Sunday, July 3, 2011

Chaar aane ka gyan

Price is what you pay, value is what you get – Warren Buffet, legendary investor and world's third richest man

The humble ‘25-paise coin’ has been consigned to History. As per an order issued by The Reserve Bank of India, 25-paise coins have ceased to be legal tender after 30th June 2011. Sure, the coin had already gone out of circulation for all practical purposes, but now the RBI has officially confirmed that twenty five paise mean nothing. They’re worthless.

It was not always so. When the 'quarter rupee' coin was introduced in 1835, it was made of Silver. Over a period of time, Silver gave way to Nickel, then Copper, Steel and eventually, the Government found there is nothing the coin can be made of. Everything costs more than 25 paise.  

I have a very clear memory of the 25 paise coin. When I was in school, it could buy you a pepsi cola. The  pepsi cola here was actually an ice candy, available in different flavours like mango or kala khatta, sealed in a transparent plastic tube and sold on the street outside my school. Why it was called pepsi cola, I have never understood, but so it was.  In those days, even the five paise coins were in use.

Why can’t we use them today? How & why does a currency lose its value?

Unlike ordinary mortals like you and me, our Government spends more than it earns. The gap between its expenses and income is filled up by printing money. When the newly printed money is spent, ‘more rupees’ enter the economy and find themselves chasing the same amount of goods and services. This causes prices to rise. (Simple arithmetic here: Rs. X was the total cost of Y goods, so each good cost Rs. X / Y. Now, thanks to the printing press, there is (X + 1) money in the economy, so each good costs Rs. (X+1) / Y). In other words, prices have gone up. You need more Rupees to buy the same amount of goods. Gradually, the smaller ones, like the 25 paise coin we were talking about, don’t buy anything and die a natural death.

Fortunately or unfortunately, The Government of India is not alone in printing money. Governments all over the world have been busy destroying the value of their currencies this way. Only the speed and degree of destruction differs. The US Dollar has lost 95% of its value in the last hundred yearsThe 12 year old Euro is fighting for survival, as member nations are unable to match their expenses with incomes. Greece is on the brink of default, and there are riots on the streets of AthensPortugal, Ireland, Italy and Spain are next in line. An extreme example from recent times is Zimbabwe, which was hit by hyper-inflation five years ago. The inflation rate reached more than a trillion percent, prices doubled and tripled every day and all shops became empty. The Government tried desperate measures, such as depreciating the currency repeatedly (to more than one trillionth of its original value) but failed. Today, the country has no currency, uses the barter system or unofficially, the currencies of other countries.

A Zimbabwean currency note from my personal collection - perhaps the only  instance anywhere in this world of a currency note with an  'expiry date'

The only currency that has not lost its value over extremely long periods of time is Gold. A gram of Gold buys the same amount of food or clothing today, as it did ten or hundred or a thousand years ago.

Meanwhile, the only place where the 25 – paise coin will now have a value is in a numismatist’s collection.

No comments:

Post a Comment