Economics 101: How Paper Money Got Its Valueas A Currency

You probably wonder why money has its value. They’re mere printed papers, after all. And that’s despite of your money being placed in modern banking accounts, such as those with app funktionieren for mobile use.

Yes, they have nationalistic or historic designs, but that doesn’t instantly make a printed money worth its designated value, does it? You see, a 5-dollar bill doesn’t even worth $5.00 when you count the cost of materials used for it.

But why does money has value? What gives its worth, and what makes it usable in commerce?

Learning What Gives Money its Value

Barter trade is the ancient way of our ancestors to acquire things. They exchange items to get another item, as long as both party would agree on the items they’d exchange. |The problem with this system is obvious. Nothing has constant value, so conflict often result on trading.

That’s why ancient civilizations came up with currency.

Precious Metal Currencies

People in the ancient times make coins out of gold, silver and bronze among other precious metals. The value of a specific coin depends on the amount of certain metal it contains. So, people can melt a coin, churn it to certain products and sell it up. Forward to the modern era, paper money have made such process more convenient.

Gold and Silver Backed Currencies

Carrying many coins in your pocket is quite inconvenient. Try doing it with the coins of today, and you’ll end up with a torn pocket. That’s why governments have come up with paper bills to carry large value.

The amount of bills circulating in the market depends on the amount of gold reserve a country has. In late 1940s, for example, the value of an ounce of gold is $35.00. So if the USA has 1 billion ounces of gold, for example, there should be $35 billion in circulation. In fact, people before can bring cash to the government and exchange it for gold.

Thing is, President Richard M. Nixon put gold backed dollar into a halt in 1971. From then on, fiat currency circulated in the US market until today.

The Value of Fiat Money

Fiat money is a currency which doesn’t peg its value on a commodity such as precious metals. Its coins and bills which has no real value, including those people use today.

How come fiat money is usable as a currency? The answer lies on the value given to it by the government and the people. That’s trust.

For example, you use one $5-bill and four $1-bill to buy a burger which costs $9.00. You trust the perceived value of the five bills, and the burger seller thinks the same. Hence, making the transaction possible.

If you’d use an old design of any bills, for example, the burger seller won’t accept your payment. That’s because he doesn’t trust such bill for today’s transaction.

Production of Fiat Money

Aside from mere trust alone, the production of fiat money also play some roles to its perceived value. It lies on the rule of supply and demand, wherein value decreases when supplies increases.

If you can easily spot $5 bill anywhere, for example, chances are you’d take it for granted. You don’t see the need to work to earn it up. On sellers’ viewpoint, since $5 bill is easily available and has a large supply, they’d put bigger price tag on commodities they sell. Inflation is inevitable in such case.

Inflation is the price increase of specified commodities over a certain period. It also indicates the decrease in value of certain currencies. That’s because people don’t trust such money to make purchase anymore.

Hence, the government tries its best to curb inflation as much as possible. Thing is, minimum inflation is a great indicator of a growing economy, as long as it remains under control. Excess inflation is hyperinflation, wherein prices of commodities soar high while value of currencies drop rock bottom.

Will Fiat Currency go away?

Experts are divided whether fiat currency would remain or not. However, may agree that it will still stay for a long time, if ever it would disappear in the future. In fact, many investors still put their focus on fiat currencies, instead of other alternatives such as cryptocurrencies. The comeback of gold backed currency is quite unclear as of now too, especially with the issue of maintaining gold reserve.

Nonetheless, many economic experts pay attention to the rise of cryptocurrencies or virtual cash. The world is heading towards a technologically advance future, after all. So, many organizations began to develop their own cryptocurrencies, or some ways to handle existing ones.

This is just a brief overview about the value of money today. From the ancient barter trade to fiat currencies, money have evolved in terms of convenience and efficiency. And that’s all for the greater good—economically speaking.