• Benj96
    2.2k
    The title of this post sounds like a bizarre conclusion but let’s look at it hypothetically.

    Money has value. But why? Where does it come from? The value of money is essentially psychological. It is a physical symbol of “trust” or “belief” in it by people. The more people that trust in a currency the more stable and useful it becomes. And the more stable/ useful it is the more valuable it is because it can be trusted more. It is less likely to fail.

    Let’s consider a primitive community of 10 people who all agree for convenience to use one currency. It can appear stable for a time but it is not. One part of the community will be generally very satisfied with the currency and will trust it - these are likely the people who offer essential products/ have great command for pricing due to the importance of what they offer for example; architects and builders, doctors, soldiers etc. The other half will be less satisfied with the currency and trust it less - because what they offer isn’t as essential; Maybe artists, councillors, poets, etc. They don’t feel they are as valuable to the society and their income reflects this.

    Consider now that this portion (3 or 4 out of the ten) unhappy individuals decide to just go back to bartering between themselves instead of using the money. The others will witness that their currency can no longer buy the art, seek council or provide entertainment like it used to.

    This generates distrust and fear. No one wants to be the last one left with worthless coins that they received for trading all their valuables. Perhaps another sells off their coins and goes back to bartering. This causes a chain reaction making the money less and less influential and more untrustworthy until it becomes essentially valueless.

    This is because the participants each have a big impact on the value of the currency because the group is small. They realise the money isn’t “real” enough or “objective” enough and therefore can’t rely on it to continue existing.

    But let’s consider a larger community of 100 individuals and three or four unhappy individuals decide to leave the marketplace and barter instead. These people see that because what they offer (poetry, art, council etc) is offered by several dozen others also they have not impacted on the trust and belief of the society that the coins wont provide them with the service. Furthermore the remaining entrepreneurs see that a reduction in competition is better for them and therefore they are better off and have a higher income.

    This currency is more stable because of the diminished influence of any one individual. Furthermore this money appears more “real” more “objective” because the marginalised group see everyone trading with it even though they decided not to. Therefore this money must be more permanent and therefore trustworthy which is likely to eventually attracted the marginalised group back into the competitive marketplace. It demonstrates they have more influence in the Economic group instead of out of it.

    Let’s take this situation and apply it to the modern world. Imagine (though this would never happen) that a global ban was placed on exchanging or spending money. No one could observe the influence of money that comes with its exchange.
    Suddenly all the assets in a wealthy mans bank are valueless because they can never be seen or used again, and suddenly the poor are no longer any poorer than anyone else.

    Money only has value in the act of exchange. As the title of this post suggests. You may argue that money that isnt being spent (that sits in savings accounts Banks etc) also has value. But it only has value because the remaining “circulating” money is acting/ moving and bolstering “trust”.
    If all the money in the worlds banks were to flood out into the market and be spent simultaneously (for example in a global existential panic) Then the value of the currency would drop to nothing. There would be so much supply and very little incentive to take it as real world objects like food, housing etc. Are fundamentally always more important than money for survival.
  • ssu
    8k
    If all the money in the worlds banks were to flood out into the market and be spent simultaneously (for example in a global existential panic) Then the value of the currency would drop to nothing.Benj96
    How so?

    Remember that spending is an transaction. There would be this just enormous bout of economic activity and yet afterwards the money would still be in the bank accounts of people and companies. Every storeowner or salesman would have happy memories of that day.

    There would be so much supply and very little incentive to take it as real world objects like food, housing etc.Benj96
    ?
  • Benj96
    2.2k
    the Active circulating quantity of money (money in the process of being transacted) is X amount and the quantity of money pent up in banks is Y - a much larger amount on the order of millions of times more than X. If Y is added to X then X - the amount of money willingly being transacted - increases massively whilst the amount of products one can buy with this money stays relatively the same (ie. demand drastically outweighs supply) Then inflation occurs whereby the same loaf of bread that was originally sold for say $1 can now go for $150. The buying power of each $ drops to almost nothing (ie the value of the currency drops) rendering 90% of the population unable to use their meager finances to buy anything and the once wealthy now have to pay extraordinary amounts of money for basic goods that was little more then pocket change to them before.

