What is the Value of Money?
November 25, 2009 8 Comments
I have been doing a bit of reading lately about money. I’ve begun to wonder about the way we value our currency. What is it that gives money its value, or even gold for that matter?
I’ve decided that money in and of itself possesses no real value but rather, it is the belief in money that gives it value. Things like gold and diamonds are nothing more than metal and minerals and without human demand are essentially worthless. Money is nothing more than ink and paper, coins are simply bits of pressed metal, no more valuable than the morning newspaper.
Is money worthless, then? Money is only worth as much as the value people place on it. Money is only valuable if two or more people believe it to be.
To back up my hypothesis, I decided to try to pay for some of my purchases with foreign currency. Why not, it is money, right? I laid my blue bill on the counter for the cashier and he picked it up looking a bit puzzled.
“What’s this?” he asked me.
“Money,” I responded, amused with the situation.
“I’m not sure we accept that here,” he said.
“Really? You don’t accept money?”
He put the bill back on the counter and I paid with an acceptable form of currency; plastic. Some people might not think that this proves anything beyond foreign currency not being an acceptable form of payment in our country. Maybe, but I think there is something more than such a simple explanation.
We don’t share the same faith in foreign currency as we do our own dollar, thus rendering it worthless in our markets. Without the belief of worth there is no worth. A dollar bill is not inherently valuable. Our faith in our currency dictates its value.
Still not convinced? In 1792, Congress passed the Coinage Act which established the US Mint and established the dollar as the official form of currency within the United States. At the time of the act, the value of the currency was directly linked to weights of silver and gold. This is no longer the reality. The United States ended the Gold Standard in 1971. We now operate on a fiat system which means that our currency is not backed by anything other than people’s faith in the system.
If money is more than paper and metal and really is valuable, why do economies collapse? Why does the purchasing power of the dollar fluctuate?
Money is only as valuable as people believe it to be. Value is a mental condition and not a physical reality. Without faith in the currency, it has no value. We do not believe in a blue bill, it is worthless in our economy.
What if we lose faith in our own dollar bill?
***
Please visit the ”Carnival of Personal Finance #233: Welcome to Webcomics” which features links to numerous personal finance blogs about frugal living, money management, debt & investing, including this site!!!
About Steven
Money is a convenient means of payment. Imagine if money is declared wortless and we had to return to bartering!
Modern electronic payment systems are gradually replacing currency and coins.
I’ve always understood money as basically a form of I.O.U. You earn it as a symbol of your time spent working and give it other people as payment for theirs. Is this not the basis for any economy? It is completely relative to your location. For example, I make less in South Dakota than I would be making in California but other things cost less, such as housing and gas. If it takes 2 people to believe in it, then my employer & I both believe my time is worth a certain amount and that is more or less than other people’s time according to their own abilities and the worth of the abilities they have given their context. I think of money as the middle man, because even if I had something tangible, like a bushel of rice, I don’t want to have to trade it 8 times for a pair of shoes. I don’t think of money as a fallacy. I think money is VERY necessary unless you are wholly self sufficient or want to live in a commune. Plastic is just the new form of middle man as it takes into account your earning capability in the future, not what you have already done.
I think different currencies are also necessary, as long as there are different economies and classes. A belief in our own money is a belief in our own economy. And of course your cashier didn’t know the relative value or the fee to exchange the currency you were trying to use. But I expect you know all this already. Were you trying to get at something bigger, like the national debt or inflation? Things like diamonds are valued as long as they are rare, if the market is flooded their price drops. As it does when there is no demand…which is a kind of crazy idea I suppose. But it’s one we see every Christmas with new Tickle-Me Elmo dolls & Cabbage Patch Kids.
Also (on another long-winded note) there are several countries that still do barter and take no form of card. However, the dollar is often still accepted (usually rounded in a non-beneficial way for you). I have to say bartering is damn annoying because, as the obvious foreigner, you will always be paying more. Can’t complain too much as I usually do make more than locals, but you also don’t want to just piss your earnings away. I am in Phnom Penh right now and they take 3 or 4 forms of currency, but I don’t think this is the norm. My pockets are bulging with the equivalent of $5!
p.s. I apologize that my comments are sometimes as long as your articles :/
I’m not arguing that money is not necessary or that it isn’t “real”. It is real and our economies operate because of it. I guess what I am getting at is that money has no value and that nothing, even gold and diamonds, have “value” except in circumstances where man has placed a value on that object in his or her mind. Hence my statement, “Value is a mental condition, not a physical reality.”
It is hard to contemplate this idea with the way our society and world operates based on the fiat money system. We actually believe that these things possess value because we can use them as a way of getting things we need or want. We exchange our time for it, we kill people for it, we use it as a status symbol. Money plays a huge role in our human lives, undoubtedly, but take away our belief in its value and it is of no more value than toilet paper.
I was reading a great article the other day about fiat money systems and learned something very interesting. Every fiat system in history has eventually failed. From Roman times to very recently (Russia…Ruble). The value of our own dollar bill has dropped something like 94% since the early 1900′s.
