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 has value because it’s useful if we all agree it has value (and we do).
We all do or have something that other people need or want. It’s kind of tough to lug around a variety of things to trade, or give our services to someone that might not need them… So, we have to come up with something more convenient. Our solution was to use bits of precious metals as tokens. Precious metal was rare, so it was impractical to just make your own, and it had value because rich and powerful people would give you stuff for it. Coins were all the rage, and we had money that you could use in trade. Eventually, there were lots of people and this exchange of precious metal becomes impractical. But, we had a system where we already valued everything in tokens, so we ran with that: you got tokens for work that you could exchange for goods or services; and the recipient could reuse for goods and services. Modern money.
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