P1. As defined by the widely used and accepted dictionary Merriam-Webster, money is “something generally accepted as a medium of exchange, a measure of value, or a means of payment.” However, this textbook interpretation does not explain the abstract question as to why society accepts a flimsy piece of paper or a transfer of virtual numbers on a computer screen as a sign of growth. As a small child I can recall asking my father a very similar question. I frequently asked “Why is money worth anything? It is only paper. Why do people care how much paper they own?” My father struggled to provide an explanation that I found sufficient. I decided, with my decision being recently confirmed in a podcast entitled “The Invention of Money,” that the only thing that you need for money to work is for people to believe in it. If people believe that it is valuable, then it is valuable. As soon as trust is lost, the value is also lost. It is similar to a car. When a new model is released, everyone wants to get their hands on it. However, one year later, people no longer want the old car. Therefore, it loses value. This simple yet complex theory has been proven true in a variety of ways among many different societies.
P2. It is difficult to comprehend the simplicity of a currency system. The island of Yap, a small island located in the Pacific Ocean, has a monetary system comprised of large stones called Fei. In the United States, small paper bills called dollars are exchanged regularly. Although being physically extremely different, the Fei and the dollar are one in the same. The only source of security that either provide is their respective society’s trust in the object’s worth. In Yap, if ownership of a Fei is transferred from one person to another, the Fei is not physically transported to the new owner. Everyone in the community simply accepts that ownership has changed from one person to another. Milton Friedman’s essay entitled “The Island of Stone Money” chronicles this concept even further. In the 1800’s, Yap was a German colony. Upon inspection of the island, the German government insisted that the citizens of Yap work to fix the roads. The people refused, so the Germans used black paint to draw crosses on many of the Fei. The black cross represented German ownership. It was done to motivate the people of Yap to abide by the German’s wishes. This small action caused the citizens of Yap to quickly agree to fix the roads. Once the task was completed, the paint was washed away and the Fei once again belonged to the original owner. It is strange to think that a small action such as painting an object can cause an entire group to believe that they are losing wealth. The Fei was never moved from its location, yet to the people of Yap, the Fei was no longer theirs to own.
P3. This idea has been displayed throughout history many times. An example of this occurred during the span of time when the United States backed their money by gold. France did not want to depend on the pieces of paper that represented the gold, so the country asked the US Federal Reserve Bank for their supply of gold upfront. Instead of physically sending France their gold, the Bank chose to move the gold to a separate part of their office and essentially, label it as “France’s Gold.” No objects were physically traded. Although the gold was still in the United States, it was considered to belong to France because people believed that it belonged to France. In comparison, an article written by Anne Renaut for Yahoo! News discusses a virtual currency system called Bitcoin. The entirety of exchanges conducted through this resource are done on the internet. Physical objects are never traded. The only representation that ownership of funds changes is a number change on a computer screen. Although seeming trivial, the significance of this change is confirmed by the trust that people put into it. In every case discussed, the exchange of money is considered important and valuable because people believe that it is so. Without this faith, money would not succeed as a system of exchange.
P4. In the late 1900s, Brazil struggled with extremely high rates of inflation. At its highest, the inflation rate was eighty percent per month. It was the norm for people to spend their paycheck as soon as it was received because the money was losing its value. In comparison, it was as though someone was handed the equivalent of a US one hundred dollar bill on Friday night, and it would be worth significantly less 0n Saturday morning. Brazil’s problem with inflation originated in the 1950s when money was created to fund the building of a new capital to be called Brasilia. Due to the mass production of money in a short time period, all money lost value. This issue worsened for the remainder of the century until several economists implanted an entirely new form of currency. People had lost faith in the old system of currency. Therefore, it was no longer functioning properly. By creating a new system using the real, people once again trusted that their money was valuable. As the citizens of Brazil adapted to the new currency, inflation rates quickly returned to a reasonable level. This event further emphasizes on the point that trust and belief are the primary reasons that money is considered valuable.
P5. It has been proven in a multitude of settings and cultures that a successful economy is formed and maintained by trust. In order for money to be valuable, people have to believe in its value. Without trust, a dollar bill would be nothing more than a piece of paper, and a Fei would be nothing more than a large stone. It is important to realize how powerful the idea of trust truly is. Without it, a functioning currency system would not exist, along with many other concepts. Belief in an idea is what gives it its power and influence over a group. Because we as a society believe that money represents wealth and influence, we consider it valuable. Therefore, it is valuable. My perspective on this topic has not changed drastically since reading more about it, though I do appreciate the acquired knowledge. As a child, I often thought about topics of the like, and I still believe that if were people not to believe in the value of the dollar, the Fei, the real, or any other form of currency, that it would not exist as it does today.
Friedman, Milton. “The Island of Stone Money.” n.d. Diss. Hoover Institution, Stanford University, 1991.
“The Invention of Money.” This American Life. N.p., n.d. Web.
“Money.” Merriam-Webster. Merriam-Webster, n.d. Web.
Renaut, Anne. “The Bubble Bursts on E-currency Bitcoin.” Yahoo! News. Yahoo!, 13 Apr. 2013. Web.