I offer you a challenge

[HeXploiT]

How does money work? I want to know. I realize they should have taught me this in high school or collage but they didn't.

So given this scenario:

A small world of 1000 people where no money exists.
Everyone has their respective jobs farmers, metal workers, carpenters etc...
But because they use no money they simply trade goods. So one day someone comes up with the idea to use money.

How would this community begin using money? Can anyone explain this so that the rest of us can understand?

 

[tfcmasta97]

Currency would begin as something that is widely used, or valuable to all parties.

If you mean 1000 people in the entire world, you wont need to set up a real currency

 

[Brainonska511]

People first need to have confidence that they will be able to get something valuable for their money, whether it is something backing the currency, such as gold, or being able to exchange the money for goods and services that they need. How they would go about doing this beats the hell out of me.

 

[Mo0o]

establish a value for the money that reflects regular barter values. If 4 chickens equal a pig. they could set $10 to be worth 4 chickens or 1 pig. Obviously the currency would have to be something all 1000 people could agree on to use

 

[ViviTheMage]

money is something that is equal...

like mo0o was saying if 4 chickens = a pig, that means 1 chicken coudl be 25 cents and a pig could be a dollar.

 

[HeXploiT]

Ok but where does the money come from and how does it begin circulation? Obviously someone has to print it. So what some guy distributes it evenly? No that wouldn't work. Does he trade his newly printed cash for goods? No because then he gets rich from nothing. So maybe a better question would be how does money BEGIN circulation?

You would think this would be very simple to explain.

 

[ManBearPig]

good Q.

 

[vi edit]

In a very simplistic sense "money" is nothing more than a placeholder of wealth. It is a "certified" object that has a predetermined value and is honored by the general public and businesses as legal tender.

Instead of paying you in pigs and chickens, I pay you in these nice and easy to carry pieces of paper and shiney little disks. It packs in the pocket easier, and it doesn't poop in the back seat of the wagon

It's much more complicated than that since you need to have some sort of controlling unit that actually issues the money and regulates it's prevalence. Plus you need to have banking institutions that have incentives to loan and store it.

 

[SlitheryDee]

The most successful farmer in the colony could issue paper money as payment and back his currency with something tangible. For instance he could set the value of one of his dollars to be exactly one pound of grain. Anyone with one of his dollars could redeem the one pound of grain or equivalent goods from the farmer AT ANY TIME.

Anyone who chooses to buy things from other people with this farmer's money would be essentially bartering with grain. The money would be good because if it served no other use it could at least be traded with the issuer for its value in goods.

The original farmer in question would have to be extremely reliable and trustworthy, not to mention in possession of a great deal of goods for this to work.

 

[darkswordsman17]

Money is just a common commodity that people can use to gauge the value of other things. So instead of needing to figure out how many rugs, sacks of vegetables, books, shoes, iron plates (and etc) a bag of beads is worth, people use a common commodity (in the past it was often precious metals like gold and silver) to understand the relative value. Without anything to trade for, money has no value (especially considering its current day paper form). It simplifies trading as you don't need to know the exchange rate for the vast combination of items (we would not have been able to evolve to the point we are today where there are billions of different items). This way instead of trying to trade 100 bags of beans for a car you sell the beans to someone who readily uses/needs them in exchange for money which you then use to buy the car. It adds liquidity to trade, and considering how few people anymore produce any actual good that they could trade it makes things just easier for people to have something common to determine value.

Obviously things have become more complicatated than that (competing currencies with different values that isn't really determinant of the goods they represent). You also have to factor in confidence in the money and a ton of other factors. The future is looking somewhat interesting as paper money is likely going to become less and less prevalent as we shift to digital/electronic handling of money.

 

[HeXploiT]

Originally posted by: SlitheryDee
The most successful farmer in the colony could issue paper money as payment and back his currency with something tangible. For instance he could set the value of one of his dollars to be exactly one pound of grain. Anyone with one of his dollars could redeem the one pound of grain or equivalent goods from the farmer AT ANY TIME.

Anyone who chooses to buy things from other people with this farmer's money would be essentially bartering with grain. The money would be good because if it served no other use it could at least be traded with the issuer for its value in goods.

The original farmer in question would have to be extremely reliable and trustworthy, not to mention in possession of a great deal of goods for this to work.

Ok now we're getting somewhere. So then theoretically i can trade in my dollar for some gold at fort knox?

 

[Special K]

We don't base the value of US currency off of gold anymore, correct? So doesn't that mean our money is only good because everyone agrees that it is?

For that matter, even if it was backed by gold, the only reason that worked was because people "decided" that gold was valuable, correct?

 

[Special K]

Also how do exchange rates work? Who decides those?

 

[intogamer]

I suspect that this thread will be long

 

[ViRGE]

Originally posted by: Special K
We don't base the value of US currency off of gold anymore, correct? So doesn't that mean our money is only good because everyone agrees that it is?

For that matter, even if it was backed by gold, the only reason that worked was because people "decided" that gold was valuable, correct?

Correct, we've been off of the gold standard for a while. A dollar is worth a dollar because everyone agrees it's worth that.

