How do societies initially trust using money when it has no inherent value?
In: Economics
As long as everyone has faith in the currency and goes about their day, everything is fine. That is, you assume your national government is a stable and reliable issuer and your currency will be worth about the same next week as it is today.
Pretty much every currency you might handle is based on the shared idea that it has value. Some percentage of total currency in use is backed up with holding of other foreign currency or precious metals, but it is not 100% and often not even 10%. Unlike say 100 years ago, any particular note you may have in your wallet or in your bank account does not entitle you to trade it in for a set weight of gold or silver (or a set number of Dollars/Euros/Yen). It is not a “Gold Certificate” or “Silver Certificate”, but a trade instrument based on faith and confidence in the particular currency issuer.
If a large enough group of people no longer feel that the currency is good or going to be good in the near future, there will be a large scale attempt to transfer their currency into a different country’s currency, move into precious metals, durable goods or otherwise abandon a particular currency and devaluation begins to occur. People worry that their national currency isn’t going to be worth anything next week, so they start selling it on the cheap this week in the hope of getting some value before the system becomes further devalued. If the national bank can’t check this in time and restore confidence/value, volatility can spread through the system and runaway inflation can occur, driving the value of any particular denomination of currency down dramatically. If many/most/all people feel a currency is unreliable due to high volatility, it essentially becomes worth nothing.
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