"We invented money and we use it, yet we cannot...understand its laws or control its actions. It has a life of its own."
- Lionel Trilling, literary critic
Money was created because we cant be carrying around tons of wheat or a herd of cow to make a transaction. Also the product may be perishable but money doesn't. It allowed us to save for our children and future. But mainly, we needed a common accepted format of value to make business.
Money has value only because since everybody believes it has a value.
An important effect of coins was that governments now controlled the release of money into the market. They could also manipulate the money supply. This was done by various Roman emperors, who would reduce the precious metal content of Roman coins when they needed money. They figured that if a ton of gold made 10,000 gold coins, they could have twice as many coins by cutting the gold content in half. Instead of making the emperors richer, the constant devaluation of Roman coins -- and the resulting instability of the Roman economy -- is one of the factors that led to the fall of the Roman Empire.
When Rome fell, most of Europe returned to a more primitive, feudal system of economy. Throughout the Dark Ages, people became distrustful of coins, and that currency fell out of use. Coinage wouldn't return until the Renaissance.
The use of paper money really caught on in Europe in the 1700s, when the official bank of the French government began issuing paper money. The idea came from goldsmiths, who often gave people bills of receipt for their gold. The bills could be exchanged for the gold at a later date. That's an important fact in the development of paper money, because it means that the money represented a real amount of gold or silver that actually existed somewhere. A piece of money was actually a promise from the institution that issued it (either a government or a bank) that the institution would give the holder of the bill a certain amount of gold or silver from its stockpile whenever he wanted it. Under this kind of system, the money is said to be "backed by gold." With a few temporary exceptions, during wars or other emergencies, all currency in the world was backed by a real supply of precious metal until 1971.
So realizing money is just a representation of value , the new means of transaction came to place- the Electronic System. So that means everybody accepts that if a particular money was there in one's account it meant something of value.
The growing worldwide acceptance of the Internet has made electronic currency more important than ever before. Purchases can be made through a Web site, with the funds drawn out of an Internet bank account, where the money was originally deposited electronically. People are earning and spending money without ever touching it. In fact, economists estimate that only 8 percent of the world's currency exists as physical cash. The rest exists only on a computer hard drive, in electronic bank accounts around the world.
One of the long-standing myths about modern currency is that it is backed by the U.S. gold supply in Fort Knox. That is, you can trade your greenback dollars to the U.S. government for the equivalent amount of gold bullion at any time.
At one point, this was true of most paper currencies in the world. However, the U.S. took away the government backing of the dollar with an actual gold supply (known as leaving the gold standard) in 1971, and every major international currency has followed suit.
The obvious question is, "Without gold, what does guarantee the value of our money?" The answer is: nothing at all.
The only reason a dollar, or a franc, or a Euro has any value is because we have a stable system in which people are known to accept these pieces of paper in return for something valuable. Or, as Nobel Prize-winning economist Milton Friedman puts it, "the pieces of green paper have value because everybody thinks they have value."
Perception of Value
Understanding that the value of money is based on our perception of its worth is easier if we look at how that perception can alter the specific amount of that value. Let's say that one American dollar is worth 5 French francs. One day, the U.S. government announces that part of its economic policy will be to allow the value of the U.S dollar to decrease slowly to about 3 francs (the U.S. government might do this to encourage foreign investors, among other reasons). The next day, the value of the dollar would likely drop sharply, which it has in similar situations. Why? The government announcement led people to believe that their dollars would be worth less -- therefore, they were worth less.
After World War I, Germany was forced to pay war reparations of about $33 billion. It was virtually impossibly for the nation to produce that much actual output, so the government's only choice was to print more and more money, none of which was backed by gold. This resulted in some of the worst inflation ever recorded. By late 1923, it took 42 billion German marks to buy one U.S. cent! It took 726 billion marks to buy something that had cost just one mark in 1919.
Inflation is when a certain form of currency starts to have less value over time. It is caused mainly by two things: people's perception of value, and the economic principle of supply and demand.
If governments print money, why can't they just print more money is anybody's first thought. But that would be so wrong because a money is just a value which we can exchange for a product. If everybody has more money then everybody will buy everything and at the end many will be having money worth nothing. So the producers would raise the price to suffice everybody so we would be carrying a lot of money just to buy a bottle of milk. Also it would mean the money has less value.
I found a wonderful explanation of this while browsing that I'd like to share.
Suppose you have a cake. You hand out tickets to people so they can each get a piece. If you hand out a thousand tickets, either you're going to have to slice the pieces very, very thin, or a lot of people are just going to have worthless tickets. If you hand out just two, each person can have quite a bit of cake. The value of the tickets, then, depends a lot on how many you hand out.
That's basically what money is. It's a promise to pay from the government. You get the money and you can trade it with people in that country for stuff. And just like with the cake, if suddenly tons of people have money, either the money ends up being worth very little or most of the people with money get nothing for it.