As for the OP's question, I'm not immediately aware of any modern society that didn't start with their money somehow backed, either via tangibles like gold or someone else's currency. You wouldn't jump from no money to fiat money, you'd have a middle step.

 

[SlitheryDee]

Originally posted by: Perry404

Originally posted by: SlitheryDee
The most successful farmer in the colony could issue paper money as payment and back his currency with something tangible. For instance he could set the value of one of his dollars to be exactly one pound of grain. Anyone with one of his dollars could redeem the one pound of grain or equivalent goods from the farmer AT ANY TIME.

Anyone who chooses to buy things from other people with this farmer's money would be essentially bartering with grain. The money would be good because if it served no other use it could at least be traded with the issuer for its value in goods.

The original farmer in question would have to be extremely reliable and trustworthy, not to mention in possession of a great deal of goods for this to work.

Ok now we're getting somewhere. So then theoretically i can trade in my dollar for some gold at fort knox?

I don't know if my scenario applies to our currency at all. I was merely postulating a situation in which people could be convinced to adopt a form of currency that has no intrinsic value beyond what it's backer guarantees it to have.

If the farmer was reliable enough and successful enough, then his currency would eventually be used universally by everyone. They would begin to trust its value and he would be tested less and less on his guarantee of trading goods for it. There may come a time when the amount of money in circulation exceeds his ability to readily reimburse all of it.

 

[darkswordsman17]

Originally posted by: Special K
Also how do exchange rates work? Who decides those?

The market does. If one day everyone on Wall Street wakes up and decides that they feel the U.S. dollar is worth 2 Euros, they can. Its up to the people they trade with to decide if they agree. If not then it won't be traded and they'd have to figure out at what value people do agree with.

 

[Special K]

Originally posted by: darkswordsman17

Originally posted by: Special K
Also how do exchange rates work? Who decides those?

The market does. If one day everyone on Wall Street wakes up and decides that they feel the U.S. dollar is worth 2 Euros, they can. Its up to the people they trade with to decide if they agree. If not then it won't be traded and they'd have to figure out at what value people do agree with.

But there are markets everywhere. Do all of the smaller markets just go by what the NYSE says?

 

[tfinch2]

Like this

 

[HeXploiT]

Is it just me or is the idea that our money is held up by aspects of psychology somewhat disturbing? Also if our money is not backed by the gold in fort knox then why don't we use the gold in fort knox for something useful? Or is there even still any gold in fort knox?

This raises some disturbing questions.

 

[Mo0o]

Originally posted by: Perry404
Is it just me or is the idea that our money is held up by aspects of psychology somewhat disturbing? Also if our money is not backed by the gold in fort knox then why don't we use the gold in fort knox for something useful? Or is there even still any gold in fort knox?

This raises some disturbing questions.

it's really not that disturbing... if you're that interested you should take an economics course

 

[ViviTheMage]

government is your answer

 

[HeXploiT]

Originally posted by: Mo0o

Originally posted by: Perry404
Is it just me or is the idea that our money is held up by aspects of psychology somewhat disturbing? Also if our money is not backed by the gold in fort knox then why don't we use the gold in fort knox for something useful? Or is there even still any gold in fort knox?

This raises some disturbing questions.

it's really not that disturbing... if you're that interested you should take an economics course

I tried but the scool refused me. They said they don't take pigs.

I disagree with the idea that it's not disturbing. I'd like to know how much my money is really worth. Especially when i have no idea how much money is being printed.

 

[darkswordsman17]

Originally posted by: Special K

Originally posted by: darkswordsman17

Originally posted by: Special K
Also how do exchange rates work? Who decides those?

The market does. If one day everyone on Wall Street wakes up and decides that they feel the U.S. dollar is worth 2 Euros, they can. Its up to the people they trade with to decide if they agree. If not then it won't be traded and they'd have to figure out at what value people do agree with.

But there are markets everywhere. Do all of the smaller markets just go by what the NYSE says?

By market this encompasses all trade and markets in what I was talking about. I'm not talking about Wall Street or any individual market, just trade in general.

 

[eoliss]

Originally posted by: Perry404
How does money work? I want to know. I realize they should have taught me this in high school or collage but they didn't.

So given this scenario:

A small world of 1000 people where no money exists.
Everyone has their respective jobs farmers, metal workers, carpenters etc...
But because they use no money they simply trade goods. So one day someone comes up with the idea to use money.

How would this community begin using money? Can anyone explain this so that the rest of us can understand?

I very simplified story that I was told on how money/banking started:

At some point, a person gave their valuables to someone very trustworthy and honorable. Lets say a farmer gave some gold to the village elder or something while he left the area. The elder then would give a written piece of paper with the information on it, namely the amount of gold. This is the receipt. The farmer would come back, hand in the receipt, get his gold back. Over time, people saw the elder as trustworthy and gave him their gold too. Additionally, it was thought that the gold was safer with the elder.

When people needed to do transactions, they would turn in their receipts, get their gold, give it to seller. Then the seller would then go back and turn in the same piece of gold. To reduce the redundancy of this process, the elder just started to trade these receipts.

These receipts developed into currency. The elder turned into a banker.

We have fiat money in the U.S. Basically, it has value because most believe it has value.