Does anyone know if tax policy directly affects the value of money? Does lowering taxes devalue money the same as printing more money? If there were zero taxes, would money have any value?
Taxes have nothing to do with the value of money.
They quite simply are the part of your earnings you have to give to the government (just like you had to give a tithe to the curch or a cow to your feudal lord).
Can you explain your reasoning a little more? I have no idea how you get taxes into the value of money, based on the many fine answers already provided.
In some sense, with a very specific set of facts (but it would be wrong in the general sense), less taxes (or more) effect inflation. But, I don’t want to have that discussion as I think it would do more to add confusion.
An answer to your last question might help, if there were zero taxes, money would still have value. Think of people making exchanges before the local governing authority took tax money. It still happened, right? So, there must have been value.
Maybe I am stupid, but non of this makes sense to me. Money has value because the government says it must be accepted for payment. But the government does not back it with anything. Why do worthless pieces have value? Why supply affect the value if the demand is just based belief of value? What causes people to believe a Euro is worth more than a dollar today,but tomorrow the dollar.might be worth more?
Today, money is not backed by any commodity (gold, silver, etc). It’s just paper money, or numbers in a computer.
The reason money has value is because the government requires you to pay your taxes in US dollars. You can’t do business in the US if you don’t pay tax, as the law will come after you and shut you down.
But paperbackwriter, I have a crazy friend who says “the market” is evil. Is my friend crazy?
It might help to understand how we got here, from a historical perspective.
Once upon a time, it was obvious why money had value. People used to trade in actual pieces of gold, that were melted and shaped in to “coins” so that they were easy to count, weigh, and carry.
It’s obvious why gold has value - many people want it, so that they can melt it down for jewelry, it can be used to decorate, etc.
Eventually, governments came up with a more efficient way of handling money. Why not store most of the gold in bank vaults, and get people to trade in pieces of paper that represent a slice of that gold? At any time, you could take your piece of paper to a bank, and retrieve your gold. Of course, hardly anyone ever did that, because it was so much easier to use paper money.
Eventually (and this was very recent, less than 100 years ago), people had gotten so used to accepting money for payment, some probably didn’t even realise it was backed by gold. So the government thought they would try a little experiment. What if they just permanently “removed” all the gold that backed the paper money? What would happen? Would people still accept it for payment, given that they are just so used to doing it?
And the answer was… yes. There was no guarantee at the time that this would work, and indeed, when some other governments tried it, the economies of those countries totally collapsed, and people started bartering (I think it happened in Argentina at some point).
But with only a (somewhat shaky) requirement that people “must” pay their taxes in US dollars backing the currency, the American dollar has powered on ever since. Today, I am fairly sure every single country now uses currency that is not backed by anything.
What causes anything to have value? What causes that pretty painting of a smiling lady in the Louvre to be be worth a fortune?
It has value, since we put value in it. And if enough people put value in the same thing it becomes valuable.
It used to be gold, now it’s printed paper.
It’s all the same.
I can see why Jesus Harold Christ is getting frustrated. I, too, simply could not accept a response like that when I was trying to understand why money has value.
What you basically just said was:
“Money has value because people want it. People want money because it has value.”
That fails to answer the question, it is just circular reasoning.
People want paintings because paintings have an intrinsic use - decorating your home, admiring the skill and talent of the artist, etc. Money does not have any instrinsic value or use, unless you’re a coin collector.
Yeah, I know. I tried the other way first, but then figured a “leap of faith” might work instead.
Let’s try this instead:
People want money because you can buy stuff with it. The reason you can buy stuff with it is because the Government says you can.
The reason the Dollar/Euro exchange rate fluctuates is because at every given time someone wants to exchange those two and if at any given time more people want Dollars than Euros, the Dollar becomes worth more (and vice versa).
There was a novel written, describing the development of paper money: had to do with how currency evolved in Heaven. Gave me a “clarity” moment when I read it 10+ years ago. I’ll try to remember the title.