A good example of this from history was Germany in 1922. Faced with a sagging economy and forced to pay massive debts as reparations for World War I, the government started printing money as fast as they could to meet these demands. Paper mills and printing presses were LITERALLY running as fast as they could night and day. Over a period of six months or so, the value of the German mark dropped 3.7 MILLION times! What you could once buy for a mark now cost four million marks. People literally lugged around suitcases full of money to pay bills. Absolutely crazy stuff.
To really understand the concept of money one should definitely about the Federal Reserve, mostly all countries have such a system. Lets just concentrate on United States for now.
This is the body which decides what the money value is worth.
Another great example of understanding the inflation and recession is the 9/11 attacks.
Quarterly profits in the airline industry fell $25 billion (or about $100 billion annually) in the years following the attacks before profits gradually rebounded [source: Makinen]. Several airlines went bankrupt before that happened, despite generous loans from the U.S. government [source: Ackman]. The financial effect on New York City was put at a loss of gross city product (a measure of the size of the city's economy) totaling $23.7 billion through the end of 2002, with tax losses adding another $2 billion [source: Makinen]. An estimated 100,000 jobs were lost in Manhattan alone, and 18,000 businesses were destroyed, disrupted or forced to relocate.
Like a huge stone thrown into a lake, the ripples of the attacks spread out and reached every aspect of the U.S. economy. It was initially estimated that the U.S. would lose 1.8 million jobs because of the attacks, trimming as much as 5 percent, or $500 billion, from the gross domestic product [source: Templeton and Lumley]. Other studies provide lower estimates [source: NBC Los Angeles]. It's very difficult to get a handle on these large-scale losses, however, because the economy was already in a recession before the attacks. It's impossible to know which losses were due to the attacks and which were just a natural part of an economic downturn. Other losses occurred because security concerns raised the price of oil and may have affected the flow of investment dollars into the U.S. [source: Wolk].
Once we start discussing indirect economic effects, the numbers become staggering. Since the attacks, $1 trillion has been spent on national security [source: The Economist]. That does not count the wars in Afghanistan and Iraq. The two wars add another $1 trillion in costs and counting [source: Wolf].
There are countless other costs, such as government settlements to first responders, security and legal costs for terror trials, increased energy costs, loss of time due to airport security, and more. And we haven't even begun tabulating "opportunity loss" costs based on the things we didn't get to spend that money on because it was used on 9/11-related things instead. It's virtually impossible to put a single, final number on the economic impact of 9/11, but it's surely in the trillions of dollars.
Money was created because we cant be carrying around tons of wheat or a herd of cow to make a transaction. Also the product may be perishable but money doesn't. It allowed us to save for our children and future. But mainly, we needed a common accepted format of value to make business.
Money has value only because since everybody believes it has a value.
An important effect of coins was that governments now controlled the release of money into the market. They could also manipulate the money supply. This was done by various Roman emperors, who would reduce the precious metal content of Roman coins when they needed money. They figured that if a ton of gold made 10,000 gold coins, they could have twice as many coins by cutting the gold content in half. Instead of making the emperors richer, the constant devaluation of Roman coins -- and the resulting instability of the Roman economy -- is one of the factors that led to the fall of the Roman Empire.
When Rome fell, most of Europe returned to a more primitive, feudal system of economy. Throughout the Dark Ages, people became distrustful of coins, and that currency fell out of use. Coinage wouldn't return until the Renaissance.
The use of paper money really caught on in Europe in the 1700s, when the official bank of the French government began issuing paper money. The idea came from goldsmiths, who often gave people bills of receipt for their gold. The bills could be exchanged for the gold at a later date. That's an important fact in the development of paper money, because it means that the money represented a real amount of gold or silver that actually existed somewhere. A piece of money was actually a promise from the institution that issued it (either a government or a bank) that the institution would give the holder of the bill a certain amount of gold or silver from its stockpile whenever he wanted it. Under this kind of system, the money is said to be "backed by gold." With a few temporary exceptions, during wars or other emergencies, all currency in the world was backed by a real supply of precious metal until 1971.
So realizing money is just a representation of value , the new means of transaction came to place- the Electronic System. So that means everybody accepts that if a particular money was there in one's account it meant something of value.
The growing worldwide acceptance of the Internet has made electronic currency more important than ever before. Purchases can be made through a Web site, with the funds drawn out of an Internet bank account, where the money was originally deposited electronically. People are earning and spending money without ever touching it. In fact, economists estimate that only 8 percent of the world's currency exists as physical cash. The rest exists only on a computer hard drive, in electronic bank accounts around the world.
One of the long-standing myths about modern currency is that it is backed by the U.S. gold supply in Fort Knox. That is, you can trade your greenback dollars to the U.S. government for the equivalent amount of gold bullion at any time.
At one point, this was true of most paper currencies in the world. However, the U.S. took away the government backing of the dollar with an actual gold supply (known as leaving the gold standard) in 1971, and every major international currency has followed suit.
