This simple question seems to have provoked quite a bit of ill-will. In these two previous threads:
http://boards.straightdope.com/sdmb/showthread.php?threadid=26774
and:
http://boards.straightdope.com/sdmb/showthread.php?threadid=26279
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.