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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What do you do for things that don’t have a defined value?
Now we have people doing work that saves you having to do work. They make machines to let work get done faster. Fancy math is done to figure out the easiest way to do things, so you don’t have to try everything to find what works best. Processes get improved to make the most out of what work gets done.
How do you define the value of someone who saves work? If it’s tied to a physical equivalent, that work would be considered ‘worthless’.
The currencies we use have value because it sets a standard, allowing easier interactions. You don’t need to haggle to try and get a better price. Value is fairly equal no matter where you go, it’s not tied to what someone wants to trade.
If you’re a farmer and grow only flowers, you would only have flowers or your other possessions to trade. If you needed tools to do more work, a blacksmith isn’t going to have any use for flowers. If you sell your flowers and collect money than can also be used elsewhere, then you’re not limited to just interacting with people who want flowers when you want to trade for something.
Even the gold has arbitrary value. Any standard we pick would be arbitrary. Money is not a fact, but a symbol we agree to believe in.
The thing that gives *anything* value is people’s willingness to give you stuff in exchange for it.
Gold isn’t a particularly useful material, but it looks pretty and we all *like* it. If you have a gold bar, people will trip over themselves to give you stuff in return for it. That gives it value. The fact that you could trade it for food, or for shelter, or for a new car, or for whatever you want or need. If you couldn’t do that, if people didn’t care about gold, then it would be worthless. The value of gold doesn’t come from the material being useful, it comes from everyone *agreeing* it has value.
So what gives money its value?
The same thing. We all *like* it. Everyone will give you stuff in exchange for it. If you give someone money there’s no end to what they’ll give you in return. A loaf of bread, a subscription to Netflix, a plane ticket to another continent. The value of money comes from everyone agreeing it has value.
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.
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