The Conception of Money

My conceptualization of money has not changed significantly, yet I found myself questioning what is money? Would it be the cash sitting in my wallet or is it the numbers listed in my checking account? The idea of money has been around for centuries in basically every society. It may not be a dollar bill, but giving away something of value in exchange for goods and services is the core essence of money. 

I most enjoyed the island of Yap, the people used a monetary system called fei; which were large limestone coins. This grandeur display of wealth was frankly impractical as the limestone quarry was 400 miles away, but the people of Yap still went through the process of gathering it. If the stones were lost to the ocean or ownership was transferred, “its new owner is quite content to accept the bare acknowledgment” (Friedman, 1991). This is very much true of how the economy functions in modern society. I could send almost anyone 100 dollars over Venmo and the only acknowledgment that it was transferred is the numbers going down on my account. I never have to physically see the money nor do I have to even be near them to do this. I’m trusting that they received the money; it is still as real as the stones at the bottom of the ocean.

In 1932, France requested that the U.S. Federal Reserve Bank store their gold for them, labeling what was theirs. This action was the same idea that the Germans did to the people of Yap; the federal bank marked France’s gold with “black paint” to signify that it belonged to them. While this concept may seem unusual because while the gold sat in the U.S. bank, it actually belonged to the French.  

Sometimes money will lose its value because people stop believing it is worth anything. In the podcast, The Invention of Money by Planet Money, Brazil began experiencing an economic crisis in the early 1950s and prices were on the rise constantly. Inflation was getting out of control and the government’s solution of printing more money wasn’t working. When the government put a price freeze on goods, people stopped selling things. It wasn’t until a virtual currency was introduced that the economy boomed and rose to the eighth-largest economy in the world. The value of URVs in accordance with the physical money people in Brazil held changed, but the price of goods in URVs did not. No one can see or hold URVs, nevertheless, Brazillians believe that it holds value; it is an idea and everyone agrees upon it. 

While the situation in Brazil lasted for multiple decades, the U.S. financial market crash in 2008 is another prime example of how trust is what gives money its value. Starting in 2007, banks and firms on Wall Street had loads of assets that were losing value and needed someone to lend them money in order to offset their losses. Jim Cramer stated that the Federal Bank needed to create money in a way that no one had talked about yet, so they did exactly that. Over one trillion dollars was created and loaned to various financial institutions. With high interest rates, collateral in the form of home mortgages was being accepted as payback. The Federal Reserve has the power to just change the amount of money flowing through the economy at any given time with a few clicks of a button, yet they must play a game of balancing as they will never really know the exact effects of increasing or decreasing values will do. 

Cryptocurrencies such as Bitcoin and game currencies hold that same augmentation of money that doesn’t really exist. In mobile games, currencies can be gained through playing it or purchasing it. Knezovic notes in, Udonis, that in-app purchases for game currencies are the pillar point for monetization. It is a widespread  abstract concept that is universally regarded as holding value. Bitcoin is only as valuable as the people make it. One day it could be worth hundreds of dollars and the next it could be worth nothing. Renaut states in Yahoo!News, “Bitcoin is made of strings of dazzlingly complex code created by raw computing power” this form of “e-money” is fickle, and many wonder if the risks of purchasing it will have a greater payoff. It has no corporeal value, it is whatever some guy says it is. Reeves uses this argument in MarketWatch and quotes this as being “the greater fool theory” as you would have to find someone more foolish than yourself to purchase Bitcoin at a higher rate than you purchased it. Similar to the concept of Bitcoin, the monetary value of money isn’t solid and its value could disappear at any time.

So, our money is extremely similar to that of the island of Yap in the sense of us giving monetary value to something we will never lay our eyes upon. Our virtual currency is essentially stones at the bottom of the ocean and all we can do is trust that it exists and when the time comes to use it, that it will be accepted. 

References

Friedman, M. (1991). The Island of Stone Money. Working Papers in Economics. https://counterintuitive.blog/wp-content/uploads/2015/01/stonemoneyessay.pdf 

Planet Money. (2011, January 7). The Invention of Money [Video]. This American Life. https://www.thisamericanlife.org/423/the-invention-of-money 

Reeves, J. (2015, January 31). Bitcoin has no place in your — or any — portfolio. MarketWatch. https://www.marketwatch.com/story/bitcoin-has-no-place-in-any-portfolio-2015-01-28 

Renaut, A. (2013, April 13). The bubble bursts on e-currency Bitcoin. Yahoo!News. https://sg.news.yahoo.com/bubble-bursts-e-currency-bitcoin-064913387–finance.html?guccounter=1 

Tabuchi, H. (2013, January 10). Japan Approves $116 Billion for Urgent Economic Stimulus. The New York Times. https://www.nytimes.com/2013/01/11/business/global/japan-approves-116-billion-in-emergency-economic-stimulus.html