What is money?

This simple question seems to have provoked quite a bit of ill-will. In these two previous threads:




we had some severe misinterpretations over this relatively simple concept. In hindsight after rereading these threads, this is in large part my fault. It is difficult to prove a negative.

I would like to try again. Rather than discussing what money is not, I’d like to discuss what it is. Hopefully then, it will become quite clear why money does not have certain properties.

So, here goes.

Money is a concept. It does not actually exist. That dollar in your pocket is currency, not money.

Basically, money is supposed to have ACTUAL VALUE. This actual value gives people confidence in it. This confidence is why people are willing to except in return for their hard -won goods and services.

An example is this. If you were selling your car, and somebody attempted to pay you in dollars from “The First Interplanetary Bank of Neptune,” you would probably not accept this form of payment. You would have no confidence that Neptune dollars were worth anything. You would probably ask for “real money.”

In order to produce confidence in it’s currency, the US Government actually asserted that dollars were worth something.

A dollar represented a certain amount of Gold which was safely held in reserve by the government. Gold has actual value. Theoretically you could take your dollars and cash them in for Gold anytime you wanted to.

This brought about an interesting problem. Money, by virtue of its lendability can create more money. Consider the following:

You take your gold backed dollars to the bank and deposit them. It’s safe, and the bank pays you interest, so why not? In order to give you this interest, the bank takes a large portion of your money and lends it to somebody else at higher interest (they pocket the difference which is how a bank makes money.) If that person spends the money on a used car, the seller of the car may very well take that money back to the bank and deposit it where it will be lent out again. Both depositing parties will have cash in the bank, but there is only enough gold in reserve to pay one of them! Because money can get lent out many many times this problem is worse than it appears. If everybody suddenly decided to cash in their dollars for gold, there might only be enough to pay people 1/10 or less of what they were actually entitled to.

This means that the statement that your dollar was backed by gold was actually a lie!

“No Problem,” said the government, “the chances of everybody wanting to cash in their dollars for gold at the same time is very slim, and just to make sure we will make it illegal for people to hoard gold.”

What this meant was that your dollar was exchangeable for gold upon demand, but that it was illegal to demand gold for your dollars!

After people got used to this little catch-22, the government took the next step. They stopped pretending that the dollar actually represented gold. They took away the exchangeability (big deal, you weren’t allowed to use it anyway,) and nowhere on your dollar did it actually say that it was worth so much gold.

At this point, the value of a dollar was still officially tied to gold. It was believed that if our currency did not have a stated and inherent actual value, people would lose confidence in it, so the government set the value at “X,” and recquired everybody to pretend that it was actually worth “X.” You were legally bound to accept it at this value.

Beleive it or not, this worked just fine. For a time. The U.S. and its citizens did business throughout the rest of the world though. The rest of the world was quite happy to accept our dollars, but the quaint notion that you couldn’t actually have the gold that the dollars represented didn’t go over too well. In order to get the rest of the world to accept U.S. currency, the government actually paid foreign countries in Gold for their U.S. dollars.

At this time the balance of trade was strongly in the favor of the U.S., and everything was just fine because we were taking in more than we were paying out. We didn’t actually have to shell out any gold. We just said that we would. THe U.S. dollar was the “Gold Standard,” a phrase that lives on today. Everybody wanted U.S. dollars, and the U.S. actually started holding gold for other countries, such was the confidence in the dollar.

Eventually though the balance of trade went the other way. The U.S. had to start shelling out gold. Pretty soon it became clear that the U.S. would run out of gold, but because of the balance of trade there would still be just as many dollars out there (if not more,) than there were before, and no gold to back them up!

“Tricky” Dick Nixon basically said “Gold, what Gold?” He cut the dollar lose from the gold standard, and the value of the dollar fell, and fell. I still remember the news reporting this as “the price of gold gowing up.” Look at it this way: If you jump out of an airplane, is the airplane going up, or are you going down?

