It’s Real, As Long as We Believe
If I pose the question, “What is money?”, what comes to mind? Normally, you would state what has been dictated as the obvious, such as dollar bills or coins. Growing up we were trained to believe in the notion of money and its importance, including myself. The importance of a monetary system in our society is not being questioned, however, consider for a moment, how much of that money have you seen. While virtually the entire population believes in the value of paper money, the vast majority of that money does not actually exist. Money is an abstract concept that is created out of nothing and if there is no belief, the entire notion of money would crumble. The concept of money only has tangible value if people believe it is real.
In NPR’s podcast This American Life, Chana Joffe-Walt explained how four men “deceived” the people of Brazil into using a new currency and its positive results of decreasing inflation. Brazil had been struggling with high inflation rates and the unstable nature of the Brazilian economy left its citizens with little trust in their money. The plan involved the creation of a virtual currency which was known as URVs and the value of a URV varied on a daily basis. Yet the Brazilian citizens were only aware of how they could spend each URV with a conversion table. For example, the price of milk would stay the same, but the only aspect that would change would be the amount of cruzeiros you handed to the clerk. This sense of monetary reliability, which was nonexistent in the past, restored the citizens’ trust and belief in their economy. This led to the creation of the Brazilian real by the government, which was easily accepted by the citizens. This plan successfully lowered the inflation rates and helped stabilize the Brazilian economy. The fact that the people of Brazil believed that this fake currency was real, is what made it real. This situation is summarized by Jacob Goldstein stating “You don’t have to touch money. You don’t have to see it. It’s just information.”
In his essay, “The Island of Stone Money,” Milton Friedman explains how the German colony on the Island of Yap utilized a unique method of currency that was essentially based on belief and trust. In the early twentieth century, Germany claimed this underdeveloped civilization containing a small population. They noticed the islanders’ unique form of currency, known as fei, which entailed the exchanging of incredibly large stone wheels. The intriguing nature of this system was that physical possession of the stones was not necessary for indicating ownership. Instead, ownership was recognized through trade and verbal transactions. Due to the inconveniently large size of the stones, fei wasn’t obligated to leave a previous owner’s land if a bargain was made with another islander. The transaction was unquestioned and acknowledged by everyone with only a mark symbolizing the exchange. When Germany wished to impose fines on the inhabitants of Yap, they had to make use of the stones by painting crosses on the stone wheels to identify that they had taken ownership. When the German government’s wishes were abided by, the transaction of returning the fines was done by removing the paint from the stones. The value of these large stone wheels is essentially created through the islanders’ belief. One story that was told by Friedman was explaining the legend of a family on the island who had inherited a vast amount of wealth from their ancestors. Their ancestor had lost their large fortune of fei at the bottom of the sea in a storm, and it was never seen by a single person on the island. Despite this event, the wealth of the family was unaffected, and their immeasurable fortune was recognized by everyone without question. That fact that this form of money was still considered to have value on the ocean floor, even though it has never been seen is a testament to how belief in a concept can give it value and worth. If people believe it to have value, then it inherently does.
Although using stone as currency isn’t common for the rest of the world, the actions of the people of Yap are not so different from an economy that uses gold and paper currency. Ira Glass explains how when the United States abandoned the gold standard, there was no physical accountability backing all the money printed. Before, each paper dollar that was in circulation was represented by one dollar worth of gold stored at the Federal Reserve. Then, the United States Federal Reserve had realized the unimportance of the physical gold representation corresponding to the money in the economy. Money was being created essentially out of thin air by the Federal Reserve, as they felt it was necessary for the economy. The people of the United States have belief in this system of currency, which allows this unbacked printed money to have value in our day-to-day transactions.
These previous examples all display the fact that money and its worth is not determined by its physical object. This belief in the value of money is also seen in one of the world’s biggest virtual currencies, Bitcoin. Bitcoin is popular for its high trading value, and it is a cryptocurrency that skips over financial institutions. Anne Renaut describes how Bitcoin is a completely virtual form of currency and how no one ever sees it. It can be described as strings of code that were created by computers, and it functions similar to how stocks do. As Renaut stated, “…Bitcoin users can only cash out their money if other people want to buy their Bitcoins.” This proves proof that the sustainability and value of Bitcoin is only valid as long as others have belief in this form of currency.
After researching this topic, I have gained a whole new perspective on money and its value. For the entirety of my life, I have seen my parents paying for groceries or paying the bills monthly. There is always a demand for money and the aspiration to accumulate large sums of it, however we have never been taught the real reason as to why the concept of money has value. It is not due to any physical or materialistic worth, but it is because of people’s belief in that concept that supports it.
Friedman, Milton. “The Island of Stone Money.” Diss. Hoover Institution, Stanford University, 1991.
Renaut, Anne. “The bubble bursts on e-currency Bitcoin.” Yahoo.com. 13 Apr. 2013. 30 Jan. 2015. https://sg.news.yahoo.com/bubble-bursts-e-currency-bitcoin-064913387–finance.html/
“The Invention of Stone Money.” 423: The Invention of Stone Money. This Is American Life, WBEZ. Chicago. 7 Jan. 2011.