Money

Why is Money Valuable?

Why do I accept fiat currency in return for a day’s work? Why does the grocer accept fiat currency for eggs and potatoes? Why does the farmer accept fiat currency for his produce?

The astute reader will notice that the above questions answer one another. Money is valuable because we all agree that it’s valuable, because by agreement it will buy eggs and potatoes, or a day’s work, or a car, or a house – no other reason is necessary. I was once a huge proponent for returning to a gold standard or some other standard that would put real value behind the paper money in my wallet, but I’ve come to realize that “real” value isn’t necessary, because as long as everyone agrees that money is valuable it will remain so. 

Now it wouldn’t work for us all to agree that leaves are valuable and use them for money, because rather than trade a day’s work or a bag of potatoes for leaves we’d just gather them off a tree.  If the leaves don’t represent work or other real value, then they cannot be of value, not even if our government declared leaves valuable, that is, assigned fiat value to them. Whatever is chosen for fiat money must be of limited and controlled quantity. Paper money can be of value if counterfeiting and excessive government printing can be avoided, and if people have confidence that the society that declares the money valuable will continue to do so. This generally translates to confidence in the government of that society.

During the Revolutionary War the Continental Congress printed paper money called “Continental Dollars”.  The buying power of these dollars plummeted when the Continental Army looked to be on the verge of collapse following the battle of New York and subsequent retreat across New Jersey; so to make up the shortfall congress simply printed more of them.  Of course this caused the currency to become even less valuable. “Not worth a Continental” became a catchphrase in Revolutionary America.

When a currency has no inherent value behind it, its value remains intact only as long as most people have confidence that it will remain valuable, that everyone will continue to agree to use it in exchange for goods and services.  The grocer wouldn’t take my dollars in trade if they had a quickly approaching expiration date printed on them, or he would devalue them now if he knew that they would be devalued by Congress next week.  Congress devalues currency by printing more fiat money than warranted by the value that society creates. Consider what would happen if Congress announced a plan to print (or electronically create) enough dollars to send every American citizen a few million; the value of dollars would plummet to near zero.

So money can have value because of what it is, gold or silver or other precious stuff; it can have value if it is redeemable in such precious stuff.  Fiat money is redeemable in the precious commodities that we buy every day, but to remain so it must continue to meet the criteria of scarcity and confidence.

Fiat money would become worthless if civilization collapsed due to a nuclear winter or other catastrophe, but gold and silver might be worthless also.  Some remnant of civilization must exist in order for precious minerals to be precious.  People must agree that gold is precious and worthy of being a medium of exchange, because otherwise a cellar full of potatoes would be much more valuable than all the gold in Fort Knox.

Why is Money Good?

Money is a good thing because of the good things that it represents.  It’s a good thing because it allows us to specialize in our efforts to survive and prosper.  Before retirement I designed machines for a living, someone else builds houses, and another person is a nurse.  Only because we have a universal medium of exchange that represents the value that each of us creates in our jobs can we trade on a large scale what we do for the value created by others.  Only by use of money can most of us set aside some of the value we earn for future use. If I raised potatoes, those potatoes would eventually rot and be of no value. I could trade some of my potatoes for some of your beef and we could each make a stew, but that too would rot, and if you live in Texas and I in Maine such barter would be impractical.  By the use of money I can sell my potatoes and receive money that maintains its value (more or less) until I have need of it.  You can do the same with your beef.  We can each buy the commodity raised by the other when convenient from “middlemen” that transport and store such commodities to earn their money. All of us benefit because money exists.

The very properties that make money so useful create drawbacks.  Because money is portable it can be stolen or otherwise obtained dishonestly more easily than the commodities or labor it represents. This problem is partially alleviated in modern times by the fact that most money is not carried around.  Paychecks and other forms of income are commonly directly deposited into ones account.  Purchases are made via credit card or other electronic media and moneys are automatically transferred between accounts.  But of course these conveniences, while largely eliminating the problem of folks being robbed on their way home from work on payday, create new mechanism for theft. Also, because some money still exists as paper, counterfeiting could theoretically devalue the currency, but devaluation is much more likely to be caused by authorized government printing as noted above in the example of Continental Dollars than by illegal counterfeiting. Of course these negatives are tiny compared to the benefits already discussed.

Critics of money complain that its durability and transfer-ability allows some few individuals to amass large amounts of it, but even this is a good thing.  It’s only with vast amounts of capital that individuals or groups of individuals can venture to create and manufacture the modern miracles that make our lives so comfortable and help us to live so long – things like computers, cars, refrigerators, pacemakers, birth control pills, antibiotics, etc, etc, etc.  And it’s only because of the desire to create even more wealth that they risk their money in such ventures. And in the process of making more money and creating these things that make us comfortable they employ millions of people, mostly in good paying jobs.  I spent 35 years working in Silicon Valley where there are many thousands of companies, large and small, that employ millions in just that small geographical area, and it’s all funded by rich people trying to get richer. The existence of money makes it all possible.