    Everyone loses confidence in the currency as it cannot do anything for them and it collapses
  • ssu
    8k
    If Y is added to X then X - the amount of money willingly being transacted - increases massively whilst the amount of products one can buy with this money stays relatively the same (ie. demand drastically outweighs supply) Then inflation occurs whereby the same loaf of bread that was originally sold for say $1 can now go for $150.Benj96
    The Quantity Theory of Money goes like this:

    money supply × velocity of money = price level × real GDP.

    If something is sold out, it doesn't mean that the price will multiply then by hundreds. If you cannot get the car you want today, will you insist to pay ten or twenty times more to someone that did get it today in order to get it? Or do you wait those six months? People will simply opt to wait until more are produced. High demand on products or services doesn't result in hyperinflation. Hyperinflation is a separate phenomenon from demand-pull inflation, which this is crucial in your example. I'll try to explain this (so others can understand what I mean...and I get it right myself).

    Secondly, if people today empty their bank accounts and buy things today, likely tomorrow it's going to be a slow day in shops and in the markets. Hence the money velocity will have this huge spike today and then go to a lower level than before tomorrow. If I go and buy stuff with everything that I have in the bank account, that still doesn't mean I cannot future pay money debts as I still am working. It is correct that velocity of money is important for inflation to happen, but the issue is more complex than what you gave in your example.

    Basically your model would result just in a run on the banking system if everybody would simultaneously want to use their money to buy something. Likely the central bank would give the banks more liquidity. It's the market mechanism here that would simply push prices higher. This is just the demand curve shifting to the right:

    images?q=tbn:ANd9GcSMmfXhYsuoDl0FEH8WqipzP06SC88GWLSFhA&usqp=CAU

    If the supply cannot adjust to the new demand, then prices will rise. Put it to the larger context, this is called demand pull inflation (AD=Aggregate Demand, AS=Aggregate Supply):

    inflation_demand_pull_causes.png?mtime=20160408142439
    Notice that demand-pull inflation is quite normal for the market mechanism.

    Yet if there's more demand, likely manufacturers will produce more. Also starting from things like clothes or food, your example of a loaf of bread, there's limitations to how much we want. I only can eat so many loafs of bread. Hence there has to be a genuine reason why people want to change their money as fast as they can to something else. And that again is the crucial point in understanding inflation...and hyperinflation. And the real issue here is the actual confidence in the currency, as you observed.
  • Leghorn
    577
    Money can have no certain value because it has an ambiguous nature: it is both the means to wealth, and wealth itself.
  • Possibility
    2.8k
    Currency is the process, and money is the symbol. Its value is an agreement determined by its relation to other processes: exchange, production, demand, inflation, etc. and likewise the value of other processes (including human beings) are largely determined by their relation to it.

    But human beings have an ability to restructure their relation to the process in a way that no longer requires the symbol. It is the significance of the symbol in relation to the currency that deteriorates, while the currency itself simply changes form. Bartering is just a more localised agreement of valuing currency.
  • ssu
    8k
    Bartering is just a more localised agreement of valuing currency.Possibility
    Barter doesn't imply anything with currency. My lawnmover is worth x amount of your loafs of bread that we both agree on. Or that I mow your lawn for y amount of loafs of bread. The agreement is only between the two sides in the barter and likely will be different for a third person as his or her needs differ from mine.
  • Echarmion
    2.5k
    Money has value.Benj96

    I think the more accurate statement is that money represents value. It's the measuring stick by which we assess value.

