“Money is Worthless”
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, its value is reduced significantly. This analogy shows that the value of money can fluctuate, just as the value of commodities can fluctuate. This simple yet complex theory has been proven true in a variety of ways among many different societies.
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. The trust that a society has in its currency can fluctuate over time, which would change the overall value of said currency as well. 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. In a different society, in which possession of a commodity is required to represent ownership, the Germans would have seized the stones. However, the Yap society does not require one to physically possess an object to own it and share in its wealth. Therefore, the black crosses proved as a sufficient form of symbolic “seizing.” 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, since the German interference created doubt in the value of the stones. 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.
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, in fear that the American dollars would be worthless. In other words, the French were worried that the latest car model would be released, causing the older models to lose their worth. Instead, the country asked the US Federal Reserve Bank for their supply of gold upfront. They requested a commodity that everyone would value equally, which is gold, rather than the dollar bills. 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. It is as significant as the label being changed in the Federal Reserve Bank, which redirected ownership from the United States to France. 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.
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 on 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 cruzeiros, Brazil’s former currency, in a short time period, all money lost significant value. This issue worsened for the remainder of the century until several economists implanted an entirely new form of currency, the real. People had lost faith in the old system. Therefore, it was no longer functioning properly. By creating an entirely new currency that was not already considered valuable, people gradually began to depend and rely on it as its value remained constant while the cruzeiro’s declined. 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.
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. In its truest form, money is completely worthless. Nobody wants money, as in, nobody wants flimsy paper bills. However, almost everybody desires power, and power is garnered through the paper bills that we call money. Because we as a society believe that money represents wealth and influence, we consider it valuable. Therefore, it is valuable. The newer car model will always be more valuable than the older model because the majority of people value the newer model more. In this way, money itself is only valuable because the majority of people believe it to be 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.