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What is Money? In any society there is a need for currency for the trading of goods. Whether it is a large stone, gold, silver, electronic currency, or a paper currency there has always been a currency. Goods themselves were used as currency. This is called bartering, however in a modern day society most transactions occur through the purchasing of a good with a currency of some kind, but what is money? What makes the value of money? How is there trust in a currency? Is it perceived or is it an actual value? Most human beings don’t think about how a currency functions or the origins and trust of a currency, but looking to how other currencies work can help human beings fully grasp the concept of currency.
If we were to ask, “what is money?” we would have to look to our bank accounts. Looking at your bank account you see only numbers. To us humans there is a value in these numbers, but there is no physical currency tied to those numbers until you personally withdraw it. If someone added twenty zeroes to the end of that balance on accident you would be considered the richest person ever, however the amount of money you have hasn’t actually changed. Now yes, you could try withdrawing this money and you may be successful in getting quite a bit, but once someone sees the mistake it would be corrected rather quickly and your monetary value has dropped considerably. How can this happen? This can be rather difficult to wrap our heads around so let us look to the Yap. The Yap are a group of people who’s currency are giant stone discs. Milton Friedman’s paper, “The Island of Stone Money” describes how this currency works. Milton explains how a resident named Fatumak explains how it works within his community, “My faithful old friend, Fatumak, assured me that there was in the village nearby a family whose wealth was unquestioned, — acknowledged by everyone — and yet no one, not even the family itself, had ever laid eye or hand on this wealth.” This is a great example on how this currency and any currency works. The numbers in your bank account are perceived as wealth, but you can’t actually see this wealth. For all we know the stone on the bottom of the ocean doesn’t exist. This perceived wealth is based only on trust and trust alone. Our economy works this way as well. Most of our currency is digital, not physical so the trust in the United States Dollar isn’t backed by anything. Just trust that our perceived value of the United States Dollar never changes radically.
We can look at the trust of a currency by looking at the Brazilian Cruzeiro. This currency as told in the NPR article, “How Fake Money Saved Brazil” was falling into what I would call an inflation spiral due to building a new capital in Brazil. This inflation spiral led to the dramatic rise of the price of goods. As the article explains, “Twenty years ago, Brazil’s inflation rate hit 80 percent per month. At that rate, if eggs cost $1 one day, they’ll cost $2 a month later. If it keeps up for a year, they’ll cost $1,000.” This extreme rise in inflation led to the loss of trust within the Brazilian Cruzeiro. The economy of Brazil due to this extreme inflation started to stall and crash. The solution was to create a new currency. This new currency had no backing except trust. One day it was a fake currency the next day it was the official currency of Brazil. This currency, the Real, stopped the inflation spiral overnight and the economy of Brazil slowly started to recover. This is a prime example of perceived wealth. The immediate trust of a currency can seem insane to some people. This is very understandable as the ability of to do this can be out of desperation. When your economy is crashing adopting a new currency can be the only way even if it has no actual backing besides the trust of the populace.
We can even look to cryptocurrency and Bitcoin. Bitcoin had reached up to $20,000 and then dropped dramatically. This currencies perceived price had dropped dramatically and people lost a lot of money. Those who were made millionaires lost a majority due to this extreme drop in trust. This is a bubble bursting. This has happened before, but in different markets. Whether it be the housing market or the tech market when there is a drastic raise in interest of a certain product or currency it can cause dangerous results. The housing market caused a recession causing the loss of millions of jobs. The tech bubble to less of an extent, but still a noticeable extent. Perceived value can be extremely beneficial, but it can be extremely horrendous. When the markets reset and the perceived value drops we can see the losses. Loss of jobs, loss of acquired wealth, loss of life, etc.
So what is money? Money is whatever the majority says it is. If tomorrow the United States Dollar consisted of beanie babies then you better acquire beanie babies. The stones of Yap, the Real and Cruzeiro, Bitcoin, and your bank account help show just how must perceived value can have an effect on an economy.
Friedman, Milton. “The Island of Stone Money.” Diss. Hoover Institution, Stanford University , 1991
“The Invention of Money.” 423: The Invention of Money. This Is American Life, WBEZ. Chicago . 7 Jan. 2011.
Renaut, Anne . “The bubble bursts on e-currency Bitcoin.” Yahoo.com. 13 Apr. 2013. 30 Jan. 2015. https://sg.news.yahoo.com/bubble-bursts-e-currency-bitcoin-064913387–finance.html/