Here is a deep question for you. What in the world is money? Have you ever held that green dollar bill in your hand (I say dollar because the possibility of me holding a $20 in my hands is very slim), and thought to yourself why it is so valuable to everyone around you? After all, it is just paper. If that were the case I have plenty of paper at my house and consider myself wealthy.
Money today is quite different than it was centuries ago. Currently, most of us hold plastic cards, that if traced, only have numbers to back it. The bigger the number recorded in the computer, the richer that individual. How has society become so withdrawn from the physicality of money? Why does green paper with a number in the corner hold a value to another? This is a big question to consider, but I find it fascinating.
Imagine for a moment. When you arrive at a bank to deposit a check from work, what happens to that “paper”? They run it through a machine which identifies the account from which the money should be withdrawn (or shall I say, they minus numbers off of the account), then they add numbers to the account of the person who is “cashing” the check. If you do not find this strange, then maybe you were not paying attention.
Let’s talk history. Anciently, it was common for individuals to barter, or trade goods with another. I’ll make a modern day example. Let’s say that you need milk for your cereal in the morning. In order to obtain this milk from the local market, you must bring something of value to the person whom you wish to trade with. Let’s assume that you heard that John (the milk salesman) has wanted an LCD tv to watch March Madeness. Now depending on how desperate you are for that milk in your cereal, which for me is a must, you will take the TV in your living room down to the market and begin the bartering process. In reality, no one in their right mind would trade a TV for a gallon of milk. But of course, you could possibly set a future determined amount of milk you wish to receive over the next 2 yrs from John. The deal is made if both individuals determine that they will gain from this trade. Hope you enjoy that milk in your cereal.
Now you understand that bartering is two individuals trading ownership of items which both consider to hold a determined value.
Eventually people determined that currency could hold this notion of value. These were anything from cowry, rocks, and eventually the use of silver and gold. Understanding that a measure of value must be obtained, it became common belief that all members of certain societies deduced value from these coins. Today we believe the same. Although the dollar bills in your pocket are just paper, society as a whole believes that this paper can be exchanged for goods at your local grocery store. No longer is there a need to carry your LCD tv down to the grocery store and work out a deal for a supply of milk 2 or even 3 years in the future. Instead, that grocer has calculated the price of milk using dollars.
Although this seems simple, it still boggles my mind. Everyone in the world believes that the dollar contains a determined value. Who determined this? How did they determine it? These are question that I may answer in some future blog. But for now let’s move on to the most modern way of exchange, digital money.
When I say digital money, it is hard to grasp. How can something digital be of value to another? It is simple in our minds to determine that the larger the number, the larger the amount of purchasable goods. Yes, indeed the higher the number, the more you can buy. But why does a number determine a value to society.
It would be easy to add six zeros to the end of my accounting balance. Wouldn’t that allow me to buy more than I could possibly dream? How does society control how this system works? Banks seem to be fairly responsible with this aspect of their functions. When money is deposited in a bank, that bank increases the amount in your account by the same amount deposited with them. By using your card to buy a TV, the merchant believes that those numbers in your account will transfer over into their account, thereby increasing their buying power as well.
Why does this work? Because, once more, society as a whole believes that more numbers in their bank account results in a larger buying power. If everyone in society understands and believes that something has a value, it can be used as a medium of exchange, or currency.
Let’s assume that everyone believed that LCD TVs were valuable, and again assume that they converted each LCD tv into $100. Then, simply put, everyone would be walking around with LCD tvs in their pockets to purchase the things they need. Value is determined by society. When an item is believed to be valuable, it will have a medium of exchange.
Now, we all understand the reality of everyone walking around town with TVs in their back pocket would be absolutely chaotic. But it would lower pick pocketing crimes. Could you imagine the effort it would take to slyly steal a 60 inch TV from someone’s back pocket?
Money has been determined a valuable medium of exchange. If that someday changes, we as a society would determine a new medium of exchange. All I can say is that I hope it will not be TVs.
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