The Concept of High Powered Money
Meaning of High Powered Money
In the context of supply of money, the concept of high powered money is more prevalent in modern time. In the context of purchasing power of money, there are two types of money. (1) High Powered Money (2) Low Powered Money.
High Powered Money indicates the purchasing power of supply of money. The total purchasing power of people depends on the growth rate and quantity of total supply of money. From this point of view, money multiplier is considered in addition to quantity of currency and bank money. During the given time, the transaction made with the units of money are taken into account e.g. The R.B.I has issued rs. 100 crore currency but if this currency is used as medium of exchange thrice it indicates 100*3 = 300 corers wroth purchasing power. Modern economists call it money multiplier. Money multiplier is as important as the supply of money. Suppose the government pays dearness allowance to employees in cash, the purchasing power in economy goes up. But if the government deposits dearness allowance in the P.F accounts of the employees or pays this in form of term deposits, the growth rate of supply of money decreases. If people borrow loans from P.F. of if banks provide loans against appropriate mortgages or pledges the supply of money increases.
In short, the increase in volume of money creates purchasing power in more or less degree. The increase in supply of money that generates more purchasing power is called high powered money. Financial institutions should take high powered money into consideration to schedule stability in the country along with development.
The concept of high powered money is not new. Dennis Robertson had called it money riding on wings. Fisher consideration in his law of money quality, in the supply of total money, the velocity of legal money and velocity of bank money. In the R.B.I's concept of liquidity of money supply in L4, new M3, L2 and L3 are included. This includes the purchasing power of money. Thus, it indicates high powered Money