“Money alone sets all the world in motion.” ~Publilius Syrus in his Maxims, 100 BC
Every payday, we have large chunks of money extracted from our paychecks for federal withholding tax, Medicare, and social security. All of these monies are deposited within the Internal Revenue Service framework, and are organized according to our social security numbers. When we fill out our 1040 forms in the springtime, the amount of federal withholding tax comes into play as we go line by line, then ask ourselves: did we pay enough taxes last year? Did we give them enough money?
That withholding tax is money that we never see. Our bosses probably efile the taxes they have collected for the government, so they never see or handle it either. Even though we have not seen or touched it, this nebulous item, tax money, has value for us and for the government. So who decided what it is worth?
Currency, comprised of both paper and coin, is distributed by a government and used within the economy to purchase goods and services. It is the basis of all trade, and without currency, an economy would have a difficult time functioning efficiently.
“So you think that money is the root of all evil? Have you ever asked what is the root of money? Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal wlth one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?”
AYN RAND, Atlas Shrugged
In early history, bartering or exchanging one item or service for another item or service was the way people obtained things or services. Because this is frequently awkward, societies began to establish one thing or a commodity that everyone would use for their purchases. In many early societies, this “commodity money” could be shells, skins, salt, cattle, tea, seeds, tobacco, or other desirable commodities. Obviously, the commodities could be difficult to transport or store, so early governments (5000 -700 BC) began using pieces of metal and later coins. These provided the benefit of not perishing and were certainly much easier to move than say, a bag of salt or a herd of cattle. Light-weight money—actually made of leather—originated in early China around 900 AD and usage spread throughout Asia during the next few centuries.
Commodity money obviously had a value because of the inherent worth of the items being exchanged. The difficulty of dealing with the bulk and fragility of commodities caused brokers to start issuing receipts for the goods. These receipts became paper money. This concept changed everything in trade for this piece of paper really has no true value. Paper or coin currency is called “representative money” because it symbolizes a value that has been assigned to it.
In recent centuries, most governments backed their representative money with gold. A paper/coin money value was assigned to the gold, and everyone who used that currency recognized that gold value of the currency. Governments promised the users of the currency that the government was willing to “back” or exchange the currency for equivalent gold. With that promise, citizens had faith or confidence in the national currency.
American currency: from chaos to order
In the early days of American history, there was no national currency and the money system was in chaos. Different monies, both coin and paper, were used throughout the colonies, and some were accepted everywhere and others in only a few places. Primarily, after Independence, Americans used various coinage until 1862, when the first paper money was issued by the government ($5, $10, and $20 bills). This new money became “legal tender” or the legal type of payment allowed in the country but still, people were not obligated to use this tender. It took until 1873, that Congress finally passed the Coinage Act where the US backed its currency with gold and silver. In that same law, the US government “required” people to use the US minted coins and printed money. That’s why all of the early paper money read “gold certificate” or “silver certificate.” In 1933, Franklin D. Roosevelt stopped the minting of gold coins, and gold no longer backed the currency. Then in 1970, the government quit the minting of silver coins, and at that point, no precious metals backed the US currency.
So, we are back to the original question: what gives our money value? There are several reasons for this, but the most important is people BELIEVE that it has value. According to the current economic conditions (inflation, deflation, etc), it can have greater or lesser value. In other words, things cost more or less because the money is worth more or less in our eyes. It boils down to how we consumers value things. Consumer confidence is what gives money its value.
Government also has a role in this by declaring that its currency has such-and-such a value. This declaration probably has more impact on the international currency platforms than in our local grocery store, but overall, it is still one of the deciding factors of how we value money.
That confidence by the public in its money will be tested more in the future as money becomes virtual. Our society today is moving away from the paper and coin currency that we have used for hundreds of years. E-filings, debit card payments, ecommerce, and all of the other transactions that we never see except in initiation and finalization will only work if we still have belief that our money has value. We trust that the car payment we make online by taking money (online) out of our bank account and paying (online) the car company has value. They believe this also or they would never accept simple numbers coming across the screen.
We trust that our employers, when e-filing our withholding taxes, are actually moving money with value to the IRS. And the IRS—they trust that the employers (and we) are depositing withholding taxes of virtual money that still has value. Trust is the basis of it all.