Have you ever overheard people say that money is simply small green pieces of paper? Well, that’s precisely what they are.
Money doesn’t have any intrinsic worth, except if you like staring at images of dead public heroes, then money has no more value than any other piece of paper until as a nation and an economy, we attach meaning to it.
Then it has value, but the value isn’t inherent, it’s assigned and usually agreed upon by users worldwide but it didn’t always operate this way.
In history, money usually took the form of coins made of valuable elements such as silver and gold.
The value of the coins was then harshly founded on the value of the metals they contained because you can always melt the coins down and use the metal for other purposes and until a few decades ago paper money in various countries was based on the gold and silver standard or some combination of the two.
This then meant that you could take paper money to the government, who would then trade it for some gold or silver based on the exchange rate, which was established by the government.
The gold standard continued until 1971 when President Nixon declared that the United States would no longer trade dollars for gold. This ended the Bretton Woods system.
Presently the United States is on a system of fiat money, which is not attached to any other stock, therefore, these pieces of paper in your pocket, are just simply that, pieces of paper.
Therefore, why does a five-dollar note have value and some other pieces of paper don’t?
It’s really easy, money is great when there is a restricted supply and there is a need for it because people want it.
The reason we want money is that we know other people want it, so then we can use the money to buy goods and services from them. Goods and services are what sequentially matter in the marketplace. People exchange their labour to earn money in the present to buy goods and services in the future.
And if we think that money will have value in the tomorrow, we will strive towards getting some of that.
Our system of money works on a common set of ideas, so long as enough of us believe in the future value of money the method will work and it is doubtful that money will be replaced in the coming future.
If one currency is to be succeeded by another, there will be a period in which you can change your old money for new. This is what occurred in Europe when countries changed over to the Euro.
Therefore, our money is not going to die completely, even though at some future time you may be trading in the money you have now for some kind of money that replaces it.
Money that has no intrinsic worth, paper money called fiat money, which originates in Latin, where it’s the imperative mode of the verb facere, to make or become.
Fiat money is money whose purpose isn’t inherent but called into by a human system and in the United States, it’s called into being by the federal government, which demonstrates why the expression “backed by the full faith and credit of the government” which indicates what it states and no more.
The money may have no inherent value, but you can trust using it because of its federal reinforcement.
Why else might we consider that our money might not be of value to others in the future? Well, what if we thought our money wouldn’t be nearly as valuable in the future as it is today?
This increase of the currency, if it became superfluous, then makes people want to get rid of their money as quickly as possible and inflation and the normal way citizens respond to it can cause great suffering for an economy.
People will not sign into lucrative deals which involve future payments because they’ll be uncertain what the value of money will be when they get paid and business activity piercingly weakens because of this.
Inflation can cause all kinds of other inabilities, from the cafe down the road adjusting its costs every few minutes to the homemaker taking a wheelbarrow full of money to the bakery in order to purchase a loaf of bread.
The belief in money and the constant value of the money are not innocuous things.
If citizens lose confidence in the money stock and think that money will be worthless in the coming economic activity, it can then grind to a standstill.
This is one of the principal reasons the US Federal Reserve works diligently to keep inflation within the bounds, a little is really good, but too much can be destructive.
Money is actually good, so as such is governed by the premise of supply and demand and the value of any good is defined by its supply and demand and the supply and demand for other goods in the marketplace.
And a reward for any good is the sum of money it takes to get that good.
Inflation happens when the price of goods rises, in other words, when money becomes less important relative to those other goods.
This can happen when the amount of money goes up and the amount of their goods goes down.
The principal cause of inflation increases in the supply of money but inflation can happen for other reasons, say if a natural catastrophe damages shops but left the banks intact, we’d expect to see an instant increase in prices, as assets are not limited relative to money.
These kinds of situations are unique and for the most part, inflation is created when the money supply increases quicker than the number of other goods and services.
Money only has worth because people think that they will be able to exchange this money for goods and services in the future and this idea will only continue so long as people don’t fear future inflation or there is a collapse of the issuing agency and its government.
Our money only has worth because we maintain it does.
A dollar bill is simply a worthless bit of green paper in your pocketbook unless everyone else thinks it’s worth a dollar but green pieces of paper aren’t like pieces of silver or gold, you can’t boil them down to make anything of value.
Money only means something because we as a culture acknowledge that it does and that’s why we feel happy taking cash as payment for the work that we do, rather than gold or timber or something else.
But remember, money is great just like anything else and goods are subjected to the dictates of supply and demand. If you have a lot of widgets and no one really wants a widget, then those widgets would be worthless.
The same is true of our money, if there’s too much money out there, that money will be used to purchase things and then charges on goods like a four-star meal will rise swiftly and each dollar won’t have that much value.
That’s inflation but the reverse, deflation is just as harmful.
So, why does money have value? Because everybody says it does!