Your money's worth

Every society in between the Stone Age and the fictional future uses money. The Sentinelese, who inhabit North Sentinel Island in the Andamans, don't use money. There are also a few pre-monetary tribes in the Amazon rainforest.

A lot of science fiction, some of it excellent, considers post-monetary societies. The late Iain Banks' novels are set against the backdrop of a galaxy-spanning Culture, which is so resource-rich and so technologically advanced that money is obsolete: anything (including immortality) is available for the asking. Ursula K. Le Guin also indulged in a thought experiment about post-monetary societies when she dreamt up the anarchist, 'syndicalist' civilisation of The Dispossessed.

One way to understand why money is useful to us is to look at the idea of non-monetary 'resource-based economies' dreamt up by the Zeitgeist Movement and The Venus Project. These oddball movements were founded in the early 21st century by folks concerned about inequitable distribution of resources. In these socialist utopias, money will be abolished. All-knowing computers will track all resources. The silicon commissars will figure out what every individual needs, and allocate food, energy, healthcare, etc. in equitable, environmentally sustainable ways. What happens in such a hypothetical society if, for example, a chap who doesn't like chocolate is allocated 100 grams of chocolate per day? Can he trade that chocolate for extra massages (he is only allocated one massage per month)?

He can do so directly only if the masseur wants chocolate and the two figure out a mutually agreeable rate of exchange of massages for chocolates. If the masseur wants a bicycle instead, the computers must figure out how to equate chocolate with massages and bicycles. This is easy: just price all three, using money.

But, then, why not use money anyhow? People use money because bartering goods (bicycles=chocolates) is cumbersome, and bartering services (I fix your computer, you look after my health) more so. Bartering goods for services (chocolates=massages) is a nightmare.

In fact, barter is impossible in a modern, industrialised society with zillions of goods and services. A car has over 30,000 parts. An oncologist spends seven years learning her specialisation. A civil engineer spends five years learning his. If the doctor is incompetent, a patient dies; if the civil engineer is incompetent, a bridge may collapse, killing hundreds. How do you compare the value of these two services versus that of the pizza delivery boy, or the popular musician, or the porn star? Use money.

Money used to be backed by things, ranging from useless bling (gold, precious stones) to useful (arrowheads, bronze ingots, salt, rice). Indian coastal kingdoms used cowrie shells, which is why several Indian languages use 'cowrie' as a colloquialism for small coin. 'Salary' is derived from the Latin for salt. Japan used gold and silver coins, anchored to koku-the average daily rice consumption of an adult. The Finns and Russians used fur pelts.

Gold became the international standard and enabled cross-border trade. Coins from different nations could be compared in weight and purity. The preferred currency of the Mughals was silver. Babar's standard coin (the Shahrukh) contained just under 5 grams of silver. The US dollar was briefly bi-metallic and, therefore, linked to the price of both silver and gold.

The concept of scrip or banknotes became popular as paper technology improved. Paper is easy to carry. If that paper has a promise or a guarantee that it can be exchanged for gold (or silver, or whatever backs the currency), it is even more useful than metal itself. It didn't have to be a sovereign state issuing a promissory note-a merchant whose credit was good could do so. The temptation to print more paper than there was gold in the vaults was high. It also soon became apparent that it didn't really matter if gold and paper didn't match. Nobody actually exchanges paper for gold; they exchange paper for goods and services.

Say, a 16th century monarch had 10 kg of gold. Well, he could print a thousand notes, each backed by 10 grams. Or he could print 10,000 such notes-after all, who was counting the gold in the vaults? If somebody wanted to exchange paper, that person could be fobbed off with more paper. The concept of seigniorage emerged. If it costs, say, 1 rupee to print a note with a face value of Rs 500, well, the state has 499 extra rupees, just like that. Printing paper and putting it out enables such tricks that can help further trade.

