Why Do We Use Money?

What can you get with 100 dollars?

Theoretically you could get 100 things from the dollar store. Maybe you could buy that new dress or jacket you’ve been wanting, but what is that hundred-dollar bill worth?

Sure, you can buy a quality product for that money, but when you get into the concept of modern money, that hundred-dollar bill is worth no more than a piece of paper dyed green. The only difference between a one-dollar bill and a hundred-dollar bill is that one has two more zeros on it than the other. They’re made of the same paper, they’re the same size, shape, and weight, yet we see their individual worth as far from equal.

The United States used back its money with gold. Before Nixon ended this practice in 1971, your hundred-dollar bill would be backed by about 2.8 ounces of gold. This is opposed to the dollar bill, which is only backed by around 0.028 ounces. This golden standard made money worth more than just a piece of paper.

Our world’s currency system accepts different money, including coins and paper notes that are government issue. They are are then circulated within the economy. Currency is used as a medium of exchange for goods and services. Currency is the basis for trade. Around the world, currencies are unique to their regions and most places don’t accept money from places other than own. But there is one exception, the universal currency, gold.

Gold, and sometimes silver, have been used as currency for centuries, dating all the way back to the time of the ancient Egyptians. Using these precious metals as currency is called commodity money. Commodity money is a means of making exchanges. In the past people have use peppercorns, salt, and even alcohol as their forms of money.

Communities used these items because there was a huge demand for them no matter where in the world you went. People used the salt and peppercorns to make their rotten food more palatable because of the lack of refrigeration. Later down the line, cigarettes and alcohol were used because most people heavily relied on them in their daily life. These types of commodity money had direct uses to the public, so why did the U.S. back our money by gold? Sure, it’s the standard for universal currency, but why?

Gold is a finite resource, meaning there is only so much of it in the world. We are expected to mine the last of Earth’s gold by 2030. When that happens the price of gold will skyrocket. Gold’s what used to make the U.S. dollar so valuable, but what makes gold so precious to us? We can’t eat it, or drink it, we can’t breathe it in, it’s just pretty to look at. Gold, however, is by far the most practical metal for the world to use as currency. It can melt easily, it won’t rust, and it won’t explode when it comes in contact with everyday elements of the word.

While gold is still an amazing investment, it is no longer our direct form of currency. If you walk into your local Walmart and try to pay with gold or try to trade with a bag of sugar, you are bound to get some confused looks. The United States is now using fiat money, which are our coins and paper money. Fiat money has nothing to back it, but debt. It has no inherent value, however the government allows us to use it to pay off all debts both public and private. The American dollar has no where near the amount of uses gold or any other commodity money has, and yet we still use it. Gold still remains a desirable standard. You can use gold or a lot of things, but when it comes down to it, both are worthless to a human being, a pretty rock and a piece of paper, but that doesn’t stop us from going crazy over them.

While the physical value of currency itself is worthless, it serves a huge role in society. Dollar bills themselves are just pieces of paper, but they hold up our entire way of life. Without some currency, the world would revolve around bargaining. If you wanted something someone else had, you’d better hope you had something they wanted too. If you were a mechanic, and you wanted bread, you’d have to look for a baker who needed his car fixed. But even then, it’s idealistic to think the world would advance to automobiles without currency.

Without a set means of currency, there would likely be no forms of high education. Families would live off of the selective items they bargain with. Why would people want higher forms of education when they needed to focus and providing others specific desired items? Yes, alone currency is worthless to us, but when implemented in society money can be a medium of exchange, a unit of account, and acts as a store of value.

Our money facilitates exchanges in our economy, but really money is only useful to us because society says it is.

What do you think of our currency system?

Sources

Market Business News

Youtube - Ted Ed

The Gold Standard