How does the economy work and what even is currency?

Growing up in the United States, I learned that a rectangular piece of paper with numbers in each corner represents a unit called dollars and whatever number is in the corner determines the value in dollars. This is something I’ve never fully questioned and have accepted for all of my lifetime. After listening to “The Invention of Money” an NPR Broadcast and reading the articles “The Island of Stone Money” by Milton Friedman and “Opinion: Bitcoin Has no place in your – or any- portfolio” by Jeff Reeves, my perspective on currency changed completely. My initial reaction to both of these sources was that they were wild. But then upon some further thought, I was in total agreement with them.

The NPR broadcast starts out with a discussion on the economic collapse of 2008 where the United States “lost” trillions of dollars. One of the members of the broadcast was confused as to how all of that money can just be lost and I was also confused. That same member had asked his Aunt, a businesswoman, the same question in which she answered “So the answer to the question, where did the money go when the housing market collapsed turns out to be that the money never existed in the first place. All those houses used to be worth a certain amount and now they were worth a lower amount. Simply because that’s what everyone now agreed.” No actual physical money was lost or vanished. It was the opportunity to make money on certain items and the valuation those items (in this case, houses) that were no longer worth the amount of money that society had once deemed them to be worth. Gaining this knowledge from the broadcast helped me develop my first claim.

Society dictates how well an economy can do. A society that stays constantly engaged in exchanging of goods/services and can identify the correct values of those goods/services will stay afloat, will allow more money to be produced, and allow its money to maintain its correct value. Why? When society correctly values goods/services and they support the value with the funding needed, more money can be distributed because the goods/services represent a need and society and the more money they can get, the more productive they will be in producing for society. But when that good/service is no longer of need or the funds stop coming in, it can create a crash. How? When a good/service becomes obsolete, members of society may be left with funds that once were used on that good/service and they now have no use for them. This causes prices to go up on items that weren’t once as expensive and it causes people to hold money to do nothing with it. What does that do? It devalues money which is a sign of economic downfall. The opposite, meaning still having goods/services but no funds can also cause economic crash. If a good/service is still a need but there aren’t any funds coming in to support it, the situation can get very ugly. The producer will be end up charging top dollar for their good/service because they won’t have enough money to keep producing it due to insufficient funds in society which creates a lose-lose situation. The lose-lose is that no one will likely be able to pay for the good/service and because no one can pay for it the production stops creating an economic crash.

The NPR broadcast was huge in helping me find answers and developing my claim about economics. But I was still left with some questions on why different types of currency are recognized as valuable. Thankfully, articles “The Island of Stone Money” by Milton Friedman and “Opinion: Bitcoin Has no place in your – or any- portfolio” by Jeff Reeves were able to provide some insight and answers to the questions I had. Friedman’s article documents the different types of currency that exists among different societies. The most interesting form of currency documented in this article in my opinion is the stone money from Caroline Islands. The article states “their island yields no metal, they have had recourse to stone…Their medium of exchange they call fei, and it consists of large, solid, thick, stone wheels, ranging in diameter from a foot to twelve feet, noteworthy feature of this stone currency … is that it is not necessary for its owner to reduce it to possession” I was truly blown away for multiple reasons when reading about fei. What I first thought was wildly interesting was the fact that there were no metals on the island. The reason this was shocking to me is because most currency around the world regardless of material, holds its value due to precious metals such as gold and silver. The other big shock to me was the size of this currency. Because the currency was so large, the owner didn’t even have to possess it to have the rights to it and they were just the assumed owner by good word. You would think this type of currency could only be useful to the island natives, but that wasn’t the case when Germany took over the islands. To get natives to cooperate with their takeover they used their one of a kind currency against them “he simply marked a certain number of the most valuable fei with a cross in black paint to show that the stones were claimed by the government. This instantly worked like a charm” Although the currency didn’t hold any value in Germany, the Germans were able to use its value to the natives as a black mail tactic.

Now to Reeves’ article, which discusses the potential of Bitcoin which at the time was a brand new virtual currency. At the time(2015), Reeves makes what I think is a good/reasonable point when he says “bitcoin has no central bank or authority behind it… A bitcoin, then, is simply worth whatever a random person is willing to pay” I would’ve agreed with Reeves in 2015 because in order to have valuable currency, it needs to be backed by some kind of authority and have a market for which it can have genuine value in.

With the takeaways from both articles, I was able to develop my second and final claim. Any form of currency can find a way to hold value as soon as a market is developed for the currency to thrive in. This claim is supported by what happened on the islands because fei which was once useless to the Germans, became useful when they established a way for it to be used during their takeover. Eight years since the release of Reeves’ article, we now know that Bitcoin has an established market due to technological and digital advances globally. Therefore, I don’t see a reason that anyone can come up with any form of currency to be used as long as there is an established market for it.

Based on the knowledge I’ve gained from these sources, I’m able to claim and conclude that a society that stays constantly engaged in exchanging of goods/services and can identify the correct values of those goods/services will stay afloat, will allow more money to be produced, allow its money to maintain its correct value, and all currency can hold value when given the correct market.

References:

Reeves, Jeff “Opinion: Bitcoin Has no place in your – or any- portfolio” Market Watch 31 Jan. 2015 https://www.marketwatch.com/story/bitcoin-has-no-place-in-any-portfolio-2015-01-28

Friedman, Milton. “The Island of Stone Money.” Diss. Hoover Institution, Stanford University , 1991.

“The Invention of Stone Money.” 423: The Invention of Stone Money. This Is American Life, WBEZ. Chicago . 7 Jan. 2011.