May 25, 2024

In the past, the value of your coin depended on the value of the metal it was made from, because you could melt it down and use it for something else at any time. Not so long ago, even just over 50 years ago, the paper money of many countries was denominated in gold or silver (or a mixture of both). This meant: You could go to the central bank with the paper money in your hand and buy gold as much as the value of that paper money.

The gold standard in the USA ended in 1971, when President Richard Nixon abolished the practice of converting paper money into gold. Since then, the gold standard has not been used in any major economy. The system that is currently used in countries and in which the value of money is not dependent on any consumption item is called the nominal money system. So roughly speaking, the pieces of paper in your pocket are just pieces of paper.


Beliefs That Value Money


So, how do we explain the fact that the papers in your wallet have no value?

Simple. Money has limited supply and demand; People always want money. We want money because we know that other people also want money; so that we can meet our needs by giving money to those people. The people you pay money to will also use that money to meet their own needs.

After all, it is goods and services that matter in the economy, and money is a tool that allows people to bypass less attractive goods and services and focus on the goods and services they want. By selling their labor (i.e. working) people earn money to buy goods and services in the future.

Our monetary system is built on a belief shared by all; so the system will continue to work as long as people continue to believe that money has value.

So what could cause us to give up on this belief? It does not seem possible that money will be replaced by something else in the near future, because the disadvantages of the conflict of mutual wishes are well known to humanity. Even if the currency is to change, there is a period of time when people can exchange the old currency for a new one. For example, this is how the countries that switched to the euro switched to the euro. In other words, the concept we call money will not disappear completely; only today’s money will evolve into other currencies in the future.

Fiat Currency


The money that is essentially worthless and indirectly accepted to be valuable and generally made of paper is called fiat money. The term is derived from the Latin verb “fiat” meaning “to be”.

Fiat money has no particular value; It has been considered valuable in the system created by people. According to the laws of the country, the value of the paper, which is considered money, is secured by the “trust and credit of the state”. So the laws say: this paper itself has no value, but you can trust this paper because it has government support behind it.

Future Value of Money


So why should we think that our money will not be valuable to others? But what if our money isn’t as valuable in the future as it is now? If the inflation of money rises above a certain level, people will want to get rid of their money as soon as possible. Inflation and the rational response of citizens to the situation is a source of great pain for an economy.

People will not sign business deals that include future payments because they will have doubts about whether they will be paid the money they demand. Because of this, business activities go into a serious decline. Inflation may cause the cafe we ​​go to change its prices every few minutes, or cause us to go to the bakery with a wheelbarrow full of money to buy a loaf of bread, as was the case in post-World War I Germany .

Belief in money and the stability of its value is not harmless. If people lose faith in the money supply and that money has a value, the economy comes to a standstill. Therefore, the Central Bank makes great efforts to keep inflation at a certain level. A little inflation is good, but high is a big loss.

Money is essentially a good thing as long as it is managed within the axioms of supply and demand. The value of money is measured by the supply-demand for money and the supply-demand for products in the economy. The price of a good is measured by how much money is needed to buy that good. Inflation occurs due to the decrease in the value of money as the price of the good rises and occurs under the following conditions:

  • money supply rises
  • Product supply drops
  • Demand for money falls
  • Product demand rises

The key action that causes inflation to rise is the increase in the money supply. Inflation may be due to other reasons as well. For example, if a storm breaks out and leaves the banks intact, the amount of goods will decrease, and there will be a tremendous increase in prices, resulting in inflation.

But such cases are very rare. Inflation often occurs when the money supply is faster than the supply of goods and services.

the essence of the word

Money is valuable because people believe they can use it as a tool to exchange for goods and services. This belief will continue as long as people do not fear inflation or trust that the existing government and money supply institution will not collapse.

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