What Gives Money Its Value?

Factual Questions
1

True story. Back in HS government class, our teacher told us US money is backed with basically nothing. Then she gave us a parable. If someone gave you a thousand dollars, what would you do, burn it or spend it.

Anyway money is definitely not backed with nothing. We give money (for example) to needy nations all the time. If money was just something we printed up at random, that would be pointless.

So what is money backed with? And what gives it value? What is our economy based on?

Just a little more background on what I DO know. Up until the late 60’s, 5% of US federal reserve notes were backed with gold. Then we effectively went off the gold standard. Yeah, the world economy couldn’t be based on gold. Cause there wouldn’t be enough to go around. People would starve.

But it has to be based on something valuable. So what is it based on???

:):):):):):):):slight_smile:

2

Is this a serious question?

3

Does it?

The convenient fact that people are willing to exchange money for goods and services. If they’re no longer willing to do that, then it won’t be worth anything.

4

To paraphrase John Kenneth Galbraith:
“money is exactly what you think it is.”
It is worth exactly what it is worth to you. It you are prepared to offer your time or property in exchange for money, or you have need of services or some tangible, or even intangible, thing, and you have some money to exchange for that, then that is what the money is worth to you.

The entire question of intrinsic worth comes down to trust. Really, what it is that makes you happy to have money in your possession rather than say more stuff? That trust is what people talk about as the backed value of the money. Is there someone who will ensure that your money continues to have some value as a token of exchange of goods or service, even in the face of bad behaviour of people who have a great deal more of that money? Behaviour that might act to weaken trust in the value of that money. In most countries, local currency is in some form guaranteed by the government. Usually by guaranteeing that banks that engage in fractional reserve lending will never run out of money if there is a run on funds. In exchange, the government (hopefully) prevents those same banks engaging in bad behaviour (like really risky lending practices). YMMV. Of course in order to prop up banks, if something does go bad, your government has to issue more currency. And then question then is: just what makes the paper printed (or otherwise created) by your government worth my trust? In the end, you are putting your trust in the value of your country. Strong reliable countries with good robust economies are resistant to the problems of printing money, and if the government borrows money (ie issues bonds) a country with good intrinsic value will have no trouble convincing people to buy those bonds, as they trust that they will get their money back. If the trust in your county’s value i erroded (maybe your oil wells are running dry, your government is corrupt, or whatever) things are going to be harder. Trust in your money is going to be eroded. Its value tends to follow.

5

Taxes. It’s backed by the fact that it can be used to pay taxes. So long as you can use money to avoid getting into trouble with the government - so long as money is the only thing that you can use for paying taxes - money will have value.

For something to have value, it has to have an end consumer. Real estate has value because people need to live in it; food has value because people need to eat it; money has value because governments have to take it.

6

Of course, one can say much the same thing about gold. Gold has little intrinsic worth; like anything else, it is only “worth” what someone else is willing to exchange for it.

Money has value because people trust it. If I give you a Dollar in exchange for something, you can reasonably expect that Dollar to keep its value, at least in the medium term. You understand that if you keep that Dollar for a long time, inflation will reduce its purchasing power, so you either turn it back into something you need or lend it to someone who will pay interest that counteracts the effect of inflation.

7

Gold’s value comes from being a raw material for the jewelry industry. If people stopped wanting to wear shiny things, gold would lose most of its value.

If gold looked like lead, it would be nearly worthless.

8

I’d first ask OP what he thinks about Bitcoins. Tell us how you think their value compares with that of U.S. banknotes and we’ll have a better idea how to answer OP.

BTW, when the world was still on a gold standard the “money supply” was greater than the amount of reserve gold. That “excess money” loomed as a threat, with depositors wanting private banks to redeem their deposits, and banks sometimes wanting the central bank to fulfill its gold promises. A partial-gold standard persisted all the way until 1971 when France’s demand for the U.S. to exchange its paper money for gold forced Nixon to finally abolish the gold standard completely.

Paper money is essentially just IOUs, but now instead of the USG promising to give you gold or silver for your $100 bill, it promises only to give you five $20 bills! (Or a fifty and ten fives.) :slight_smile:

Sooner or later you’re going to wish you’d spent that $100 while it still had value. There’s trillions of dollars worth of wagers on the table right now that that day will come later rather than sooner.

