When I was in the 5th grade, I learnt the basics of monetary theory from a local shopkeeper in Assam. Here is what happened.
At that time, my father got posted to a remote place in Assam’s Kamrup district. There, the most prominent shop in the local market was a grocery store which we used to simply call “Marwari shop” (Marwari ki dukaan).
When we went to this Marwari store, sometimes, if this shopkeeper did not have the exact change, he would just take a piece of paper and write the due amount, and sign below it.
And his reputation was so strong that any local shop would accept his note just like actual currency!
Do you realize what he just did? He effectively created a local currency almost the way the RBI did. In fact, just look up a 20 rupee note and it has a promise – “I promise to pay the bearer the sum of twenty rupees”, below which is the signature of the RBI governor, who makes that promise.
That is pretty much what that Marwari merchant did by signing below the promised amount.
Now obviously, the parallel between the Marwari and the RBI Governor is not perfect, but it does give an intuitive feel of what money is. And only when we have intuition do we really understand something.
The fun thing is that there is so much one can learn from the world around us – we just have to observe keenly.
Life is often the best teacher. No?
– Rajan