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The Many Pitfalls of Holding on to Money

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By Dr Maya Mohsin Ahmed [ Published Date: March 21, 2015 ]

Benjamin Franklin once noted that "Wealth is not his that has it, but his that enjoys it". This becomes a scientific truth when wealth is in the form of money. Clearly, money being just paper cannot be enjoyed unless spent. Some people derive vicarious pleasure imagining how they may spend their hard earned paper money. The power of money is that it can be a TV, a computer, or an iPhone before it is spent. Money can be anything you want. However, money is the only valuable we know that loses value in time. When investing money, we need to address inflation, that is, the decline in the purchasing power of money.

Aristotle introduces money as a development of exchange that evolved through four forms. The first is barter or exchange of commodities without money. Barter is inconvenient and Aristotle believes that money came into existence to make this kind of exchange easier by allowing the sale and purchase to be separated in time and space. Consequently, the use of money was the second form of exchange. Once people got accustomed to this, another form of exchange came into play wherein people did not come to market with surplus goods they produced to exchange for things they needed. Their aim was to get money by buying goods and selling them at a greater price. The fourth form is usury, the lending of money for interest or the breeding of money from money.

Though most economists agree with Aristotle that money was invented to replace the barter system, there are others who believe money emerged first as credit in gift economies and only later acquired the functions as a medium of exchange and a store of value. In gift economies, an implicit "I owe you" and social status are awarded in return for the gifts. Graeber proposes that money as a unit of account was invented to transform the unquantifiable obligation "I owe you one" into the quantifiable notion of "I owe you one unit of something".

In 1895, Georg Friedrich Knapp who was a German economist published "The State Theory of Money", which founded the Chartalist school of monetary theory based on two leading principles: A country's money is what the state accepts as payment, not simply what is of general acceptance among the people; a particular metal is selected for the standard of currency not because of the qualities of the metal but to have better control over commercial exchanges with foreign states. Thus, money has no intrinsic value and is strictly used as a token issued by the government. Economists call these tokens fiat money. Fiat money is currency that a government has declared to be legal tender, but is not backed by a physical commodity. Historically, governments would mint coins out of a physical commodity such as gold or silver, or would print paper money that could be redeemed for a set amount of physical commodity. Fiat money is inconvertible and cannot be redeemed. Fiat money is based solely on faith. Fiat is the Latin word for "it shall be". Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. Unfortunately, most modern paper currencies are fiat currencies.

Lien-Sheng Yang dates paper money in China soon after the year 1000. Song Dynasty of China introduced the practice of printing paper money in order to create fiat currency. Paper money allowed governments to spend far more than they received in taxes. Since the Song were often at war, such deficit spending caused runaway inflation. The problem of paper money inflation continued after the Song Dynasty. From then on, nearly every Chinese dynasty upto the Ming began by issuing some stable and convertible paper money and ended with pronounced inflation caused by circulating ever increasing amounts of paper notes to finance budget deficits. During the Mongol Yuan Dynasty, the government spent a great deal of money fighting costly wars, and reacted by printing more, leading to inflation. Marco Polo astonished the Western world when he described the use of paper currency throughout Khubilai Khan's Yuan dynasty. In his book "The Travels of Marco Polo", Marco Polo writes:

"With regard to the money of Kambalu, the great Khan may be called a perfect alchemist, for he makes it himself. He orders people to collect the bark of a certain tree, whose leaves are eaten by the worms that spin silk. The thin rind between the bark and the interior wood is taken, and from it cards are formed like those of paper, all black. He then causes them to be cut into pieces, and each is declared worth respectively half a livre, a whole one, a silver grosso of Venice, and so on to the value of ten bezants. All these cards are stamped with his seal, and so many are fabricated, that they would buy all the treasuries in the world. He makes all his payments in them, and circulates them through the kingdoms and provinces over which he holds dominion; and none dares to refuse them under pain of death. All the nations under his sway receive and pay this money for their merchandise, gold, silver, precious stones, and whatever they transport, buy, or sell. The merchants often bring to him goods worth 400,000 bezants, and he pays them all in these cards, which they willingly  accept, because they can make purchases with them throughout the whole empire. He frequently commands those who have gold, silver, cloths of silk and gold, or other precious commodities, to bring them to him. Then he calls twelve men skillful in these matters, and  commands them to look at the articles, and fix their price. Whatever they name is paid in these cards, which the merchant cordially receives. In this manner, the great sire possesses all the gold, silver, pearls, and precious stones in his dominions. When any of the cards are torn or spoiled, the owner carries them to the place whence they were issued, and receives fresh ones, with a deduction of 3 per cent. If a man wishes gold or silver to make plate, girdles, or other ornaments, he goes to the office, carrying a sufficient number of cards, and gives them in payment for the quantity which he requires. This is the reason why the Khan has more treasure than any other lord in the world; nay, all the princes in the world together have not an equal amount.''

