How can money have value if we don’t use the gold standard anymore?

Question

Before the gold standard was dropped, it was relatively easy to understand where money got its value.

Money represented a certain proportion of gold in a country’s National Reserve. The money could be cashed in for gold, a very physical and tangible item. That all makes sense.

But we don’t use that anymore. So isn’t the money just paper? I don’t see how this system makes sense anymore.

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Answer 1

Just going to repeat a couple of things I’ve said before on here.

First, think a bit more about how the gold standard works. You say the money has value because it can be cashed in for gold. But *why* is this?

You can only make this exchange because the government says you can. You don’t actually *have* gold, you still have to trust the government. Governments can, and do, change these promises – they suspend convertibility (like in WW1), the change the value of currencies, change to different metallic standards or abandon them altogether.

Second, the idea that money has value “because we say so” is kind of true but also kind of misleading.

It can make it seem like money is this strange special thing that depends only on people agreeing to make it work. The thing is, that’s how most social systems work. For example, laws don’t have any physical existence any more than money does. They work because enough people agree to follow and enforce them.

People agree that money has value because it’s *really useful*. Most people, governments and institutions think it’s in their interests for money to continue having value, and that’s a very powerful force. To roughly quote the economist Adam Tooze, modern money isn’t backed by gold, but it’s “backed by everyone who matters”.

As an experiment, try to imagine what it would take for a major currency to *stop* having value. Try to imagine who would benefit from that, or what kind of mistakes or challenges would lead to it. What would make *you* start to go “I’m not accepting your money”?

Historically we can see that it’s generally only in very difficult circumstances when this breaks down.