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Why money worth anything ?

  Money is arguably one of the most important things in the world. While happiness and joy might outrank it at least on your uplifting Instagram feed, money does seem to make things easier. When you actually stop and think about paper money, though, we're left with a perplexing conundrum. There's nothing inherently valuable about these banknotes, at least today. So why does money have any value at all? Over time? How paper money is valued has actually changed, so to understand how modern money is worth anything. First, we have to look back to the early days of paper money. In the early days of governmental currency, money wasn't paper. Rather, it was usually a coin made of a precious metal like gold or silver. The value of that money was intrinsic as the value of the metal that made it up. If you melted a gold coin down, you'd have the same amount of gold as the coin was worth. As this system of money became impractical, governments decided to come up with a new way of holding value in currency.


 Paper money. At 1st, paper money was backed by something called a gold standard. This meant that a dollar bill or any other nation's currency could be exchanged for an exact amount of gold. This was a way of making it so that you didn't have to carry around valuable gold and silver in your pocket every day. This also meant that theoretically, the US or other countries held the equivalent value of gold in a reserve as there was paper currency in circulation. Banks wouldn't just be able to cash your checks, but they could give you gold or silver directly in exchange for your paper money based on an exchange rate set by the US or other governments. All this worked well until in 1971 the US abandoned the gold standard for their currency. President Nixon believed that the gold standard undermined the core U.S. economy, which is what led him to start that movement to a system that we have today.



Fiat currency. the US and many countries around the world currently operate off of a Fiat money system, which means that paper money. Isn't tied to anything or any commodity. Ultimately this means that modern paper money's value isn't inherent, but it depends upon human thought and valuation. So if the paper money isn't actually worth anything, then why do we give it value? Dollar bills and other modern bills have value because it's viewed as both a good and a method of exchange. This means that it's in limited supply, or in other words, the US Treasury or other countries treasuries don't print an unlimited amount of money. People see cash as a means of exchanging goods, or rather, sellers are willing to accept money for their products or services. As you might be able to infer, money's value depends on large part on the latter reason, its usefulness as a method of exchange. If people stop wanting to accept the US dollar or any other currency for their goods or services, then we'll see inflation or devaluation. Modern money operates on the belief that money holds value when will in the future. This belief is usually backed by the federal government in a country meaning that as long as the government is strong and healthy, the money will likely have great value. Conversely, this is also why we've seen massive, nearly unimaginable inflation in Venezuela as their government has fallen apart in recent years.



 So what's the future of money? While many economists don't like the system of Fiat money that we currently have, it's unlikely to go away anytime soon. That means that the future of any given Fiat currency depends solely on user sentiment. The value of Fiat currency decreases when the supply of said money goes up, the supply of other goods goes down, the demand for money goes down, or when the demand for other goods goes up. These four principles are core to how Fiat money changes value or inflates or deflates its price. So at the end of the day, modern money has value because we say it does and believe it will in the future. How does that make you feel about the $20 in your pocket right now?  

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