The falling dollar meant that things got really expensive if all you had to pay for them was dollars. Within a few years the price of everything doubled, and kept increasing. SInce everything cost a lot more, the government had to print more money so that people would have enough to buy things. Nobody wanted dollars everybody wanted assets. Inflation, and recession were inevitable, and they hit this country hard.

Eventually the dollar began to recover. America was after all still producing stuff, and that stuff had to be paid for, didn’t it? That stuff got paid for in dollars, so it must have some use. Goods and services achieved balance with the money supply, and again their was stable interchangeability between the two just as their was during the days of the gold standard.

What does this mean?

It means the dollar is fiat money. Officially, it’s not worth anything, or exchangeable for anything. We just print the stuff.

We accept this seeming lunacy because it is extremely convenient.

The dollar is an agreed upon substitute for value. We all pretend that is worth something, and when we accept dollars as payment for say a used car, we are accepting them in lieu of actual value. We do so because we believe that somebody else will eventually accept them for something of value we want to purchase. After a while we start forgetting about the “in lieu” part and believe that the dollar actually is valuable in and of itself.

If we all believe the illusion, it becomes real, and the dollar has whatever value and properties we ascribe to it.

Everybody is happy because it works.

The Treasury Department and the Federal Reserve go to extraordinary lengths to keep this assumed value of the dollar relatively stable, as do similar institutions with the currency of other countries.

Our country has done such a good job at this, and the dollar has been so stable that we have once again become the “gold standard” for the world.

How and what techniques countries use to maintain this illusion of stability (with varying degrees of success) is a topic for another day.

What I’ve tried to accomplish is this:

In another thread, a poster jokingly mentioned that perhaps airplanes were held up by the “happy thoughts” of the passengers inside them.

Well, when we are talking about money, this is the literal truth. The value of the dollar is supported by the happy thoughts of those that have them, and those that want them. Nothing else.

Okay Scylla, here’s my take on this insanely long OP (but I read it all, hot-dammit!)

Back in the day, when a barter economy abounded, Person 1 would do a service for Person 2 if Person 2 did something for Person 3, which would prompt Person 3 to do something for Person 1.

Now we live in a country with millions of people. Instead of having a little document that says “I sold a goat to Person 3,452,009… do something for me and he’ll help build your house”, we have this thing called a “dollar” that basically implies that the possessor of that dollar did something for someone else, and his giving it to you would mean that those someone elses would do something for you.

Money is just an idea that’s accepted on popular grounds, for reasons of simplification, that currency would be worth a service based on the probability that the holder of the currency also performed some service to get the favor of said currency.

Confusing, yes. But just try to remember how many different ways you can pay for a TV in a true barter economy to put it into perspective.

Two great posts above. Thanks.

Now my $.02:

Money is a way, a vehicle, a method used to transfer goods and services. For example-

A lives in Milwaukee and has a refrigerator he no longer wants, but would like to have a piano.

B who is in New Orleans, has a piano he longer wants, but is looking for a 65 VW Bus.

C in San Francisco has outgrown his hippie lifestyle and would like to divest himself of his 65 VW Bus. Upon moving out of the bus and into an apartment, he discovers he must furnish his own refrigerator.

If there were no money, how would this exchange be accomplished? C drives from San Fransico to New Orleans, trades the 65 VW bus for the piano. He then rents a truck and transports the piano to Milwaukee, trades it for the refrigerator, rents another truck and hauls the refrigerator back to SF. Whew! (would have been a lot easier just to call Sears, have them deliver the refrigerator and go on the $15 per month plan–no wait! there’s no money! sh*t!)

So money is just a way of ‘compressing’ value in an easily transferable form. It doesn’t have any intrinsic value, nor is it a ‘measure’ of worth.

Thank you, Sneevil…

“Money” is essentially “Barter”, except compressed into a .zip file.

I’ve been using the computer for too long.

Entertaining OP, but not completely accurate. If it were, then the solution for countries with extremely weak currency would be for people in those countries to have happy thoughts. Just think: Inflation in Mexico could be held in check if Mexicans would only come together and be happy about the new peso!