The problem of inflation became so severe during the rule of the Yuan dynasty, that people stopped using paper money, which they saw as worthless paper. Fearing the inflation that plagued the Yuan dynasty, the Ming Dynasty initially rejected the use of paper money and did not issue paper currency until 1375. Again, the value of money rapidly declined and by the early 15th century, paper money disappeared from commerce. There are no known references to it being in circulation after 1455 thus ending China's first experience with paper money. For  the next 500 years, China functioned under a silver economy that ended following Chiang Kai-shek's rise to power in 1928 and the formation of a Central Bank. In November 1935, the Central Bank of China officially took the country off the silver standard, made its bank notes legal tender, and placed the country on a fiat currency.

The 1923 German Inflation (Source:

Date                        Dollar     Marks 
1919                          1          4.2 
1921                          1          75
1922                          1          400 
January 1923              1          7000 
July 1923                   1          160,000
August 1923               1          1,000,000
November 1, 1923       1          1,300,000,000
November 15, 1923     1          1,300,000,000,000 
November 16, 1923     1          1,4,200,000,000,000

Following  World  War I, Germany experienced a disastrous period of inflation. The German government's method of financing the war by borrowing heavily and printing large quantities of unbacked currency began the inflationary spiral. It was compounded by the loss of resources and reparations, which resulted from the Treaty of Versailles. And these difficulties were in turn compounded by political violence. The unwillingness of industrialists and labor leaders to put aside their narrow interests and work for the common good was yet another factor which aggravated the situation. By November of 1923, hyper-inflation paralyzed Germany and only foreign loans and the issuing of an entirely new currency restored confidence and ended the crisis.

Other cases of hyper-inflation is presented in the order of severity in the Table below. In all cases, the government lost credibility so that it could not borrow to finance large budget deficits, and hence had to pay its bills with massive amounts of newly-printed fiat money.

Hyperinflation at a glance (Source:

Country             Date                                            Daily           Prices 
                                                                            inflation      doubled 
                                                                            rate            every
Hungary             Aug 1945 - July 1946                 207 %     15 hours
Zimbawe            Ma 2007  - Nov 2008                  98 %       25 hours
Yugoslavia          Apr 1992 - Jan 1994                  65 %       34 hours
Weimar Germany Aug 1922 - Dec. 1923              21 %        3 days and  17 hours 
Greece               May 1941 - Dec 1945                  18 %        4 days and 6 hours
China                Oct 1947  - May 1949                   14 %        5 days and 8 hours
Peru                  Jul 1990   - Aug 1990                   5 %         13 days and 2 hours
France               May 1795 - Nov 1796                   5 %         15 days and 2 hours
Nicaragua          Jun 1986  - March 1991               4 %        16 days and 10 hours

In 1775, the U.S. Continental Congress issued currency to finance the Revolutionary War. These notes, called Continentals, had no backing in gold or silver. Easily counterfeited and without solid backing, the notes quickly became devalued giving rise to the phrase "not worth a Continental". This brief period marked the first time that U.S. currency’s value was derived solely from its purchasing power, as it is today.

The U.S. Treasury issued demand notes in 1861 to finance the Civil War.  Nicknamed "greenbacks" because of their color, they were the first paper currency to circulate in the United States after the Continentals. The following year, Congress authorized a new class of currency called United States notes or "legal tenders". The mounting costs of fighting the Civil War, and the uncertain financial position of the North cheapened the paper dollar so much that circulating copper, silver, and gold coins were hoarded and almost disappeared completely. The Southern Confederate government also resolved to solve its financial woes by issuing its own paper currency. As the war went on, Southern currency continued to depreciate in value. In spite of the depreciation, the Confederate Congress continued to issue millions of dollars worth of notes. During the American Civil War, the  term "inflation" started to appear as a direct reference to the currency depreciation that occurred as the  quantity of redeemable banknotes outstripped the quantity of metal available for their redemption. At that time, the term inflation referred to the devaluation of the currency, and not to a rise in the price of goods.

