Measuring the exact value of money

Syed Zahid Ahmad Often it is said that money value is declining, but we have yet to find any statistical report over it. The Reserve Bank of India (RBI) as monetary regulator in India monitors different monetary ratios like 1) GDP/Broad Money, 2) GDP/Narrow Money and 3) GDP/Currency with public etc. to evaluate the impact of money on income velocity. But still after 75 years of monetary regulations, RBI is not in a position to tell us exact figure of decline in money value because its approach misses some important factors like growth of credit and accrued interest etc. in broad and narrow money. The value of all commodities and services could be measured in terms of money, but money cannot be measured through itself. Since money is used to measure and exchange the goods and services produced in any economy, it is better to evaluate money value in proportion of Gross Domestic Products (GDP). The value of GDP at Market Prices in proportion of Broad Money may reveal lowest value of Money whereas Value of GDP at Market Prices in proportion to currency with the public reveals the highest money value. It would be confusing to denote different money value at a time, so it is desirable to find actual money value at a given point of time. Considerably it is the liquid of money which allows economic transaction in any economy. Since the actual liquidity in the market differs from Narrow Money (M1) and Broad Money (M3), we need to evaluate actual liquidity in the market which enables sale of GDP at market prices. So, it is better to compare the components of M1 and M3 with respect to actual liquidity. Only then we would be able to understand what RBI is missing to evaluate the actual money value. The Narrow Money (M1) constitutes of three factors a) Currency with the public, b) Deposits (other than Bankers deposits) with RBI and c) Demand Deposits; whereas the Broad Money (M3) is equal to Narrow money plus Time Deposits. Since Time deposits pull liquidity from the market and discourages economic transactions, RBI in general considers Narrow Money as total liquidity in the market.
250.00 221.48 200.00 150.00 100.00 50.00 27.07 23.26 0.00 5.42 58.26 52.15

B nk Creditsas%of Na a rrow Money B nk Creditsas%of G P at Ma et Pric a D rk es

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B nk Creditsas%of B d Money a roa Linear (B nk Creditsa %of Na a s rrow Money)

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There are factors increasing the market liquidity which are not part of Narrow or Broad Money. The first is Bank Credits which as proportion to Narrow Money has increased by 194.41% during 59 years (from 27.07% in 1950-51 to 221.48% in 2008-09). Similarly bank credit as percentage of GDP at Market Prices has increased by 46.73% during this period, as it was just 5.42% in 1950-51 which increased to 52.15% in 2008-09.
30.0 20.0 10.0 0.0 -10.0 1.0 22.4

5.9 5.3

The second factor is the accrued interest over Time Deposits which may be used by the depositors periodically or after maturity. Considerably annual interest on Time deposits as percentage of Narrow Money was just 0.98% in 1950-51 which was found 22.41% in 2008-09. This as percentage of GDP at Market Prices has also increased by 5.08% during 59 years (from 0.20% in 1950-51 to 5.28% in 2008-09). Thus bank credits and interest on time deposits when added to narrow money increases gross and net liquidity above and above the narrow and broad money in the economy.
400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 128.0 110.0 25.7 343.9 321.5

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InterestonT e D im epositsa %of GD a Ma et P s P t rk rices InterestonT e D im epositsa %of B d Money s roa InterestonT e D im epositsa %of Na s rrowMoney L inea (Interes onT eD r t im epositsa %ofNa s rrow Money)

1 5 4 5 7 5 0 6 3 6 6 9 6 2 7 5 7 8 7 1 8 4 8 7 8 0 9 3 9 6 9 9 2 0 5 0 8 0

90.5 75.7

Net Liquidity a %of Na s rrow Money Net Liquidity a %of GD a Ma et P es s P t rk ric G sLiquidity a %of B d Money ros s roa Linea (G s Liquidity a %of Na r ros s rrow Money)

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Net Liquidity a %of B d Money s roa G sLiquidity a %of Na ros s rrow Money G Liquidity a %G P a Ma et Pric ros s D t rk es Linea (G Liquidity a %G P a Ma r ros s D t rket Pric ) es

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So if we really want to evaluate actual liquidity in the market, we need to add these two components into the narrow money. To know about net liquidity in the market we have to add Bank Credits into Narrow Money and to get gross liquidity, we have to add accrued interest on time deposits into net liquidity.
14.0 12.6 12.0 10.0 8.0 8.0 7.2 7.1

6.0 5.0 4.0 2.0 0.0 4.3 3.9 4.2 1.3 1.1

The amount of Gross and Net liquidity reflects the gross and net purchasing capacity of consumers. So, to evaluate the exact money value at a given point of time, we need to divide the value of GDP at Market Prices with Gross Liquidity or Net liquidity. The outcome will be actual value of money. After analyzing the available data for last 59 years (1950-51 to 2008-09), we have found that the value of money declines considerably if we divide GDP at Market Prices with Gross Liquidity, or Net Liquidity or even with Broad Money. This decline moderates if we divide GDP at Market Prices with Narrow money. Contrary to these evaluations, if we divide GDP at Market with Currency with public, the value of money is found to be increasing. Who will accept this analysis that value of money has increased during 1950-51 to 2008-09? Better we should consider the value derived by dividing GDP at Market Prices with Gross Liquidity as real value of money which has considerably declined by 2.66 points (from 3.9 points in 1950-51 to 1.2 points in 2008-09). So, to achieve non inflationary economic growth for India, RBI will have to control the growth of net liquidity (instead of Broad Money) as proportion to net GDP growth. If we use this mechanism of evaluating the currency value, we may go on evaluating currencies of different countries. The respective points of currencies in different countries may allow us fix actual rate of currency exchange instead of taking purchasing power parity, SDR or US Dollars as base to calculate currency exchange rates. The value of currency in different countries by dividing their GDP with their gross liquidity may help us evaluate exact currency value of different countries, which may be compared among nations to fix exchange rate of currencies at international level. Lets hope the monetary regulators at international level will start behaving rationally and do justice in protecting values of their currencies and adopt fair currency exchange rates for different countries. 3

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G P a Ma et Pric / G s Liquidity D t rk es ros G P a Ma et Pric / Na D t rk es rrow Money G P a Ma et Pric / Net Liquidity D t rk es Linea (G P a Ma r D t rket Pric / Currenc with Public es y ) G P at Ma et Pric / B D rk es road Money G P at Ma et Pric / Currenc with Public D rk es y Linear (G P a Ma et Pric / B d Money) D t rk es roa Linear (G P a Ma et Pric / Net Liquidity D t rk es )

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