A lot of the things you said about money are insightful, but money is more than all that. Money is like a reflection in a mirror.

Money shows how well a society is working within the capitalist value system. Stable currency is a reflection that the countless little ingredients that go into an economy somehow (perhaps inexplicably) are working at the moment. Instable currency means that something is out of whack, even if we might not know exactly what.

Money is a byproduct of an enormously complex reaction, like a chemical reaction inside a medicine cabinet of a house that’s on fire.

Lots of things happen. Decisions are made. Drought strikes one area, floods hit another. Laws are passed. Crimes are committed. Floating on top of it all, like scum on a murky pond, is money. Nobody knows exactly what it is or where it came from. But when there’s more scum floating on the pond, we know something is happening in the water. And when there’s less scum, then we figure some unseen reaction has gone cold.

I think of a U.S. dollar – whether a coin, paper money or merely an electronic entry – as nothing more than one share in the dollar based economy, which is centered around and largely managed by the U.S. government, but also is also active to various degress in most other countries of the world, overlapping to some extent with the Euro-based economies, the Yen-based economies, etc.

What is really surreal are some backwaters where apparantly to some they have economies based on counterfeit U.S. dollars.


If you will grant me “happy thoughts” as a euphemism for confidence (which is how I intended it,) then yes indeed, those happy thoughts will most certainly bolster the peso.

Of course there are other factors at work, but within the context of my statements I think I’m being pretty accurate.

Currency is worth nothing in and of itself. It doesn’t measure because as a benchmark it fails miserably due to its inherent changeability.

It’s primary properties, are liquidity, a medium of exchange, portability, and as a store of value.

The point is currency has never had substantive tangible value. In the OP you can generally substitute “gold” for “dollar” and “goat” for “gold”, and the meaning of the post doesn’t change. Sure, some people may want gold for its essential value, but most people want gold because it’s a symbol for wealth. The same is true for dollars, and any other currency.

One of the greatest parts of being human is noticing these implicit abstractions. In a sense we use currency in similar way that we use language. The contexts are just different.

Isn’t it weird that money, which seems to run the world, has no analogy in nature? it’s like we exist on a different plane than everything else on earth, and attach meaningless value to…well what is it attached to? hard work? pretty rocks? ideas?
money is an artificial system of survival invented by the weak

You’ll have to explain this one 'cause you totally lost me.
Are you saying that without money the ‘weak’ could not exist? Or are you implying that nature intended us not to use money???

I see no contradiction in the fact that “money” is not backed by gold. I mean I have as much use for green paper bills as I have for gold: none. They both get their value from the same concept: people will accept them as valuable. It could be coffee beans or whatever… They do not have to have actual usefulness, just represent value.

::sigh:: where to begin??

The OP is so riddled with inaccuracies, it would take too many boring posts to correct.

No, it is both.

Says who? And actual value is such a nebulous term.

No. When we started our monetary system in 1793, we had coins made from copper, silver and gold. They were issued in weights that represented their current value on the world market for that metal at that time. When we started issuing banknotes in 1862, those notes were backed by the Federal Government’s obligation to pay them, not by gold. We issued many different kinds of notes over the next 70 years, most of which were not backed by gold, but by silver, and obligations of the US Government to pay.

Well and good if you had gold backed dollars. Most of them weren’t. And banks didn’t always pay interest. They “kept” your money for you during the depression at no interest, as a favor to regular depositors.

No. You were only entitled to get gold if you had a note that said you could redeem it in gold. There were many other notes which were not redeemable in gold. Since 1913 there were many notes in circulation that were Federal Reserve Notes among others. They were not redeemable for

I can’t quite understand what you are saying here. After 1933, your notes that said they were redeemable in gold weren’t. Before that, they were.

I am going on memory here, so I would always stand ready to be corrected–Nixon took us off the silver standard, not the gold standard. Roosevelt took us off the gold standard in 1933.

Between what years are you speaking? 1968 and when? And this was a product of us going off of metallic standard? Not likely.

Again, that term! What, praytell, is actual value?

