How do societies initially trust using money when it has no inherent value?

Question

How do societies initially trust using money when it has no inherent value?

In: Economics

Answer 1

The US dollar was originally backed by gold. Meaning, anyone could turn bills in for gold coins, and turn gold coins in for bills. Bills were basically deposit slips for the giant government gold stockpile at Fort Knox.

So the answer (at least for the US dollar) is that it was “bootstrapped” using gold (going back hundreds of years to Spanish gold coins).

When there started to be a lot of technology in the late 1800’s / early 1900’s, this caused big economic problems.

Due to the new technology, the other stuff in the economy was growing faster than the supply of gold. (Think growing crops with tractors instead of horses, or all the increased efficiency due to railroads and factories and electricity.) Prices are “sticky” meaning they don’t adjust quickly, especially downwards. And when they do, it causes a bad economic crash where lots of businesses fail and lots of people lose their jobs.

So they changed the system. Overnight they outlawed the private possession of gold, and [changed business contracts](https://en.wikipedia.org/wiki/Gold_Clause_Cases) so that contracts based on gold were based on dollars instead.

Everyone was already set up to use dollars, so they kept using dollars. That’s what they call “network effect” — once it’s big enough, it’s self sustaining. (The sudden gold ban was a shock, and a lot of people were outraged at the government, but business kept on going, and the court system upheld the government’s actions.)

Also, it helps that the government does business in dollars. Most people need to pay taxes, so they need dollars for that.

On the other side of the equation, the government spends all the taxes it collects (and then borrows so it can spend even more). So if you want to sell your services to the government, you’ll be getting dollars for them. You could be an 18-year old Army private, a mid-level Washington bureaucrat, or a NASA scientist building space robots. If the government’s paying you, they’re paying you in dollars.