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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Money is something of an abstract concept. In the past, as you said in the beginning, people would trade gods and services directly with each other and between the two parties they would decide what was of equal values (“I’ll give you a sack of potatoes for a sack of apples”. “I want half a dozen pairs as well”. “You can have three”. “Deal”.)
Money is a commodity used as a ‘middle man’; rather than trading things directly (the grocery store doesn’t care what I do for a living) everybody trades their goods and services for money. Now the agreed value becomes someone being willing to pay the vendor’s price, the vendor dropping the price if nobody does, or the vendor and customer negotiating a different price (haggling at a market for example).
So money allows you to access a wider range of vendors than you could in the past because you’re not trading your labour or your own goods directly with them. Its value is then connected to its purchasing power which brings in a whole new set of discussions about wider national and international economic conditions.
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