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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Ultimately, it’s faith. It’s a societal agreement that people will accept this paper in exchange for something that is scarce/useful/desirable BECAUSE other people will accept the same paper in exchange for something else that is scarce/useful/desirable.
Even gold is only “valuable” because everyone is convinced that everyone else will accept it in return for stuff. It does have some of its own intrinsic value in that it is useful for making certain things but that is a rather small portion of society’s obsession with the stuff.
Once people stop believing the money will be accepted by other people then it becomes “worthless” because everyone believes that nobody else will accept it, so they shouldn’t accept it either.
This idea plays out very interestingly in situations where economies are crashing, or during wartime where currency of different places are esteemed in different ways. Heck, in North Korea, the elite like to hoard dollars because they have more “faith” in it as a medium of exchange both domestically and internationally than they do in North Korean currency (which isn’t really internationally traded much).
Short of that you are either trading stuff directly (a pair of shoes for someone to fix my car for example) or trading stuff that will be a medium of exchange (like the idea about cigarettes in prison).
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