In Currency We Trust
P1. Although people don’t often think about it, communities are based on trust. While driving down the highway, everyone driving trusts each other, to some degree, not to cause an accident. Although this trust is based around mutually assured destruction, it shows that something that people do every day relies on trust. Before currency, goods that had an intrinsic value to each person were exchanged. If each person has something the other wants, then this system works easily. In larger systems or when people need different things, this type of trading becomes very inefficient. It could require multiple steps of trading with others until both people have something of value to the other person. On the other hand, currency has no intrinsic value. It gets its value from trust. People trust that other people will accept it in exchange for goods and services. When this trust erodes, the currency is worth less and inflation occurs. This was the problem in Brazil with the cruzeiro. People didn’t trust the currency and its value decreased everyday. The constant inflation caused a positive feedback loop that made people trust the money less and inflation to be worse. When a new currency was introduced, Brazilians trusted it because the value was stable and because other people trusted it. Money is only as valuable as other people think it is
P2. Brazil introduced a new currency, the URV. People were paid and taxed using this virtual money. The URV remained stable while the cruzeiro continued to lose value. For example, a gallon of milk may cost 20 cruzeiros one day and 30 the next while it continued to cost one URV. When people saw that it was stable, more and more businesses accepted them until they were widely used. Without inflation, people didn’t have to rush to exchange their currency into goods before it lost value. When people don’t trust a currency, they exchange it for something with intrinsic value quickly. This happened in Brazil and to Bitcoin. When the value of Bitcoin was rising, more and more people were trying to trade their Bitcoin before it lost its value. This flooded the market with people selling their Bitcoin which decreased the value. It is like playing musical chairs with people trying to get rid of their money before it is worthless. Since the value of URV remained the same, people trusted that it would continue to be stable. People felt safe holding the URVs instead of exchanging them for goods.
P3. For a person to trust a currency, everyone else needs to trust it. If everyone puts their faith in a currency, it is in everyone’s best interest to continue trusting it to ensure that their money doesn’t lose value. The Yap used large stones as a currency. The community agreed on a stone’s value and trusted that the stones would be accepted by anyone else in the community. The stone didn’t even have to be moved because everyone knew who the stone belonged to. This is similar to how a debit card works. Nothing physical moves but it is understood that money has transferred owners.
P4.In Japan, the value of the yen is losing value. Japan has been accused of starting a currency war. The less value holds, the more competitive Japan’s exports are with other countries. Having more demand for exports could help Japan’s economy. If other countries try to devalue their money, people’s money loses its worth. People will not trust their money and the world will end up with a problem similar to Brazil’s problem.
P5. In the past, American money was backed by the gold standard. In 1932-33, France was worried that American money may not be backed by gold in the future. France requested that the Federal Reserve exchange the money they held for France into gold. They did this by simply labeling the gold for France. When Americans found out that the Reserve now had less gold backing the dollar, they panicked. They thought that the French money had grown stronger and the American dollar had weakened. This caused the Banking Panic of 1933. Americans had lost trust in their money. Even though it was the same money, people thought it was worth less because it was no longer backed by as much gold. Because they trusted the dollar less, it had less value. This shows how important trust is and how easily the symbolic value of money can be changed.
P6. Whether it takes the form of paper, coins, gold, computer data, or huge stones, money is a medium for trade. It has no intrinsic value. It is given value by the people who use it. Since money only has value symbolically, it is possible that one day the world will be stuck with worthless pieces of paper or coins. This doesn’t happen because people believe that their money has value. They exchange their time and work for money with the belief that they will be able to exchange it for goods or services. No matter what form our money comes in, all types of money operate under the same belief. People trust that other people value their money. Without that trust, our money is worthless.
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