So what is Money? Currency? Financial assets?
From what I read, it is worth keeping terms clear (and this is true in almost any communications really -- a shared lexicon helps keep communications clear and efficient. And it actually skews thinking too, but that's for another day...).
Money is what we think of as cash - coins, banknotes, and so forth.
Currency is the broader system, generally issued by and supported by a country or national bank.
Financial assets are intangible contractual items of value, that can include bonds, deposits, and stocks.
Tangible assets are things with physical value, like land or equipment.
Why is money worth anything? Well, it can be said to have intrinsic value, like coins made of metal (and metal, being relatively difficult to obtain and having useful applications, then has embodied value). But it can also be, and usually is, worth what it's worth more or less due to mutual agreement, and if a particular form of money has nominal intrinsic value but a significant agreed value, then you've built a fiat currency (one not based on gold, or such). The US used to have a gold-backed currency most of the time, but abandoned that in 1970, and is now a fully fiat currency.
How can a country make its money worth something, and be used by its people? It's not a trivial question, and it turns out that private currency can work too, more or less by the same rules. To have a currency and money respected, you need two things:
- Authority stating a non-optional need for individuals to have the money.
- Significant repercussions for failure to meet that need.
All sorts of natural experiments support the above. If I'd been planning ahead, I'd have links, but I only have one handy krohn.pdf
One currency I read about was school currency that could only be earned by volunteering at local community service organizations, but was required in modest quantities to pass a class or earn a degree - the school wanted a way to compel its students to help out in the local community that supports (and puts up with) them. It was created by the Economics School at the college, and apparently has worked stably for years. Also, as we'll see is important for fiat currency, exchange rates have arisen, and there is an informal value for the bucks of something like $15. What is interesting is that early-on bucks sold for $5, but are now $15, and the rate of increase has outpaced inflation, and the value of the currency is actually greater than the value of the student labor, due at least in part from parents and visitors taking bucks for souvenirs or mementos.
On the flip side, in the Civil war the South created a currency that largely failed. The authority was weak, and so were the repercussions. At the sovereign level, taxes are the mandated need, and imprisonment is the repercussion, so respect is nearly universal. The problem with the South was they kept taxes too low and punishments too weak, so the currency had little value and inflated.
As noted in the article above, there are a LOT of local currencies, and most fizzle quite quickly. I haven't thought them through, but it would be interesting to know how many failed due the criteria above -- for sure, most local currencies are feel-good items (Support your local vendors! Support your school!) and harsh penalties would be hard to fathom.
When it comes to money, a lot of other interesting points arise. For example, if you want to issue a currency but lack authority, intrinsic value always works. That's why any king or duke could issue coinage -- all they had to do was get some existing coinage and re-stamp them with their own likeness. However, to use fiat money, the king would need to assess a head-tax and send collectors out to collect or imprison (or worse). The notion of floating exchange rates, and what outside draws on money can do to the value, is important as well.
Cigarettes as prison currency, or ammo as dystopian cash, are examples where intrinsic value sets a base, but agreed exchange rates may fluctuate.
Barter is a system where only intrinsic value matters, and exchange rates are local, between two parties. I think, but don't know, that prevalence of such systems implies poor availability of money, and presents an opportunity for a local authority to facilitate the economy.
If anybody sees errors or omissions in what I'm writing, please chime in. I claim no expertise in economics, and am simply talking out loud as I plod my way along trying to clarify my own understanding.
Next round I'll get back to that key equation. After a little more reading, I gather that it isn't so basic after all, but was more the place I happened to start.
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