I’m not saying that we shouldn’t use money because in our society, money is necessary to function at a comfortable level. We need to work to earn money in order to survive and enjoy the finer things in life but I think it is important as well that we really consider the reality of money so that we aren’t spending all our time chasing after nothing more than an idea. It is sort of like the idea of being rich. Are you rich because you have digits in your bank account or are you rich because you are living a full and joyous life?
Like everything, there is a balance to be found. I’m not going to be burning my dollar bills in the desert anytime soon but I will not prostitute myself at a job that I hate to earn money to buy Stuff I don’t want to impress people I don’t like (you may have heard that before). I hope to be able to find a balance where I am able to enjoy my moments here on earth and function effectively and efficiently in our society. Money is not the ultimate goal (though I will plan for retirement and be in debt to no one).
Hope this helps explain a little bit about the intent of this article, I didn’t really explain my motivations at all, I just wanted to share a concept.
Yes. I am glad you elaborated further. “It is sort of like the idea of being rich. Are you rich because you have digits in your bank account or are you rich because you are living a full and joyous life?” <-Definitely should have been included in your article. Money is a crazy concept when you try to consider the worth of something. The fluidity of value is definitely lost on us in our Western world. You may not prostitute yourself at a job for Stuff, but will you do it to pay the bills and keep food in your stomach? I think it is a strange thing indeed, that farmers provide such necessary & basic things to us but are no longer seen as filling the most important niche.
But there are so many side tangents you can get lost on when you try to consider all this money stuff. In your reply were you trying to say the failure of some economies is based on the fiat monetary system? There is often much more at fault than that, I am sure. I think perhaps the 94% drop in our currencies value is a relative thing, as the dollar is still pretty strong. What was the article that said that? I am no business/financial type but I don't trust anything that sounds like weak inductive reasoning.
In Cuba, the farmers are not second rate citizens, which I think is great. We don’t appreciate the people who put food on our tables, like it magically appears in the grocery store. The difference between the United States and Cuba is that Cuba has faced a situation where they faced starving to death due to the break up of the Soviet Union and the lack of oil importation. We’ve not experienced that yet and I think that because we’ve never faced the possibility of famine that we tend to take that aspect of our lives forgranted.
Would I prostitute myself to feed myself and provide basic necessities? I hope that I will never have to be in that situation again. I’m doing what I can in my own life to hedge against it but if my situation required me to earn income in order to survive, I’d do what it takes to make ends meet. I’m not an uppitty person but I sure do hope that all of my efforts today will pay off in the future.
I’m not saying that financial systems collapse BECAUSE they operate on the fiat system just that historically, they all have failed. Whether there is a correlation or not, I couldn’t say.
Coming out of SE Asia I am starting to actually realize that we don’t really know what poor is. And how relative it is. If everyone there is poor (according to us Westerners) then they’re not really poor unless they can’t meet their basic needs of food and shelter. It is surprisig how little people actually need to get by on. There, people literally do prostitute themselves to feed their family. Vietnam being a socialist country we could easily get lost exploring the differences in socialist and communist theory and implementation; a conversation of which, Cuba would definitely become a part.
Here is an interesting article that is a little more in keeping with your original subject. Pennies and the debate of them being “useful vs. used.” They’re physically not worth what goes into making them. As a side note, we stopped at a gas station in Wyoming this morning and when I went to pay the clerk with change he saw I had a 50 cent piece in my pocket and said he’d give me a dollar for it. I guess our currency does a have a little bit of fluidity to it.
http://www.npr.org/templates/story/story.php?storyId=120358186&sc=fb&cc=fp
Was it a Kennedy 50 cent piece? ;-)
I have had opportunity to be amongst what people in the United States would consider to be poor while I was in Argentina. You know what? Despite not being “rich” by American standards, these people were genuinely appreciative of the things that they did have in their lives. I have never been to any place where poverty was so bad that the people had to prostitute themselves to feed their family but I am fully aware that the situation exists, even in our own society. We don’t need to go to Vietnam to see it. Here we have the opinion that the poor are a result of the choices they have made in their lives and that people are poor only because they chose to be. Instead of lending a hand to those in need, we stick our noses in the air and pretend that it is their problem and that we worked hard for what we have, so they can too. It is sad.
It is sad because even those of us who are buried in debt, and can’t afford to buy a DVD or new pair of pants still have it so much better than so many people in this world. We have food, shelter and clothing. Friends and family, safety and security, yet we feel like we have things so rough if we have to restrain ourselves in any form or fashion. Since I’ve began to take a minimalist approach in my life, I’ve found just how MUCH I have and how little I actually need. Even after eliminated most of my personal possessions, I still feel like I have so much more than I really need. I’m grateful for this and I now realize that I don’t need very much in order to be happy with my life.
How can we change our culture of consumption? How can our society turn from one where we never feel satiated to one that finds comfort in what we have? I don’t have the answer. The best I can do is to share my experiences and opinions with the world on this forum and hope to help people realize how full and rich their lives already are, no matter how little they feel they might have. Its a matter of perspective.