Dear Money

Publication Date :

24 Jan, 2023

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Table Of Contents

Dear Money Meaning

Dear money, or tight money, refers to a rigid form of money with high-interest rates and is, therefore, hard to obtain. This policy's prime aim is the tightening of monetary policy by the government to decrease the inflation rate in the economy.

Dear money concept allows interest rates to surge high. It makes money look expensive to individuals. Due to the tightening of the monetary policy during this phase, the general public needs help to access loans as they get expensive. However, it does benefit the economy as it helps them to fight inflation.

What Is Dear Money?

Dear money refers to tight money where the central bank imposes strict restrictions to slow down the monetary supply. The main purpose is to compact the inflation effect.
Economist John Keynes pioneered this theory in the 20th century. In 1919, the Bank of England witnessed it.
This theory occurs when the economy has an excess money supply. It makes money seem expensive to the public.
The lending capacity of commercial banks reduces significantly. Also, the central bank imposes high-interest rates in the form of CRR, SLR, Repo, and reverse repo rates.

Dear Money Explained

Dear money acts like a stubborn type that does not blend with the external situation. Instead, the heavy dear money interest rate compels people to change their behavior. Besides, people prefer to hold cash rather than spend it like they would do it in a economic recession phase. Therefore, dear money can happen majorly during the inflation phase.

The history of the dear money concept dates back to the initial 20th century. After the first World War, all the European countries faced huge destruction and a shortage of resources. As a result, the Bank of England and the Treasury removed the official gold standards needed for issuance. As a result, the government started increasing the monetary supply. Because of the excess issue of notes, the money turned cheap. However, despite recommendations by the Cunliffe Committee, former Prime Minister of England, Lloyd George, refused to implement it.

Later, in 1918, Joint Secretary Bradbury and this committee set out certain rules to improve this system. Bradbury pulled down government borrowing along with consumer borrowing. Also, Bradbury again installed the effective gold standard. As a result, the issuance of notes will remain in control. In September 1918, Governor Lord Cunliffe refused Prime Minister candidate Bonar Law's request to lower the rates. It leads to the tightening of monetary policy within the economy. As a result, in 1919, the dear money concept came into existence.

However, economist John Maynard Keynes had already discussed a similar concept in the General Theory. Keynes argued that people with savings must be aware of future interest rates. Yet, by the 1980s, the dear money interest rates had increased drastically. Thus, Keynes' General Theory of Money is correct.

Dear Money Policy

Dear money theory, or contractionary monetary policy, restricts monetary policies. It happens due to excess monetary policy within the economy. As a result, the government and the central bank implement certain measures to control the situation. But first, let us look at the features of this theory to understand the concept better:

To reduce the lending capacity of banks, the central bank increases the Cash Reserve Ratio (CRR).
The statutory liquidity ratio (SLR) also reduces.
The bank rate is also increasing, so commercial banks will borrow less from the central banks.
The reverse repo rate and repo rate also increase, which makes it necessary for banks to keep extra reverses with the Central bank.
They tend to refrain from issuing loans to the normal public, making it expensive for the people. Thus, economists refer to it as tight money.

Dear Money vs Cheap Money

They differ slightly despite using both dear and cheap money in monetary policies. The former compels the government to create strict policies, making it difficult for the people to access money. As a result, the cash flow within the economy reduces.

In contrast, the latter has a simple situation. People can access money freely by taking loans from banks. As a result, the cash flow in the economy increases. While the bank rates in the dear money example increased, the reverse happened in the cheap money situation.

	Dear Money	Cheap Money
Meaning	It refers to strict money that makes money expensive to the public.	Cheap money refers to free money that is easily available to people.
Purpose	To fight inflation	To fight post-recession
Rates	High-interest rates	Low-interest rates
Origin	1919 by economist John Keynes	Found in Britain 1931
Lending capacity	Reduced	Increased

Frequently Asked Questions (FAQs)

What is the impact of dear money on the economy?

Tight money tends to slow down the excessive cash floating within the economy. In addition, the central bank makes it difficult for commercial banks to lend money to consumers. As a result, the spending capacity of the public also reduces.

Who is the founder of dear money?

The history of dear money travels back to the mid-20th century (i.e., in 1936) when John Keynes published the General Theory of Employment, Interest, and Money. It spoke about the consequences of money and interest rates on the economy.

How does dear money affect interest rates?

The central bank tries to tighten the existing monetary policy by increasing the cash reserve ratio, statutory liquidity ratio, and repo rates. So, if banks have extra money left to issue loans, they must keep that with the central bank.

Does dear money happen in both inflation and recession?

Even though it can occur in both inflation and recession, dear money is commonly seen during inflation. While the government uses it to reduce inflation, an excess can lead to a recession. For example, if the bank rates are high for a long time, the money supply will reduce, giving rise to recession.