Everything can be considered currency. Just people accept that money has a certain value. You can just as easily use something else, which i have done in place of green backs to purchase something. Money has value because people think it does. Our money is worthless. Some of our change, is worth more as raw metal then it is face value. Money is just the universal accepted means of payment for debts. I have received payment for my services in weed once because the guy decided that i needed to be paid and had no money on him so he gives me something which he believes is of equal value and i agree.
There’s been a lot of very smart people talking nonsense in this thread. There are some really good principles mixed in.
Money has no intrinsic value, except maybe as a paperweight or impromptu kleenex. It is not given value by a “central bank,” not here, not anywhere, never, ever, period, under any circumstances. It has nothing to do with the U.S. government, and not a bloody thing to do with the IRS.
Money existed before all those things and will exist long after. All those things affect the specific value of money, but neither create value nor destroy it.
Money has no value and never did. It is a commonly-accepted exchange of value, nothing more. Employers pay in money because they know their employees can use it. If that were not the case (say, during hyperinflation), the employer might have to pay in kind or the workers will leave.
If I say that a television is worth 100$ to me, I am saying that what I can buy with 100$ is (roughly) equal to the value I put on a TV. If the price of a TV is 90$, all is good and I may buy it. If the price of a TV is 110$, I probably won’t purchase one. All money transactions, whether you realize it or no, are fundamentally bargaining positions.
We can also state that money transactions are exchanges of time and labor in just the same way. I could work for Sony or Samsung or Phillips or whomever in exchange for a TV. If my time is worth 10$ an hour, I could work 10 hours and get a TV which is “worth” 100$. Of course, that’d be relentlessly inefficient and nobody does that for serious labor needs, but that’s one way of looking at the problem. But the value is held by the person, not intrinsic in the money; if you take away someone’s money, they still have real value you’ve stolen and you have more that you haven’t earned. The onyl reason you can use it because people assume your cash is yours. But the victim of your crime will earn and create more value while you… won’t.
That’s plain wrong, no matter which way you try to explain the concept of money.
And employees accept money because they know they can use it?
And businesses accept employee money because they know they can use it?
You’ve returned to the realm of circular reasoning.
Again, I have to disagree with this 
The government of Zimbabwe says that their citizens can use their currency, too. They are hardly listening.
Let’s put it this way: If you think that the dollar has no real, underlying value, you should be perfectly willing to send me all of your valueless dollars, right?
But of course, you wouldn’t do that. A dollar has value to you because you can buy stuff with it. Maybe it’s iPods, maybe it’s groceries, maybe it’s a house, but in any event, there’s something with real, inherent value to you that you can get in exchange for dollars. If you can buy a house for $500,000 dollars, then $500,000 dollars is worth warmth, shelter, and a place to put your stuff, to you. Why does the guy with the stuff you want give it to you for money? Because he wants iPods and groceries and all the rest, too, and he can also get those things for dollars. So dollars are worth something to him, too.
Don’t try to figure out why society, as a whole, values dollars. Just figure out why individuals value them, and society as a whole isn’t really anything other than a whole bunch of individuals.
That’s not entirely correct:
Bolding mine.
Individuals value dollars because society values them.
I still say my theory holds up - we accept money because we (society) were conditioned to accept it when it had intrinsic value. It became so entrenched that when the gold backing it was removed, we continued using it. Given that we are required to pay our ongoing taxes in it, we all have to value it.
The way to approach this question is to look at it from reverse.
What has intrinsic value?
The answer is nothing. There has never been such a thing as intrinsic value in the history of the world. You have to rid yourself of that notion to understand money.
Gold? What would I do with a bar of gold or a load of gold ore? It has no value to me unless someone else says that they want it for some reason of their own. In a two person world, we could bargain until we had a satisfactory deal. And that amount of gold would be worth exactly that, for that time and place. All materials act the same way.