9

Are you claiming that it’s inevitable that the U.S. economy will eventually succumb to hyperinflation? Why? Sure, all past civilizations have eventually collapsed with massive destruction of wealth, but I don’t think that gives us good insight in the likely future path of a world economy that will ultimately be drastically transformed by technology - and I’m not talking about iPhones, I’m talking about artificial intelligence increasing productivity by orders of magnitude, post-scarcity, many of the basic principles of economics fundamentally changing. It’s unquestionably true that the world economy will look fundamentally different in 100 years, but I don’t think the only path from here to there involves massive destruction of wealth.

10

By that standard, the Zimbabwean currency should never have become worthless: People in Zimbabwe still had to pay taxes in it, so it should still have had value, so it shouldn’t have hyperinflated away to nothingness.

You were closer to the mark in your statement about gold deriving most of its value from its use as jewelry. Carry that a few steps further: Why is it useful as jewelry? Because people think it looks good. Why do people think it looks good? Because other people think it looks good. Otherwise, it would be the metal equivalent of a mullet, something people used to think looked good but is now unfashionable and worthless. Most people these days wouldn’t wear a mullet despite the fact it’s objectively not much different from the hairstyles they do wear. That specific hairstyle has lost all value, however, precisely because everyone around you thinks it’s lost all value.

If you think that’s mind-blowing, meditate on how we know what words mean.

11

I wish the ambiguous term “wealth” were avoided altogether in discussions like this.

A devaluation of the dollar would transfer wealth from creditors to debtors. It would be likely to have adverse effects that would reduce total wealth (if we could agree on a measure). But what does “destruction of wealth” even mean in your context?

I don’t know whether excessive inflation (suitably defined) or devaluation of the dollar will occur five years from now or fifty years from now. I phrased my comment so “I win” even if it takes 500 years. I’d offer to bet a case of champagne, but I might not be around in 500 years to pay off.

12

Uh, spend it?

13

Well, in the long run we’re all dead. Have another drink.

Your statement above is almost recursive. Both ‘inflation’ and ‘devaluation’ have the same meaning. In this case, it means that one dollar’s worth of value purchases less real wealth.

Remember, money - currency - is in no way wealth. Items, goods are wealth. The phone in my wallet is wealth. The $20 bill in that wallet is simply an accounting measure of potential wealth. A million dollars with nothing to spend it on is valueless.

For the OP’s question? Money has value because we agree it has value. No other reason. Any other stated reason is stuff and nonsense. If you went into a shop and offered to by a widget for $20 and the shopkeeper said he wouldn’t take your bill because he didn’t value it your money would, technically, be worthless there. Your money would no longer have value.

Now, there are some legal issues with that. “Legal tender for all debts, public and private” is written on cash for a reason. It means the government that issued those bills will back up - maybe with force - the value of those bills. But, in truth, any enforcement mechanism is also predicated on a mutual agreement between the people that those bills have value.

Yes, in a really sideways situation a National Guardsman could point a gun at the shopkeeper and force him to take your bill in exchange for what you wish to buy. But that really only works once. Quickly, the shopkeeper and his peers will either shut down or relocate to someplace where such things don’t happen.

As for gold and such? Yes, it has some value for jewelry and electronics. Fine. But nowhere near what it’s currently valued at on the spot market. Over this weekend it’s $1585 per ounce. A ridiculous figure in terms of its basic usefulness.

Because gold is, like the banknote in my wallet, money and not wealth. It’s a reserve of value that is recognized as such only because it is agreed to by many parties. It has addition cache because it has been recognized as such for a long time but it has no more real intrinsic value that a linen banknote or bitcoin, really.

14

It lost almost all of its value because the government printed too many of the damn things, that’s all, Supply and demand are still a factor. That said, I wouldn’t say that Zimbabwean currency hyperinflated into nothingness; it *approached *nothingness, but it never quite reached it. I suppose if someone wanted to pay their taxes with a dump truck full of the stuff, they would have taken it. Its value just got so close to zero that the system that relied on it collapsed.