    But why? Where does it come from? The value of money is essentially psychological. It is a physical symbol of “trust” or “belief” in it by people. The more people that trust in a currency the more stable and useful it becomes. And the more stable/ useful it is the more valuable it is because it can be trusted more. It is less likely to fail.Benj96

    I don't see how money becomes "more valuable" when it is more stable. Currency does tend to be more valuable the more widely it is accepted, but currency is not the same as money. The reason a more trusted currency is worth more is simply that it is more likely to be acceptable to strangers, but this only matters if you're liable to trade with strangers.

    Ultimately, it's not the money that we put trust in, but other people. We trust they'll accept our valuation of goods and accept a given currency.

    Let’s consider a primitive community of 10 people who all agree for convenience to use one currency. It can appear stable for a time but it is not. One part of the community will be generally very satisfied with the currency and will trust it - these are likely the people who offer essential products/ have great command for pricing due to the importance of what they offer for example; architects and builders, doctors, soldiers etc. The other half will be less satisfied with the currency and trust it less - because what they offer isn’t as essential; Maybe artists, councillors, poets, etc. They don’t feel they are as valuable to the society and their income reflects this.Benj96

    This seems to be mixing money, currency and social status all in one. Why would they trust the currency less just because they have less of it?

    Consider now that this portion (3 or 4 out of the ten) unhappy individuals decide to just go back to bartering between themselves instead of using the money. The others will witness that their currency can no longer buy the art, seek council or provide entertainment like it used to.Benj96

    What possible advantage would they get from bartering? And the way you set up your example, they need money to buy food, correct?

    This generates distrust and fear.Benj96

    Of whom? What's happening to our community that they no longer trust each other?

    No one wants to be the last one left with worthless coins that they received for trading all their valuables.Benj96

    But if the coins were worthless tokens to start with, why would you stop using them? They're tokens. It's not like you mistakenly believed they were made from valuable metal when they weren't. This is a symptom of confusing money (the system we use to compare values) with currency (tokens that represent value).

    Usually, money and currency evolve in tandem, and the currency is a commodification of the money. That is to say the currency is itself a commodity (like precious metals), so it's never worthless.

    Perhaps another sells off their coins and goes back to bartering.Benj96

    If the community is still intact, why would people barter? You only need to barter if you aren't sure the other person will honor their debts to you.

    This is because the participants each have a big impact on the value of the currency because the group is small. They realise the money isn’t “real” enough or “objective” enough and therefore can’t rely on it to continue existing.Benj96

    This begs the question though why would they ever have thought the money is "objective"?

    Let’s take this situation and apply it to the modern world. Imagine (though this would never happen) that a global ban was placed on exchanging or spending money. No one could observe the influence of money that comes with its exchange.
    Suddenly all the assets in a wealthy mans bank are valueless because they can never be seen or used again, and suddenly the poor are no longer any poorer than anyone else.
    Benj96

    What about debt though? Like could you still borrow something and pay the value later? Because as long as that works, you have money.

    Money only has value in the act of exchange. As the title of this post suggests. You may argue that money that isnt being spent (that sits in savings accounts Banks etc) also has value. But it only has value because the remaining “circulating” money is acting/ moving and bolstering “trust”.Benj96

    Money that sits in savings accounts is circulating. The banks don't just sit on it. Why do you think the stock market goes ever higher?

    If all the money in the worlds banks were to flood out into the market and be spent simultaneously (for example in a global existential panic) Then the value of the currency would drop to nothing. There would be so much supply and very little incentive to take it as real world objects like food, housing etc. Are fundamentally always more important than money for survival.Benj96

    But this would not just happen in a vacuum. Loss of trust in a currency does not happen by itself, but is a symptom of another loss of trust - for example in the ability of debtors to pay back their loans.
  • Leghorn
    577
    I think there is good reason money has gotten such short shrift among philosophers...

    Socrates, in The Republic, if I recall correctly, describes its origins in the need that arose in a barter-market to represent the value of the goods when both parties to the exchange could not be present there simultaneously...

    Other than that and, of course, Adam Smith, what philosophical weight has ever been given to it?...other than by a parade of Nobel Prize winners?
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