Money is many things to people but few people actually understand what money represents and its implication for the economy.
Money is principally a medium of exchange. We use it to trade for things, such as goods and services. And as such it works very well – allowing us to avoid the older and more cumbersome system of barter – wherein we must work out how units of A trades for X units of B. Instead, we simply agree that goods and services have a given monetary value and we trade accordingly.
Money is also used as a store of value, since we store and value our savings in currency. Our wealth can be said to be tied up in our money. I am said to be rich if I have lots of money and poor if I have little or no money.
Lastly, money is also a common unit of account. We use it to measure the many things we value – personal wealth, national debt, business performance, how much taxes we owe, etc..
What few people realize, however, is how money today itself actually derives its value. To many people’s surprise money is not backed by gold, silver or some other precious metal nor is it backed by shells, cattle, goats or land as it was in the past. Modern money today is actually not backed by anything of substance, at least not since the gold standard was eliminated in 1971. Rather modern money is backed by something called “fiat” or rather by the value that we as society or as government agree to give it. Simply put, we agree that money will be used as a medium of exchange and we set its value – rather arbitrarily – although we pretend to let market forces determine its value.
Some might argue that this is misleading – that the value of money is derived by the supply and demand for money and/or the supply and demand for a country’s goods and services. When demand for a country’s currency or exports goes up, the value goes up and conversely so. This is true on one level, since we do see movement in value with changes in supply or demand; however, on a deeper level the value of money has more to do with the confidence of central bankers, currency traders, and the general public in the future value of money, which is largely conjecture.
More often than not what lies behind this conjecture is fear – a fear of scarcity or a fear of lack. We tend to value something more, the more scarce it is or conversely we tend to value something less, the more abundant it is. This is true of money and it is true of goods and services we value with money. Hence, when a central banker starts to see an over-heated economy, s/he fears inflation (or a scarcity of goods and services relative to the supply of dollars) and s/he raises interest rates to curtail the supply of money. And when a currency trader begins to see a booming Chinese economy, s/he begins to buy Canadian dollars, expecting greater demand for Canadian natural resources. Most economists will call this the law of supply and demand but behind this law is really the human propensity to fear scarcity. We fear that the future may not provide for our needs and wants, so we scramble, manipulate and hoard in the present to safeguard ourselves.
Hence, if the value of money or the value of goods and services it represents are derived from their relative scarcity, we might say that the value of money is really based on the fear of scarcity. This fear is not necessarily inherent in money per se, since it is merely an instrument but it is the value that we give to money today.
And, if money is founded on the perspective of scarcity, the economy which is facilitated by money must be based in the fear of scarcity as well. This becomes quite apparent when we look at all of the fear surrounding the economy. Fear of booms (inflation), fear of busts, fear of debt, fear of unemployment, fear of bills, fear of capital losses, fear of taxes, and fear of shortages of basic necessities or luxuries, etc.. Fear, fear and more fear. The currency of the modern economy is fear.