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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Most money is backed by the government. I am willing to give you a sandwich in exchange for US dollars because I trust that I can take those US dollars and give them to the US government in exchange for something from them. I won’t ever actually do that because I don’t need anything from them, but I *could*. Back in the day, that “something from them” was something intrinsically valuable, usually physical bars of gold. You may not ever *want* the gold, but you know that the government has it and can give it to you.
Today, it’s backed by international trade agreements and international credit scores. That is, I will take US dollars from you because I know I can take those US dollars and exchange them for Mexican Pesos or Euros or Tanzanian Shillings or whatever. Those countries are willing to take the US dollars because of the trust between countries that the US will continue to take those dollars from them and give *them* things that they *do* need because they can’t get them – like weapons or military aid or disaster aid or whatever else the US can offer. Citizens also take US dollars because they know they can bring those dollars into the US and buy things from US citizens and businesses.
Part of that is that the US has its own credit score. Other countries trust that the United States will continue paying its debt (barring debt ceiling nonsense). The US dollar is worth a good amount because the US is pretty stable and people around the world continue to believe that the US won’t disappear any time soon. Compare that to a country at war like, unfortunately, Ukraine. If you’re a big investor, how willing are you to take Ukrainian hryvnia (their money) given that next year they may be conquered by Russia and cease to exist? (Not that I think it will happen: slava Ukraine.) Or, would you be willing to take money from a country that doesn’t have a stable economy, like Venezuela, so you have no idea how much their money will be worth *in their own country*?
So, most of the value of money comes from *trust*. I trust you that you will take my money because you trust me that I will take your money. We both trust that the government that issued that money will take it and give us things. Other governments trust our government to keep paying its debts so they give us some of *their* money now and we will give them more of our money later. And since that all keeps happening, there’s no reason *not* to continue trusting in the money and the exchange of it.
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