happen to the value of currencies they all were trying to protect? When the global economy nose dives, which country will have the money to buy the gold sold by the banks and at what throw away price? One sobering thought struck him - in that scenario, the central bank will also suffer the same fate as an ordinary depositor.
When he was about to get off from his thought train, a late worry got into the compartment – the cryptocurrency.
Cryptocurrencies come without any pretense. No guarantees for these decentralized digital assets. Not backed by a sovereign nation or physical asset like gold. Cryptocurrencies operate on a distributed ledger (blockchain) where transactions are verified only by a network of users. Funds are held in online crypto wallets and lack government insurance.
Their value is based on community consensus and cryptographic proof. But many countries permit them for use in transactions. A cryptocurrency's value fluctuates based on market demand, investor confidence, and its perceived utility. Prices can change dramatically leading to significant gains or losses, in short periods.
Investors are vulnerable to volatility, scams, and loss of funds. The lack of third-party oversight makes the crypto space susceptible to fraudulent schemes. It is left to the investor to secure the digital assets as there's no entity to recover lost or stolen funds.
Stablecoins offer a different choice by "pegging" it to fiat currencies, but its credibility still depends on the issuer's reserves and the stability of the ‘pegged’ currency.
Unlike the fiat money, governmental agencies are happy to employ a hands-off approach - regulate crypto exchanges and urge firms to set standards to protect investors. It leaves the investor to assess the inherent flaws of this decentralized financial system before taking the risk. This is the hidden meaning of the hands-off approach of regulating agencies.
ChintaMany had enough of financial jostling in his mind. On a favourable note, he concluded the journey by praising himself for not getting trapped by the allures of a tornado-fall gains in the world of Bit or 'will bite' coins! He had suffered enough nightmares after losing a paltry fifty rupee note. Poor ChintaMany searched high and low, but the note had been lost forever. He shuddered to imagine what would have happened, if it had been in Bitcoins. His wife would have jacked up its value to astronomical figures, although it was in a free fall!
You may wonder, how ChintaMany manages to get away, unscathed, after making this comment. The secret is his better half does not pay any attention to his utterings or writings!
It is now the time for us to know what set off ChintaMany on this journey into the world of finance? The trigger that set him off came from none other than his better half. She chided him for being careless and quoted that incident of the lost fifty rupee note. Inseparable being that he is from worries, he started his thought train to go on a global search and thus landed into the realm of currencies.
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