The Truth about Money

Assalamu ‘Alaikum

The Truth about Money

In 1982 the fresh graduate’s salary is RM1,200, his cheapest new car is RM14,000 and a house will cost RM60,000. Today a fresh graduate earns just RM1000 more at RM2200 but the cheapest new car is RM40,000 and a new house is RM300,000. This has little to do with increasing steel and building materials prices but more to do with the way nations create money which is not really explained to the populace. Happy to get his job the fresh graduate is informed he will be paid RM2200 per month. For the moment we will not even think about the fresh school leaver who earns a wage of RM1000 per month. Now the graduate employee believes one year from now he can buy the same number of goods with his salary as he can today. Nobody informs him the truth about money and he believes that money is just paper currency and coins and that somehow governments will always ensure the nation’s total amount of money will remain unchanged.

In the early days of banking, banks gives gold receipts to people who deposit gold in their vaults. The gold depositors discover they can use the gold receipts as money as it is readily accepted for purchase of other goods. These gold receipts then became money. Then the banks realised they could do the same with lands and other assets pledged to them.

If they can get people to deposit cash with them by promise of receipt of interest they can use these deposits to lend to other people at higher interests. To their delight they found  the borrowers do not want to receive the loans in cash; the borrowers will be happy to be given a chequebook with the bank making an accounting entry that says the borrower have that money. At first the banks ensured the loans do not exceed the amounts of cash deposited. Then they realised through experience they need only hold a certain amount of cash in their vaults; not all their depositors will come to the bank to withdraw cash at the same time. If that is the case then they had the bright idea that they can lend many times more cash than they actually have. All borrowers want are cheque books not actual cash and if everybody uses chequebooks to make payments then there need to be only a good clearing system; not much cash is required to be available.

Hence the birth of fractional reserve banking where a RM1000 deposited in a bank and lent out to a borrower less the statutory reserve can create a chain of further depositing and lending that will create RM25,000 in money out of thin air. If the figure is RM1billion then the thin air money is RM25billion. Hence over a period of time nations’ money stock will continuously increase and that is why the fresh graduates today have to pay so much more for his car and his house.

Nations’ governments also add to a nation’s money stock without the graduate employees realising it. When governments spend more than the revenue they earn they have to sell government bonds to cover the deficit. In other words they give their IOUs, take cash from bondholders and use it to pay the deficit spending. At the end of the year when the bond matures but there is still another budget deficit they issue new bonds to pay the existing bondholders as well as another series of bonds to cover the new deficit. If the volume of bonds is too high and they print paper currencies to settle some of it this is called monetisation of budget deficit which just adds further to the nation’s money stock.

With the double whammy increase in the nation’s money stock from fractional reserve banking and monetisation of budget deficits the fresh graduate soon finds his RM2,200 per month is buying less and less things. Shouldn’t we tell him about what is happening to his purchasing power?

There is also much reduction in the quality of products as suppliers have to reduce quality in order to keep their products within the price range that wage earners can afford. Keropok or fish crackers no longer taste nice as more flour replaces fish in its ingredients. In rural Indian Muslim restaurants the delicious bawal curry is no longer served replaced by the cheaper sardine curry. Fresh graduates no longer buy new cars but second hand ones; they no longer buy houses but small apartments. Some continue to stay with parents after marriage creating the new phenomenon called sandwiched families with three generations living under one roof.

We really ought to be thinking about a new money system where there are no such wild increases in the nation’s money stock. A return to gold is the obvious solution. If disbelievers say there is not enough gold to fund world trade let’s put our thinking hats together; it’s really not beyond our intellect to solve the issue. What appears lacking is the initiative to overcome the inertia to solve the problem. When our granddaughter starts work in 2020  at a salary of RM5000 per month but a new car is RM100,000 and a new house is RM1 million, do we say to her sorry we were too busy to solve the problem during our time to prevent it from reaching her?

Should not we be thinking of indexing wages and salaries? The people followed their government’s advice not to over unionise lest it affects the nation’s economy. Shouldn’t the people be helped in return now?  Yes we are proud of national corporates taking billions to retained earnings every year, but we paid for it with our sweat and tears of an untold amount of the erosion of our spending power.

Zahid