Nothing, except the total value of all the goods and services of the good 'ole US Guvmint. Never defaulted yet. Can’t say that about too many countries.

Are coins really money? Look at it this way. Paper currency has on it a little motto: “This note is legal tender for all debts, public and private”, meaning that the value assigned to that piece of paper is bound by fiat and enforceable like any other contract. That motto is a legal clause. Coins lack that clause. That means something, in that while contracts written on metal are contracts still, contracts must be written (dollars have the above clause written right on them), agreed-to (we must all have confidence in the dollar), and witnessed (the signatures of the Treasurer of the United States and the Secretary of the Treasury are on each and every piece of paper currency). An unwritten clause is not a clause, and is therefore not in force. We accept coins because others accept them, and assign them value based upon the dollar. We accept dollars because of fiat, and assign them the value the Federal Government does. Knowing this has legal ramifications, in that while the Government owns a kind of copyright on dollars, being counterfiet laws in force, coins are simply a medium of convience. In theory, you could make coins until your metal press broke, pass them all as real, and nothing the Federal Government could do could stop you.


"::sigh:: where to begin??

                The OP is so riddled with inaccuracies, it would take too many boring posts to correct. "

So sorry to bore you your grand highness.


I said:
“That dollar in your pocket is currency, not money.”
You replied:

" No, it is both. "

How useful! Yes, by that well-reasoned argument I can clearly see that you must be right. I don’t suppose it might be permissible to ask why you disagree?

FYI currency and money are not the same for reasons I stated in the OP, probably the first paragraph. You may think that currency is money, then again you may think you know what you are talking about, but…

“Says who? And actual value is such a nebulous term.”

Nebulous? Actual value is a nebulous term? A loaf of bread has actual value because you can eat it. Gold has actual value because of its workability, because it does not tarnish or rust, and because of its rarity. A dollar has no actual value because in and of itself nothing can be done with it.

"No. When we started our monetary system in 1793, we had coins made from copper, silver and gold. They were issued in weights that
represented their current value on the world market for that metal at that time. When we started issuing banknotes in 1862, those notes were
backed by the Federal Government’s obligation to pay them, not by gold. We issued many different kinds of notes over the next 70 years, most
of which were not backed by gold, but by silver, and obligations of the US Government to pay. "

Gosh, thanks a lot! You forgot to mention the giant stone currency of the Oonondoggas while you were at it. Did you not think the OP was long enough as it was? You’ll notice I ommitted buffalo nickels and confederate currency as well. I guess that just shoots my argument to shit, doesn’t it? It’s implicitly obvious that I chose to focus on gold backed currency for purposes of my OP. A comprehensive history of currency is not called for here, and to insist on it is the worst kind of nitpicking.

"And banks didn’t always pay interest. They “kept” your money for you
during the depression at no interest, as a favor to regular depositors. "

Thanks again for the pointless nitpick. You forgot to mention that some banks would also give you a toaster. In the OP I stated that the two reasons to deposit your money in a bank were safety and interest. If during the depression, some only got the former, so what?

And so on and so forth. To respond to the rest of your points would be too boring. I see no “actual value” in doing so.

Feel free to take your attitude and stick it.

Ok, let’s see, how to put this. Dollar bills printed on paper are worth the life of the tree cut down to make them(No I am NOT a tree-hugger, and I think I’m already in over my head). Plastic (or whatever it is) is worth the value of the materials use to make it. And coins? If you were to make a big statue out of melted nickels, then you would have something that could be bought with more nickels which would still be worth a value set by our government thus creating a vicious cycle. Oh, and gold, diamonds, etc. are worth the amount that our government, mixed with supply and demand. So everything worth “money” is bought/used with more “money” which is really just a cover to hide how much we need to control something. How did I do?

Did I somehow give the impression that I was a little miffed at samclem’s post?


An air of snide surperiority is a wonderful affectation if you actually know what you are talking about.

I just took a few minutes to research out a few of the remaining bolder untruths that were posted, and I must say that any verity therein was pretty nebulous. Nor am I able to say that it contained any actual value.