Sometimes inflation happened because there was too much money in circulation and people didn't trust the issuer. Sometimes there was deflation. But that was true even if metal supplies increased or fell, for every gold rush caused a dip in currency values. India had a complicated relationship with metals during British rule. The rupee was backed by silver. The sterling was backed by gold. The one rupee coin contained about a tola (11 grams) of silver till the 1930s. The relationship between gold and silver affected the sterling and the rupee.

World War I, its aftermath, and World War II destroyed the concept of backing currencies. There was hyper-inflation after World War I. Then there was a global depression. Most nations abandoned metal standards and currencies became pure fiat, not backed by anything except trust in the state issuing it. The US dollar remained backed by gold (except for a brief period in 1933-34). That was an anchor since every currency, including the rouble, had an official exchange rate with the US dollar. In 1971, Richard Nixon dropped the gold standard and every major currency became pure fiat.

Gold is next to useless anyhow, except as a store of value since we think it's valuable. Money's utility is mostly as a medium of exchange. Money allows strangers to transact without the need to trust each other; they trust currency instead.

The next logical step: why bother to carry physical currency? The cash can be stored in the bank as electronic entries. So long as those electronic bytes can be transferred and converted to cash at need, it doesn't really matter, does it? Strangers can still transact, using cheques, credit cards, mobile transfers, etc. And banks can lend bytes out and boost business and give depositors returns.

Ah, but there's a rub to cashless transactions. Anonymity disappears. Every transaction is logged with an electronic audit trail. There are also charges for cheques and credit cards that make micro transactions inconvenient. So let's say, you go to the monthly meeting of the Delhi Atheists & Rationalists and enjoy a rare steak with a nice bottle of red wine. If you pay for it by swiping a card, some officious busybody, or your vegetarian uncle who prays every day and disapproves of your godlessness, might come around to scream at you. Or, you are sleeping with some random body and you book a hotel room with the card. Well, there could be hell to pay if somebody's significant other gets a look at the card statement.

Or, imagine you're a woman who wants to squirrel away some money escaping the eyes of rapacious in-laws and an alcoholic, abusive husband. You can't do this by putting the money in the bank. You can hide cash. You cannot hide a bank account.

Most tellingly, trust in state and policy consistency must be high if you're going to keep your money dematerialised. You must believe that the state will not suddenly act in arbitrary fashion to freeze your account, or simply expropriate everything. If the said state withdraws 86 per cent of the currency, issues 180 notifications in 20 days and passes a new IT Bill inside five minutes with no debate, it is hard to trust it.

Consider how convenient a cashless system is for the state. It will take 50 days (at least) to freeze and withdraw physical cash from circulation after issuing a fatwa. But a fatwa could freeze any or every bank account in 10 minutes. Or, the government could expropriate whatever it wanted, as easily and instantly as it transfers gas cylinder subsidies. Or, a hacker might clean out your account.

There are ways to transact anonymously, electronically, using crypto-currencies like bitcoin. But that requires a fair degree of tech competence, decent internet connections, and a counterparty who is equally comfortable. India has no data protection or privacy laws and the need for passing such legislation has not been acknowledged by anybody in power. Essentially, if the state wants information on your electronic transactions, it can gather it instantly without seeking the permission of any court. It can also cheerfully release it into the public domain, just to embarrass you.

It's way easier and way safer to use paper. Cash doesn't require an internet connection. It doesn't carry extra charges. It is acceptable to all. It can be kept under a mattress rather than in a bank account visible to shiftless spouse and grasping mother-in-law. Above all, cash offers protection against state surveillance and expropriation, and against hacking.

Japan, which is one of the world's most law-abiding and prosperous nations, has more currency in circulation (18 per cent of GDP) than India (13 per cent cash to GDP ratio). Germany, another law-abiding and prosperous nation, does over 80 per cent of its transactions in cash.

The science-fictional future where India goes cashless may be worse than the one outlined in 1984. Winston Smith used cash for his transactions. Bunty Khanna wouldn't be allowed to.