How do societies initially trust using money when it has no inherent value?
In: Economics
I like to think of it as an evolution. Basically, the answer is because someone said so. Why do you take money? Your parents told you you could, and the people you interact with were told that too, so you can all use money now. Same thing with like gold for example. I can give you a block of gold and it doesn’t really serve you much more than a very fancy door stopper, but someone wants it so now it’s valuable.
But where did it start? Well a good place to go looking for that answer kind of starts way back when to the first banks. You hold my stuff, you give me a voucher for what I have. That’s a huge oversimplification, but that’s basically what it boils down to. Nowadays, they took money off the gold standard, but by now everyone pretty much accepted that paper money has a value.
But why does money have a value when it isn’t tied to anything? Because everyone thinks so. Money is just a concept, just a piece of paper. If you take a step back, money is just a commodity. At this point you are asking the question “why does anything have value?”. A potato can feed you for a day but it’s not worth much, while a painting on a wall is literally useless but can be worth millions.
Another reason is also, because the government says so. A lot of countries tie the value of their currency tied to the dollar. So they say “we will pay you 1 American dollar for however much of our dollar”. So, how does the American dollar work? Well, on every note you’ll notice it say “This note is legal tender for all debts, public and private.”. What that means that somewhere in the law it says that in any transaction, the receiving party has to accept that piece of paper as having a certain value, and accept it as payment. They don’t specify what “$1” is actually worth, but that’s really because things are valued in dollars, not the other way around. So one dude can sell a potato for $20. The law doesnt mean that you are forced to buy that $20 potato, but if you were buying that potato, that guy is supposed to accept a $20 as payment. Every country has similar laws, and every currency usually says similar things on their money.
So, asking the question “why does money have value” is really just as good as asking “why does anything at all have value”. It just does.
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