Here’s a nifty link which manages to state that Nixon released U.S. currency from the gold standard (not Roosevelt,) and that prior to that our currency was Backed by gold.

I completed this monumental feat of research by typing “Nixon GOld Standard” into a search engine and clicking the first link that showed up. THis of course is something any polite poster would have done before getting all sarcastic and claiming that a carefully researched OP was full of innacuracies. I would have done it just to avoid looking stupid.



I think you got the picture.

Think of it this way: The nickle, when thought of as a stockpile of metal, is worth a fraction of a cent. It’s mostly zinc (most modern American coins are), and zinc is just this side of worthless partly because it’s so common. Off the top of my head, I can think of no real use for zinc (someone else, tell me one, and I already know that we must eat a certain [minute] amount). It isn’t even a good conductor. So the nickle gains almost none of its worth from its composition. The artwork is worth something, but only to collectors, with no intrinsic value. Nickels aren’t exactly rare, a fact that drives down prices in the art world. So a small fraction of the worth is tied up with artistic value. Neither of those two aspects of the coin can account for the five-cent value assigned to it. Why, then, is it worth anything? Because the government mints them, we use them, and everyone else accepts them. If some shopkeeper got a bug up his bung and decided not to accept pennies (likely, considering their worthlessness as a form of money) nobody could force him to. With paper money, the story is different. The US Federal Government assigns the value of paper money by fiat and enforces it like any other contract. Part of that enforcement covers the clause on all paper money: “This note is legal tender for all debts, public and private” meaning that if you refuse to accept it, you have broken a contract in force, and enforcement may well come down on you.

Scylla, thanks for responding so quickly.

I haven’t got the time to respond in my usual imperious style as I am busy with kids tonight.

But for quickies–Your link is a high school student’s page. While this doesn’t make it useless, you could have spent a little more time searching and come up with something more scholarly prolibertate.org

As I said

covered my ass pretty good, didn’t I?

But if you read more scholarly articles about what the “gold standard” was, rather than copying your first hit on a search engine, then you might persuade me more about my misstatements. Your were right, we kinda went off the gold standard under Nixon. I was kinda right–we went off the gold standard under Roosevelt. Semantics.

Still looking for the first paragraph. :slight_smile:

And I still say they are.

Yes, currency does actually have an intrinsic value, albeit small due to the fact that the materials it is made of can be asigned a value.

Its liquidity, and the fact that it provides a medium of exchange also give it a certain intrinsic value (which I’ve previously ommitted as besides the point, but then again, maybe it’s not.)

The classic example is this.

If I offer you as payment either $10,000 cash, or $11,000 market value in ripe peas, you will probably choose the cash, unless of course you have an overwhelming need for a backyard full of peas.

You choose the cash because in order to realize the value of the peas, you will have to do something with them, even if it’s as simple as loading them up in a truck and taking it to market.

In this particular case then, cash has a value of at least 10% more in its equivalent in peas. Why? Because it’s easy to turn the cash into something else, and it’s difficult to spend peas. Cash is also easily transportable, while $11,000 dollars worth of peas would make quite a bulge in your pockets and drawing the attention of pea-muggers everywhere.

These properties do have value, so a dollar in your pocket actually does have “actual value,” to use a nebulous term again.

This is why we use money in the first place. Kinda besides the point but interesting nonetheless.

BTW, I was not aware that a merchant was not recquired to accept coinage if he didn’t want to. I was under the asumption that all currency was legal tender just that there isn’t enough space on coins to print all that.

I do happen to know that it is illegal to counterfeit coins. A policeman friend of mine confirmed this. Constructing a slug to fool a vending machine is considered counterfeiting (though rarely prosecuted as such,) and he says he personally saw a merchant get fined for passing off a Canadian quarter as American. When a customer received it as change and complained, the merchant refused to change it for a ral quarter, arguing he’d been duped as well. The customer called the police, the merchant admitted it, and was cited.

What is money?
Legal tender for all debts public and private. :slight_smile:

Ok I am outa here…