This is s perfect place for me to ask this question. My child says, “hey, I understand we give people money and they give us food, clothes, games, etc., but how is it worth anything? What gives it its value?”
He’s 7.
I tried to say money represents labor or hard work, which he understands as having value. I tried to say something like, well when people had to look and forage for food all day, they didn’t need money. But then we invented farming, so other people had more time to do other things. So if the iron maker needed food and the farmer didn’t need iron what do they do?
I think I did a good job explaining the problem, but not answering the question. So, what gives money its value?
Thanks in advance. I’m in the US, but I think even in his young brain he wasn’t asking specifically about dollars, I think this is a more general question about currency. Like I don’t think this is about the gold standard or returning to it. I think it’s more about how a currency can get value along with a little answer to the reason why currency is necessary. Which is actually a pretty smart question. For a child.
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Basically the only thing that gives money value is the mutual trust that it can be exchanged for other things of value. Imagine if instead of money, I gave you an IOU for a favor instead. If you trust me personally, you might be willing to accept it. But the key thing is that if everyone trusts me, or at least trusts you trusting me, you could hypothetically trade that IOU for a favor or product from someone else, and then they could redeem that IOU. That’s basically what money is, a general IOU of sorts. But we all have to trust that it works, even though the original exchange (money for gold) isn’t actually a thing anymore.
Now, as for why/how we trust money, that’s perhaps beyond the scope of ELI5, but as a start, that a government accepts it as a means for paying taxes and using its services is a good base for building trust.
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