Why does paper money have value?
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Because we say so. That’s it.
So long as we all agree it carries value, then it is an effective currency. If we decided one day that it had more value, then it would. If we decided it had less, than it would.
That being said, there is effectively an agreement in place that its value be fixed to the value of digital currency, and likewise that both values be matched to the overall economy.
The former is true because banks say so; a bank will exchange paper money for digital money at a 1:1 rate, so their values are fixed.
The latter is true because the dollar (or whatever your country’s currency is) is pretty much the only currency used, and bartering is almost unheard of. Digital or physical, your local currency is the only thing that people use to spend on goods and services, so it is necessarily true that the total value of all goods and services be equal to the total value of all money spent.
This is why inflation happens. As more money is in circulation, more money is spent, but no additional goods or services are rendered, so the value of all the money is spread out over more individual dollars, and each dollar must therefore have less value.
If some other currency was introduced, without a fixed exchange rate to the regular currency, then it would have a destabilizing effect on this whole system; it would cast doubt on the value of the dollar.
Because we all agreed on it as a token to carry value.
Intresting enough, the first valuables that were used as currency where shells and special stones, at some points in some cultures they were big boulders and they only carried value, because for shells, it was a sign for people more continental, that someone traveld a lot, and boulders because they took a certain man power to be brought to the point of transaction.
‘We’, to be precise the chinese invented paper money as in ‘someone owes the owner of this paper valuables of amount X’. It’s way easier than carrying around boulders. So thats that.
Todays money is still just some sort of this kind of transaction. So you put in man power at work and get a digital value out of it put in your bank account so you can pay for things with plastic cards or just get some of the sweet paper to pay for stuff.
Hope this answers your question or gives you a perspective as to way we use paper money.
Look at it this way. You can do a job for me and I give you the choice of two currencies to get paid in.
You can either get paid in the Zabumban sheckle or the US dollar. Now before you choose, think on this. Zabumba is at war with all of its neighbours. It’s right on the equator so the climate catastrophe caused massive crop failure this year. And to make matters worse, the population has angrily destroyed the country’s power plants because of climate-related problems.
Right now, 10 Zabumban shackles will buy you one bread. But with grain running out and the warlords targeting bakeries, I don’t really know what a bread will cost next week. Or if anyone will even be baking bread, most bakers are fleeing to other countries.
The US on the other hand is pretty stable. It’s far from perfect but it’s fairly safe to say that today, next week and next year, the energy grid is humming, the harvests are coming in and the bakers will be baking.
Keeping in mind that you want toast and ham for breakfast every morning for the foreseeable future. Would you prefer getting paid in Zabumban sheckles or US dollars?
That’s what gives paper money value. It’s a contract between you and the society that issues it. The more dependable the society, the more stable the value of the money.
This dickhead Hobbes wrote a book called Leviathan about social contracts if you’re interested that answers your question
Basic idea is humans tend to bend to an authority when we’re promised a degree of ‘peace and security’.
We bend to governments and currency is a tool of delivering us peace and security.
Paper money not having meaning (hyperinflation) and governments being overthrown go hand in hand – it’s happening right now in Sri Lanka, happened a bunch in a few African countries over the last decades.
America use to have the “gold standard” our paper dollars were back by precious metals like gold. President Nixon did away with that policy, so that politicans in Washington could spend money they dont have.
Just to add a bit to the other answers. Money has value “because we say so” is kind of true but also kind of misleading.
It can make it seem like money is this strange special thing that depends only on people agreeing to make it work. The thing is, that’s how *most* social systems work. For example, laws don’t have any physical existence, they work because enough people agree to follow and enforce them.
But there’s more to it than that – people agree that money has value because it’s *really useful*. Most people, governments and institutions think it’s in their interests for money to continue having value, and that’s a very powerful force. To roughly quote the economist Adam Tooze, money is “backed by everyone who matters”.
It’s generally only in very difficult circumstances when this breaks down.
Because we as a society have mutually agreed it does. We are willing to trade a few hours labor for a piece of paper with $100 printed on it, because we know the shoe store will trade us a pair of basketball shoes we value at $100 for that piece of paper.
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