Our Money Culture $1
Even if you've never been to the United States, held any US currency in your hand, or have never even seen a US dollar bill, you are affected daily by this instrument of "legal tender". The modern world economies are linked, intertwined, and closely related. A simple example of this might be explained by tourism. Currently the USD is only worth about 65% of what it was 5 years ago, one euro will buy you $1.50 in the US. A great time to visit the States; but, not a year to expect a lot of American tourists to come here on holidays! Our economy relies more heavily on them coming here than does their economy rely on us. So, what are the implications and why does this happen?
The history and evolution of money or currencies is both fascinating and complex. The long and the short of it is this: Instead of exchanging a sack of grain for four chickens at an ancient market, and to simplify multiple exchanges of an infinite variety of goods, some genius decided to mint coins of precious metals of varying values to expediate commerce. It was a brilliant idea that brought a quicker, less cumbersome, and far reaching method of supplying goods and eventually services to individuals, groups, and governments. There was faith in the value and wealth of these coins as they were made of gold or silver and could be weighed. If you took a €100 note back to ancient Egypt, instead of gold or silver, no one in their right mind would give you so much as a peanut for this piece of paper. How did our currency get from precious to paper? Trust.
At another stage of the monetary system evolution paper certificates were issued instead of the bulky and heavy coins to further speed up the exchange of goods and services. At any time the certificate could be brought to a gold or silver trader and you could swap the paper for the heavy stuff. In a sense you can still do this today. Bring ten $100 US bills to a dealer and he will give you one ounce of gold, no questions asked. The only time a problem would arise is if everyone took their hundred dollar bills and tried to cash them in for gold. If that happened the traders would run out of gold after only 10% of the paper money was turned in! What then is the other 90% of the paper worth? Trust works both ways, you trust that the paper has value and the governments trust that we all won't try to exchange it at once! Sounds a bit like a pyramid scheme doesn't it?
Consider your bank card. As a piece of colourful plastic it has little intrinsic value; but, it's value to you is represented by the fact that it can access huge (hopefully!) quantities of cash. You have confidence that with that little worthless card you can approach any bank machine and withdraw some of the money you have in reserve. Your bank card is worth only what you have backed it up with in a reliable form of wealth and you trust you can access it. If there is no money to back up your card, or if that account has been closed, your bank card's only value is as a bookmark pageholder. It may look exactly like Bill Gate's bank card; but, you know very well they are different. Our dollars, euros, yens, pesos, and rubles act in exactly the same way as bank cards do and their value is determined by the systems that back them up.
The following sections of this essay will explore how these values are determined, who does the evaluation, and what impact it has on our lives.
***Link here for Part 2 on NowPublic.