Sure, that makes sense. But asking why people want things or don’t want things isn’t a question of economics, it’s a question of psychology and sociology. So sure, people may want gold because they were socially conditioned to believe that it’s valuable… or because they actually like them, or because their lizard brains say “shiny=good”. My point is that it doesn’t matter why people want something, only that they want it for itself, and not as an investment or a means of retaining wealth or transferring value or any other theoretical construct. The vast majority of jewelry buyers and wearers will never sell their jewelry. To them, it’s not an “asset”, it;s something they wanted.

And that’s my point: for something to have value, someone has to want it - not as an investment, but for the thing itself. For some things, like gold, how much people want it is strongly dependent on social constructs. For other things, like petroleum, the desire for it is much more pragmatic (people need to fill their cars!). And for things like currency, the want is artificial - by law, the government has to want money. It has to demand, and accept, taxes. That’s what gives it value. What that value actually IS depends on the vast array of economic factors pored over by practitioners of the Dismal Science, but there has to be a core of *want *at the center.

15

If gold had no value for jewelry and electronics, would it still sell for the same price? Would it sell for anything at all? And if not, how arbitrary is its value, really?

My point is, there my be an array of multipliers that increase its value, but if you multiply something by zero, its value is still zero. There has to be a number of some sort of number at the center of the equation.

16

Look at it another way, and you can say that fiat money is backed by everything. I can take the money I earn, and spend it on my rent: Therefore, my landlord is backing money with the value of my apartment. I can take my money, and take it to McDonald’s to buy a meal: Therefore, my money is backed by Big Macs. I can take my money, and use it to buy a car: Therefore, my money is backed by cars, and so on. Even if one of those vendors decided that money was really worthless and stopped accepting it, it’d still be of use to me, because I could still use it at all the other vendors. And likewise, those vendors themselves can use money at a wide variety of other vendors, so it still has use to them, and because of that, they’re very unlikely to stop accepting it.

Alessan, dollar bills have no use in jewelry or electronics, either, nor for nearly any other purpose. And yet, they manifestly do still have value. Being pretty probably helped gold become valuable, and being originally backed by gold probably helped dollar bills become valuable, but once they’re valuable, there’s no reason they can’t remain so. And things can become valuable even with no backing whatsoever ever, like bitcoins.

17

That is simply not true. If I, in my American shop, prefer cowrie shells to your Dollars, there is nothing you can do about it. The Feds or the local police will probably point you to the Treasury which says on its website:

This means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services.

“Legal Tender” is an oft misunderstood term.

Addendum: The same law applies in the UK, but if you turn up with a £20 note that you kept from a visit in the 60s, no shop will accept it. But you can take it to the Bank of England, who will happily swap it for a current £20 note

18

Right! I think the 500-year bet would be almost a sure thing … if there were parties around to collect then. The probability of a major worldwide currency crisis in the next few decades may be small … but it’s much likelier than most of you seem to think.

No. The Thai government, for example, would love to devalue its currency. Imports would become more expensive; local prices might not change much; its exports would be much more competitive in dollar terms. It’s prevented from devaluing by geopolitical constraints more than economic constraints.

19

The value of money is the value of trust. You trust the U. S. Government to accept your dollars as money. So do a lot of other people. So many of them, in fact that other nations use dollars as a measure of the comparative value of their own currencies. At one time the value of the US dollar was a function of the fact that US manufacturing, farming, and international shipping was the largest and most stable in the world. Now it’s based on the fact that American consumers are the largest and most stable market (demand) for the goods and services produced everywhere. (Including inside the US, by the way.) The dollar is highly valued because it is highly valued. It is so huge a market that change is slowed down enough to make plans reasonable, even in the long term. It isn’t permanent. Billions of people believe it is reliable. It takes a long time to change billions of opinions. We have a large government infrastructure that really does nothing other than try to keep the opinion from changing.
What is a dollar worth? It’s worth what you are willing to do, or sell for it. If your opinion is unrealistic, you lose goods, or time. Then you need more money.

20

Along these lines… a good answer to “What is a litre of milk really worth?” is, what it costs at the supermarket. It is fascinating, but intrinsically complicated, to try to work true worth out from first principles.