| How exactly does money that is not backed by anything differ from monopoly money?

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To me it’d seem that the only reason paper money is worth something is because enough people believe it is. And if that’s the case and more can be printed. There’s no rarity really either. I’d love to hear some explanations. Thanks.

In: Economics
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You answered your own question. Initially money (in the US) was backed by gold, then silver. Now it’s backed by a promise that it has value and a system of people that believe it has value.

If we all believed monopoly money had value, it would. Kind of like how Bitcoin works now

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It isn’t. But most currency is backed by a *promise* that it’s legally exchangeable for goods or services. The value comes from that promise.

But yeah…

Why is money that’s backed by gold worth anything? Why is the gold itself worth anything? It’s all the same answer.

People agree that it is valuable. “Value” is a human invention. You are on the right track with rarity though. If we do print more of it, it does go down in value. That’s because more people have more of it, which makes us feel like it is less valuable. We value it’s rarity.

Money in the US holds value because it is the only currency the US accepts to pay taxes. There will always be someone who needs to pay taxes, so the dollar will always hold value.

Lets take something you don’t value like sand. Your land lord says starting next month he will only take rent in the form of bags of sand. Now you have a reason to value sand. You’ll need to exchange goods or services for sand if you want to avoid getting evicted.

Even the people who aren’t tenants of your sand loving landlord will value sand more now. They know tenants will be willing to exchange goods and services for it. So they’ll be more incline to accept sand as a form of payment.

It is a social construct. There is a very nice video about it. Look for “Blockchain and money” and Gery gensler on YouTube. I think session 2+3 answer your question.

Things are only ever worth what someone will give you for them.

You say that modern currencies aren’t backed by “anything.” Well, what’s the alternative? Gold? What is the value of gold backed by?

Nothing.

Gold is only valuable because people *think* it is valuable. The same goes for all currencies.

Money is used because it is useful to have a universal means of exchange, and governments require taxes to be paid using it. There are also laws giving it special status (legal tender). Inherently its only value is its scarcity. There is nothing in principle that prevents the government from creating as much money as they want by “turning on the printing presses” (or using equivalent electronic means), but when countries have done this in the past, it causes the value of their money to collapse. Recent examples of this are Zimbabwe and Venezuela. The reason money holds its value is because the people who could just “turn on the printing presses” don’t, and we have enough trust in the system of government that we expect that they will continue to manage the printing presses responsibly. Because we have decent period of time where we have gone through political and economic cycles and the managers of the printing presses have behaved responsibly, we have trust that the system will continue to work.

Paper money is backed by the state’s ability to tax and enforce compliance on its people, and the state’s monopoly on violence that allows it to crush counterfeiters.

The state says “this is what you must pay taxes with, and this is how much taxes you must pay” – and if you do not agree, you find out about the violence part first hand. Starts with judicial violence, and escalates as much as it needs to submit you.

By making money the means of payment, and enforcing it, it gives it the backing that makes it functionally real.

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