The obvious question is, "Without gold, what does guarantee the value of our money?" The answer is: nothing at all.
The only reason a dollar, or a franc, or a Euro has any value is because we have a stable system in which people are known to accept these pieces of paper in return for something valuable. Or, as Nobel Prize-winning economist Milton Friedman puts it, "the pieces of green paper have value because everybody thinks they have value."
Perception of Value
Understanding that the value of money is based on our perception of its worth is easier if we look at how that perception can alter the specific amount of that value. Let's say that one American dollar is worth 5 French francs. One day, the U.S. government announces that part of its economic policy will be to allow the value of the U.S dollar to decrease slowly to about 3 francs (the U.S. government might do this to encourage foreign investors, among other reasons). The next day, the value of the dollar would likely drop sharply, which it has in similar situations. Why? The government announcement led people to believe that their dollars would be worth less -- therefore, they were worth less.
After World War I, Germany was forced to pay war reparations of about $33 billion. It was virtually impossibly for the nation to produce that much actual output, so the government's only choice was to print more and more money, none of which was backed by gold. This resulted in some of the worst inflation ever recorded. By late 1923, it took 42 billion German marks to buy one U.S. cent! It took 726 billion marks to buy something that had cost just one mark in 1919.
Inflation is when a certain form of currency starts to have less value over time. It is caused mainly by two things: people's perception of value, and the economic principle of supply and demand.
If governments print money, why can't they just print more money is anybody's first thought. But that would be so wrong because a money is just a value which we can exchange for a product. If everybody has more money then everybody will buy everything and at the end many will be having money worth nothing. So the producers would raise the price to suffice everybody so we would be carrying a lot of money just to buy a bottle of milk. Also it would mean the money has less value.
I found a wonderful explanation of this while browsing that I'd like to share.
Suppose you have a cake. You hand out tickets to people so they can each get a piece. If you hand out a thousand tickets, either you're going to have to slice the pieces very, very thin, or a lot of people are just going to have worthless tickets. If you hand out just two, each person can have quite a bit of cake. The value of the tickets, then, depends a lot on how many you hand out.
That's basically what money is. It's a promise to pay from the government. You get the money and you can trade it with people in that country for stuff. And just like with the cake, if suddenly tons of people have money, either the money ends up being worth very little or most of the people with money get nothing for it.
A good example of this from history was Germany in 1922. Faced with a sagging economy and forced to pay massive debts as reparations for World War I, the government started printing money as fast as they could to meet these demands. Paper mills and printing presses were LITERALLY running as fast as they could night and day. Over a period of six months or so, the value of the German mark dropped 3.7 MILLION times! What you could once buy for a mark now cost four million marks. People literally lugged around suitcases full of money to pay bills. Absolutely crazy stuff.
To really understand the concept of money one should definitely about the Federal Reserve, mostly all countries have such a system. Lets just concentrate on United States for now.
This is the body which decides what the money value is worth.
Another great example of understanding the inflation and recession is the 9/11 attacks.
Quarterly profits in the airline industry fell $25 billion (or about $100 billion annually) in the years following the attacks before profits gradually rebounded [source: Makinen]. Several airlines went bankrupt before that happened, despite generous loans from the U.S. government [source: Ackman]. The financial effect on New York City was put at a loss of gross city product (a measure of the size of the city's economy) totaling $23.7 billion through the end of 2002, with tax losses adding another $2 billion [source: Makinen]. An estimated 100,000 jobs were lost in Manhattan alone, and 18,000 businesses were destroyed, disrupted or forced to relocate.
Like a huge stone thrown into a lake, the ripples of the attacks spread out and reached every aspect of the U.S. economy. It was initially estimated that the U.S. would lose 1.8 million jobs because of the attacks, trimming as much as 5 percent, or $500 billion, from the gross domestic product [source: Templeton and Lumley]. Other studies provide lower estimates [source: NBC Los Angeles]. It's very difficult to get a handle on these large-scale losses, however, because the economy was already in a recession before the attacks. It's impossible to know which losses were due to the attacks and which were just a natural part of an economic downturn. Other losses occurred because security concerns raised the price of oil and may have affected the flow of investment dollars into the U.S. [source: Wolk].
Once we start discussing indirect economic effects, the numbers become staggering. Since the attacks, $1 trillion has been spent on national security [source: The Economist]. That does not count the wars in Afghanistan and Iraq. The two wars add another $1 trillion in costs and counting [source: Wolf].
There are countless other costs, such as government settlements to first responders, security and legal costs for terror trials, increased energy costs, loss of time due to airport security, and more. And we haven't even begun tabulating "opportunity loss" costs based on the things we didn't get to spend that money on because it was used on 9/11-related things instead. It's virtually impossible to put a single, final number on the economic impact of 9/11, but it's surely in the trillions of dollars.
