What is Money anyway?

[Zeno]

Is there really such a thing as money/currency? Or is it just an idea that everyone believes in, thus making it important? What is money anyway? Does it really exist, or is it just an illusion? These questions are not as silly as they may first appear.

According to the Dictionary of Finance... Money is "legal tender as defined by a government and consisting of currency and coin."

As we all know too well, when governments get involved nothing is as it seems to be. Of course, this may depend on what your definition of is IS.

Does Money, like God, need faith to “exist”?

Can anyone clear this up for me?

-Zeno

[scalf]

/images/graemlins/grin.gif it don't mean a thing,
/images/graemlins/shocked.gif if it ain't got that swing...

jmho...gl /images/graemlins/tongue.gif /images/graemlins/wink.gif /images/graemlins/diamond.gif

[RocketManJames]

Most money today is what is called "fiat money." Just as you said, everyone has to believe in the government's decree that money is legal tender for this type of fiat money to be worth anything. If a (heaven forbid) worldwide catastrophic event were to destroy much of the world, throwing it into a state of true anarchy, money wouldn't really be worth much, if at all.

Now, if you had money that was tied to something that was actually useful, then it'd be different. For example, what if we had a country where currency was canned food. Then, that 'currency' has a real use other than as currency, and would no longer be termed "fiat money," since it would have value regardless of whether a governing body deemed to to be legal tender or not.

If I'm completely wrong, then blame my past economics teachers.

-RMJ

[Wildbill]

Excellent post. Hard concept to explain really. Money is only as good as the central bank. That is why the best and most reliable currencies all have an independent CB that isn't subject to constant political pressure. Lots of lesser countries prime the pump whenever an election comes up. Mexico is a great example of what a CB that gets serious can do. For the 1900s everyone in the country feared for the Presidential election every 6 years. It wasn't like the people were able to vote for a candidate other than the one chosen for them anyways, but to rig the contest more the government would print out lots of money and give lots of favors in the 6 months before the election. Then the new President hit office and first thing he would do is devalue the currency and the economy would suffer. It was so deeply ingrained that even though the last election had an independent CB and had a very tough fiscal policy, the people still feared after the election their money would be devalued. In the weeks before the inauguration people were buying dollars every chance they could. Fox got elected and the markets acted with joy, the peso was strong, then in the month before he took office the peso saw heavy depreciation. Surprise, nothing happened, just as anyone with common sense could have told the people, but people in countries such as Mexico don't trust or pay attention to what bankers say. Now they have a lot more faith and the CB acts independently and manages the currency value effectively. That is why bankers always talk about credibility, that is what the game is all about. If you gain credibility over 5-10 years it provides untold benefits to a country from lower interest rates to far higher credit availability and that is what makes a lower or middle income country move up in the world, a fully functioning credit market. Unfortunately most of the world still operates on a vote-buying, if not vote rigging system and why populists are always getting elected, and most of all why countries need to establish and build a solid democratic society with independent institutions run by capable people, not just faithful cronies of the boss.

[Zeno]

Thank you RocketManJames and Wildbill for your informative posts.

-Zeno

[David Steele]

The best way to look at this is covered in a book by philosopher John Searle, The Constuction of Social Reality.

If you say "I have a 20 dollar bill in my pocket" ( and actually do ) then the statement is a fact but a socially constructed fact.

Searle would consider the raw material, the paper, ink etc to be objective reality. I think some extreme post-modernists would argue that all reality is socially constructed.

D.

[IJW]

wow didn't expect this on here (new to the forum)
i think this ties in with another post about Gold hence why so many countrys (mainly US, UK and germany i belive) have TREMENDOUS reserve's of gold, its a precious metal, since someone banged some flat in their mud hut and made it look pretty its been sought after, there is not an endless supply, its not very easy to get and it will allways be desired.
therefore people put more faith into it, as indeed they should IMHO :-
which has more chance of being worthless tommorrow
£1,000,000 in used £20 notes
or
20 bullion bars.?

in the event of WW III i would much rather have the bars tyvm

[brad]

too bad US didnt have federal reserve cb until after depression could have saved us

[Wildbill]

I don't know if it would have. Part of the problem then was people didn't understand monetary theory so well. They didn't realize that if you don't work counter to what was considered common sense that you will run into major problems. One of the little talked about issues from that time was the nature of bank loans and margin. Some historians say that high margin on stocks started the problem, margin calls were made and people took out their bank savings to cover them. As the savings withdrawl began picking up, a few banks got into trouble. Then people feared for their money so they started runs on the banks. In the meantime banks started calling people's mortgages to try to cover their loans, but of course just as now, few had cash on hand to pay off their mortgages so the banks took them over. In a time of panic the banks couldn't sell the homes, no banks would give loans on them and no one had the money so the housing market fell apart and the banking system seized up. So I guess in that cascading pattern, the Fed would have been in good shape, almost from day one. They would have prevented the run on the banks as they did in 1987 and 1998 by flooding the banking system with liquidity and guarantees. By avoiding the first domino, everything worked out fine. Now they had the experience of history to tell them what happened before, would a Fed of 1929 had been able to see the disaster? Good question, maybe not. The Fed might have thought let the stock price bubble burst so people stop using margin so much, but only when it got out of hand would they realize the disaster awaiting them.

[GeorgeF]

Life is the game your playing.
Your money is your score.
-Anonymous Obnoxious Jerk at Tropicana 4-8 Holdem Table

Usefull links:

A comedy of values
http://www.ozwei.net/boggs/et_koplik.html

Emperor Norton I Bank notes
http://www.zpub.com/sf/history/nortm3.html

Yap Island Stone Money
[Check out the half naked stone age girlies dancing infront of some dude's wad, that picture says it all]
http://www.econ.utoledo.edu/faculty/tank/stone3.htm

The Power of Gold: The History of an Obsession
http://www.amazon.com/exec/obidos/tg/detail/-/0471252107/qid=1067108829/sr=1-2/ref=sr_1_2/104-3825465-6082365?v=glance&s=books

Plutus By Aristophanes
http://classics.mit.edu/Aristophanes/plutus.html

[brad]

well it was a trick question i mean statement actually the fed admitted they caused the depression by tightening money when they should have done what u suggested and loosened up money supply. from off top of my head, fed didnt start loosening up until late 30s at the earliest but i may be wrong about that.

federal reserve was established 1913.

p.s. i think bernake or some fed governor in an interview said feds mishandling of monetary policy caused or greatly contribiuted/prolonged the depression.

[eMarkM]

[ QUOTE ]
For example, what if we had a country where currency was canned food.

[/ QUOTE ]

Cigarettes in post WWII Europe became a de facto currency in the chaotic aftermath, exactly like your example with canned goods. Didn't matter if you didn't smoke, it was still good as currency to the non-smoker, since you could always exchange with someone who would eventually consume it.

Libertarian thinker Murray Rothbard has an excellent little book about how money went from being backed by gold to being the worthless "fiat" currency it is today.

What has government done to our money? (http://www.mises.org/money.asp)

[Kevin J]

All I know is that the mortgage company and ex-wife both think it exists and I'd better send them some every month, or else.

[Zeno]

Social Reality is Hell, isn't it. /images/graemlins/smirk.gif

-Zeno