During World War II, Great Britain and the United States outlined the postwar monetary system. Their plan, approved by more than 40 countries at the Bretton Woods Conference in July 1944, aimed to correct the perceived deficiencies of the interwar gold exchange standard. The agreement that resulted from the conference led to the creation of the International Monetary Fund (IMF), which countries joined by paying a subscription. The IMF began operations in 1947, with the U.S. dollar serving as the fund’s reserve currency and the price of gold fixed at $35 per ounce. The U.S. agreed to maintain that price by buying or selling gold. The dollar became the most widely used currency in international trade, even in trade between countries other than the United States. It was the unit in which countries expressed their exchange rate. As the stock of dollars held by central banks outside the United States rose and the U.S. gold stock dwindled, the United States could not honor its commitment to convert gold into dollars at the fixed rate of $35 per ounce. The end came in 1971, when President Nixon announced that the United States would no longer sell gold. Fiat money rose to prominence, again, after the collapse of the Bretton Woods system when the United States ceased to allow the conversion of the dollar into gold.

Historically, infusions of gold or silver into an economy also led to price revolution. The discovery of new mines in Latin America and the subsequent drop in the value of noble metals in the 16th century led to a 150 to 300 percent rise in commodity prices. Demographic factors also contributed to upward pressure on prices, with European population growth after depopulation caused by the Black Death pandemic. By the nineteenth century, economists categorized three main factors that cause a rise or fall in the price of goods: a change in the value or production costs of the good, a change in the price of the metallic content in the currency, and currency depreciation resulting from an increased supply of fiat currency.

A comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy is called "Consumer Price Index". From the Consumer Price Index numbers for industrial workers provided by the Labour Bureau of the Government of India, we see that if the representative basket of goods cost 100 Rupees in 2008, it cost 147.77 Rupees in 2012. The All India House Price Index numbers imply that there is a 76.9% increase in the price of housing from 2008 to 2012. The Producer Price Index for gold imply that there is a 95.8%  increase in the produce price of gold from 2008 to 2012. Often, we hear people say that the best way to invest money is to leave it as a fixed deposit in a bank and live off the money fetched from interest. But a fixed deposit of 100 Rupees in 2008 at 10 % interest amounts to only Rs. 146.41 in 2012. Thus, fixed deposits clearly give the least returns compared to gold or Housing.

Nothing can guarantee that your money will be safe. It may be that you will face a land reform of the 1969 kind, when Indira Gandhi's policy placed a ceiling on all personal incomes, private properties, and corporate profits. Or you may lose all your wealth like Saddam Hussein in a foreign invasion. Kahlil Gibran once said that "Money is like love; it kills slowly and painfully the one who withholds it, and enlivens the other who turns it on his fellow man". In other words, if you have money, share it and spend it while it still has some value.

Dr Maya Mohsin Ahmed is a mathematician, artist, and writer. She has a PhD in Mathematics from  UC Davis, California and has taught mathematics in India, Africa, and America. She also earned  a diploma in communications and journalism from Mumbai  university. She has published three fiction books, namely, "Bombay sunshine", "Aspirations", and "Stories of Apoopan and Amooma". Maya now lives in Mangalore, India.

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Drona, India :
Money money money it's a rich man's world is one famous Abba song.

Now read it in Malayalam for the convenience of Mathew saar. [Hint: Just spell the above word money in Kerala accent]
A. S. Mathew, USA :
Great article.

If money or wealth is not giving us happiness and peace of mind, but misery and early death, what is the purpose of money?

Since I am watching some of my wealthy personal friends who are in serious depression due to the lost wealth in their investment; on the other hand, some other very ordinary friends who are happy and sleeping without swallowing sleeping pills, how to come to the real conclusion in life about the fact of life so far as it is related to money?

When we learn the spiritual truth of "being content in life", also through sharing certain portion of the wealth with the desperately needed people of the society, then we can be happy in life. Else, money will be turnings as the biggest pain in life.
"Wealth or money is an excellent servant but a terrible master". When money lands in our heads and try to control our lifestyle, we are totally misguided, and will be ending up in serious misery of life.

The Hunt family in Texas was one of the richest families in the U.S. They tried to get further rich, so worked with another rich person in Iran, bought the silver from all the sources available, thus tried to jack up the price and to create wealth in a hurry. They were caught by the U.S. Government for anti-trust violation, and they lost everything; a few months back, the main player of the Hunt family died in a Nursing home in Texas very poor.
Lawrence, USA :
There is a classic saying "Do not put all the eggs in one basket." Diversification is the name of the game. Mix of fixed deposit, stocks, bonds, real estate, jewelry, antiques or any thing that normally do not depreciate in value.

Investing in your own education/skill development pays off in a longer run, especially in the Western countries where learning is considered as a life long process.
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