How do societies initially trust using money when it has no inherent value?
In: Economics
I think you’re asking about what’s called “fiat currency”. This currency is NOT “not backed by anything”. It is backed by debt; that means, somebody ultimately owes the money to the bank that issued it. You see, money is not just airdropped out of helicopters; for an euro to start its existence, somebody must borrow it from a bank.
This man (let’s call him Jim) then buys off you a cup of lemonade with this money. Why do you put your trust into that, and exchange your work for it? Why do you believe that, when time comes, Jim will make you a cup of lemonade in exchange for getting the money back? He could just sit there and say “meh, keep your money, I ain’t getting my hands dirty and making any lemonade for you”, and you go home thirsty, and wondering if it was such a good idea to put your trust into the money and having exchanged YOUR work for it in the first place.
Well, the thing is, Jim OWES money to a bank. And if he does not pay up, the bank will do anything to shake the money out of him, and seize his collateral (when you borrow money, you have to give something in return, like mortgaging your house). Therein lies your assurance that when you will need to buy something with your money, Jim will be there and ready to perform, because he needs to repay his debts.
This is a simplified example, but this is in essence how fiat money works. Governments, corporations and people borrow it from banks, and the money is backed by their future performance and by the collateral that they post for their debts. So fiat currencies are not unbacked – they are backed by land plots, homes, buildings and promises of those who borrowed the money from banks in the first place.
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