It’s 26 January! Yep it is one of the day every proud Indian wants to celebrate. I remember my school days when i used to get all dressed up in white uniform & my favorite shoes, running to the school ground for Flag Hosting ceremony with all the excitement! Weather never felt cold it felt patriotic!

So let’s talk about money now, everyone seems to love it! yeah we love it but does it ever bother to you how it really works? i mean something is there which gives money it’s value.

Money is not a thing which came into existence yesterday, it seems that every civilized person in the history has used it. It can be traced back to as far as 2500 B.C., Egyptians created metal rings that they used as money, and actual coins have been around since at least 700 B.C. when they were used by a society in modern-day Turkey. Paper money didn’t come about until the Tang Dynasty in China, which lasted from A.D. 618-907. Till late 1900s shells were accepted as money in India, Yes! you could buy stuff in exchange for shells, isn’t it great?

So, what exactly gives our modern forms of currency whether it’s an American dollar or a Indian Rupee it’s value? Unlike early coins made of precious metals, most of what’s minted today doesn’t have much intrinsic value. However, it retains its worth for one of two reasons.

In the case of “representative money,” each coin or note can be exchanged for a fixed amount of a commodity. The dollar fell into this category in the years following World War II, when central banks around the world could pay the U.S. government $35 for an ounce of gold.

However, worries about a potential run on America’s gold supply led President Nixon to cancel this agreement with countries around the world. By leaving the gold standard, the dollar became what’s referred to as “fiat money.” In other words, it holds value simply because people have faith that other parties will accept it.

Today, most of the major currencies around the world – including the euro, Indian Rupee & British pound and yen – fall into this category.

More recently, technology has enabled an entirely different form of payment: electronic currency. Using a telegraph network, Western Union  completed the first electronic money transfer way back in 1871. With the advent of mainframe computers, it became possible for banks to debit or credit each others’ accounts without the hassle of moving large sums of cash. Now even small grocery shops & even pani-puri wala bhaiya accepts PayTm.

Because of the global nature of trade, parties often need to acquire foreign currencies as well. Governments have two basic policy choices when it comes to managing this process. The first is to offer a fixed exchange rate.

Here, the government pegs its own currency to one of the major world currencies, such as the Indian Rupee or American dollar or the euro, and sets a firm exchange rate between the two denominations. To preserve the local exchange rate, the nation’s central bank either buys or sells the currency to which it is pegged.

The main goal of a fixed exchange rate is to create a sense of stability, especially when a nation’s financial markets are less sophisticated than those in other parts of the world. Investors gain confidence by knowing the exact amount of the pegged currency they can acquire, if they so desire.

However, fixed exchange rates have also played a part in numerous currency crises in recent history. This can happen, for instance, when the purchase of local currency by the central bank leads to its overvaluation.

The alternative to this system is letting the currency float. Instead of pre-determining the price of a foreign currency, the market dictates what the cost will be. The United States is just one of the major economies that uses a floating exchange rate.

In a floating system, the rules of supply and demand govern a foreign currency’s price. Therefore, an increase in the amount of money will make the denomination cheaper for foreign investors. And an increase in demand will strengthen the currency – that is, make it more expensive.

Best example for such currency is Bitcoin it is really a beautiful concept of which I will talk in my later article.

While a “strong” currency has positive connotations, there are drawbacks. Suppose that the dollar gained value against the yen. Suddenly, Japanese businesses would have to pay more to acquire American-made goods, likely passing their costs on to consumers. This makes U.S. products less competitive in overseas markets.

this is how inflation affects..

Most of the major economies around the world now use fiat currencies. Since they’re not linked to a physical asset, governments have the freedom to print additional money in times of financial trouble. While this provides greater flexibility to address challenges, it also creates the opportunity to overspend.

The biggest hazard of printing too much money is hyperinflation. With more of the currency in circulation, each unit becomes worth less. While modest amounts of inflation are relatively harmless, uncontrolled devaluation can dramatically erode the purchasing power of consumers.

If inflation reaches 5% annually, each individual’s savings – assuming it doesn’t accrue substantial interest – is worth 5% less than it was the previous year. Naturally, it becomes harder to maintain the same standard of living.

For this reason, central banks in developed countries usually try to keep inflation under control by indirectly taking money out of circulation when the currency loses too much value.

Now you know how money works, please be a responsible person by respecting Currency Notes by not writing stuff on them or damaging them because they’re incarnated when they go back to banks & new notes have to printed & it indirectly affects economy of country.

Stay tuned!

Jai Hind!

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