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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It’s a convenient way to barter without actually needing to exchange goods. Basically from your example, the iron worker would write the farmer a note saying “I owe you X amount of iron whenever you need it.” If the farmer trusts the iron worker, they would happily accept that note – and it has a value equal to the amount of wheat that the farmer gave the iron worker. Imagine this happens a lot, and instead of writing IOU notes with random amounts, the iron worker just starts to keep a bunch of notes with standardized amounts on them. So, when they need a pound of wheat, they give the farmer a note that says they owe them a pound of iron. The notes are only worth something because the farmer trusts the iron worker to keep their word. And they’re useful because the iron worker can get food without actually needing to give away any iron.
Those IOU notes are a starting point for currency.
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