The Value of Money – Comprehension


Wren and Martin Comprehension Exercise 147

Supposing you have to make a payment of Rs. 100, you can do so in rupee-coins; but it would be cumbersome to pay in nickel or copper coins, because they are heavy to carry and also because it takes much time to count them. The Government therefore permits you to make the payment in rupee-notes. What are these rupee-notes really? They are a kind of money, right enough, although they are made of paper instead of metal. You can use them in just the same way that you use ordinary money. The reason why they are made of paper and used is that they save the trouble of carrying metal coins about – of course, paper is lighter than metal and they also save using silver and other metals when they are scarce.

What makes these mere pieces of paper bear the value of the number of rupees that is printed upon them? Why should a piece of paper, with “100” printed on it be worth twenty times as much as a piece of paper with “five” printed on it – and also worth a hundred times as much as a silver rupee-coin? The reason is that Government guarantees that the piece of paper is worth the amount printed on it and promises to pay that amount to anybody who wishes to exchange this paper for the rupee-coins. Also, if you think about it you can easily realize that crores and crores more of rupee-coins would have to be minted, if all paper-money were abolished.

Perhaps you may ask, “Then why not have paper money only ? Why use silver and nickel and copper at all ?” The answer is – because money must as we have already said, be something so useful that everyone wants. Also because the metals are the best form of money; and thirdly because it would be impossible to print just the right amount of paper money that would keep prices at their proper natural level. If any Government prints too much paper money, then prices go up at once. The supply of money is increased and therefore its value (in food, clothes, books, houses, land, tools and everything else) goes down.

You may think at first that it is queer to talk of having too much paper money and that money is so nice and useful that you cannot have too much of it. But if you think that, I am afraid you are forgetting that money is only useful for what it will buy; so it is no good at all having more money if there are no more things to buy with it. The more money there is, the higher will be the prices of everything. The same thing happens with rupee-coins as with paper money. But it is not likely to happen, for this reason : it is very easy to print a great deal of paper money, but not at all easy to increase the amount of rupee-coins. Silver has to be dug out of mines, and very difficult to get; so the amount there is if it keeps very steady and changes very little. In fact that is one of the chief reasons why it was chosen to make coins of.
-Ernest F. Row

1. Why does the Government allow payment to be made in paper notes?
It would be quite difficult and burdensome to pay in silver, nickel or copper coins. So, the Government allows payment to be made in paper notes.

2. What is more valuable, to have 100 rupee-coins in silver or a Rs. 100 note, in paper?
Both are of equal value.

3. If metal is so cumbersome, why should we not have only paper money? Why should we not print as much of it as possible?
We cannot have only paper money because –

  • Money must be something useful that everyone wants
  • The metals are the best form of money
  • It would be impossible to print the right amount of money, which would keep prices at their normal level. If too much money is printed, prices go up at once.

4. What is the real use of money?
Money facilitates exchange of things.

5. Why should the prices of commodities go up when there is plenty of paper money?
When there is plenty of paper money, the value of money goes down and consequently the prices of commodities go up.

6. Why does the Government print only a certain number of paper notes, and not as many as it likes arbitrarily?
The world is a great machinery. Every man is like a wheel which, however tiny it may be, is working for the machinery. The machinery is to provide for the wants of millions of people.