If I came back tomorrow with another lump of the same amount of gold, would it be worth the same amount? Maybe, but maybe not. Maybe the person who bought my gold yesterday now has all the gold needed. Now I have to look around for another person who wants gold and strike another deal, which will undoubtedly come down to another value.
Anything I choose to bargain with has the same issues. Is a sheep of any use to me? I can’t butcher it, I have no place to store hundreds of pounds of meat. I do need food, though. I have to eat. Food has value, but no particular food has an intrinsic worth. I would pay more for certain foods than for others. I would pay more for a full ready-cooked meal than I would for the individual items I’d have to cook myself. But those values would vary from day to day. Some days I wouldn’t want to go out to eat, or wouldn’t want to have the same meal I did yesterday. What I’m willing to pay for which foods changes day by day. Similarly, what others are willing to charge for foods changes day by day.
Barter economies are obviously possible, since they’ve existed for most of human history. The larger the economy gets, the less convenient they become. Either I have to carry around a large variety of items that people might want or I have to find a series of middlemen to trade with to get that item. It’s much better to have a form of middle barter, a standard trade item that everybody will take because they know that they can trade it off to anyone. We call that middle barter item “money.”
That doesn’t fix prices, though. If I go to the market I probably still have to haggle with the proprietor to determine the number of pieces of money I need to pay. As supply and demand vary, the trade price of a item will also change.
And money itself changes value constantly. How the value of a piece of money changes depends on some complicated economic rules. But the amount of money in the system, the purity of the representative token that is coined, and the inflation or deflation in the economy all work to change the value of money internally, and the exchange value of money to other economies, each of which are undergoing changes of their own at different rates.
Paper money is just another, more convenient, barter exchange token. Some people insist that a token has to be backed by something more tangible, more intrinsic, than just the overall soundness of the issuing economy. Virtually all modern economists deny this, on the grounds that anything tangible and intrinsic is just another illusion of value. Do you want your money backed with gold? Why? What’s the value of gold? You say you set a value? What’s that value based on? Why can’t you just skip the extra step and declare that the paper money has that value?
That’s where all modern economies lie. There is a slight extra risk in this. An economy based on an arbitrary value of an underlying tangible is limited in the amount of paper it can generate. That keeps the money from spiraling into inflationary valuelessness, but it also keeps the economy so small that it can’t grow to the levels it otherwise could. The current banking system says that it can keep hyperinflation from happening in modern industrialized economies. This has been true since WWII, when the modern economic world developed. It has allowed wealth creation on a scale unprecedented in history.
Yet money, exchange tokens, still has to fluctuate in daily value because it responds to a zillion stimuli, again both internally and externally compared to other economies with other stimuli. Everybody uses it, because everybody agrees that it has value. And everybody believes this because thousands of years of history lie behind every piece of paper and metal in your pocket, representing the knowledge of a trillion zillion transactions over the course of history that “this” needs to be traded for “that” and here’s the easiest, most convenient, most automatic, least worrisome way of facilitating that trade that we have devised.* That’s a lot of value right there. When backed with a $13 trillion economy, the value is even more obvious.
Money. Don’t leave home without it.
*Electronic transfers are still equivalent to physical money, since they use the same value system to account for equivalencies.
So if we don’t pay taxes, then we don’t have to value money? How does that work? How would I buy food or shelter without it? Why would a drug dealer accept money, considering that he does not pay any taxes on his illegal trade?
Not really. Your comment on Zimbabwe proves the point (against that thing with the taxes). Smiling Bandit is still mostly correct. Money is an medium of exchange. Others may value it for different reasons, but the fundamental fact is that it used so that Person A can exchange goods and services with Person B. In proto-civilizations/economies, people used money, they just didn’t call it such. It wasn’t currency either, be it rocks, shells, flowers, wheat, salt, gold, etc. Whatever it was, it behaves as currency does today (to an extent as such conditions permitted at the time).