The Theory of Currency

As a college student that works between 30 and 40 hours a week, money is almost always on my mind. It had never occurred to me to ask “What exactly is money?” before listening to a podcast episode from the Planet Money team at NPR. The podcast talked about the concept of money and illustrated different methods of currency and how they work. For example, a small island called Yap uses stones as currency. While this all sounded absurd at first, by the end of the podcast I realized that their method was not so different from our monetary systems here in the United States.

The paper “The Island of Stone Money,” by Milton Friedman, based on the findings of William Henry Furness III, discusses the currency of Yap and compares it to the currency within the U.S. The article mentions that the currency of Yap were large cut-outs of limestone. Although the physical currency being a stone seems strange, what is stranger is the methods of obtaining and “owning” this currency. Since big chunks of limestone would sometimes be too heavy to move, the original owner would just make a mark on the limestone, indicating that it now belonged to someone else.  The idea of a currency remaining in one place with no physical representation of ownership seemed crazy to me, as I’m sure it would to most people. The podcast episode that I mentioned previously forced me to realize that under close inspection, the idea of no physical representation of currency isn’t as far-fetched as it seems. 

Here in the United States our main method of currency is the U.S dollar, however many businesses don’t pay their employees in cash, but rather in direct deposit or a check. When an employee deposits a check or receives a direct deposit, the company they work for isn’t driving over trucks of cash to the bank to put the money in the employees account. Fact is, the bank may not have the physical cash to pay the employee, or at least, may not have obtained that cash from the employer. As explained in the podcast from NPR, the number we see in our bank accounts is just a number. No one is physically giving anyone any money. Similar to how the people on the island of Yap don’t physically move their money, neither do Americans. The people of Yap may not have a central bank they go to, but the idea of money being an abstract concept rather than a physical one, isn’t such a foreign idea after all.

A perfect, more modern example of currency without a physical representation is bit-coin. In the article “The Bubble Bursts on e-currency Bitcoin,” author Anne Renaut discusses the invention of bit-coin, its purpose, and its worth. Renault states, “Bitcoin is made of Strings of dazzlingly complex code created by raw computing power – – a process called “mining” that can in theory be carried out by anyone with a computer.” Bitcoin isn’t backed by any physical currency, however in April of 2013, bitcoin was trading for $266 a piece. It’s high market value is created through belief in its worth, and the law of supply and demand. The law of supply and demand simply states that the less of something there is, the more it will be worth and vice versa. The bitcoin code would stop once it hit 21 million shares, making it more valuable as less were available. The high demand and shortening of supply encouraged a strong belief of the value of bitcoin, which in turn made it more valuable. 

The thought never crossed my mind that the public’s depiction of the currency could alter its “value”. Within our banking systems here, when we look at the number displaying the amount in our bank account, we are essentially blindly having faith that the number displayed is what we really own. The blind faith in money is more easily seen through the act of loans or mortgages. When obtaining a mortgage from the bank, they loan you out money to buy a house, but you never physically see the money, you sort of just know you have it. The loan you obtained from the bank is then given to the seller of the house who now also believes that the loan is worth its said value, but  not a single piece of physical currency is ever exchanged. It is a crazy concept that money is more of a thought rather than a physical thing. 

Money as a concept rather than a physical thing never occurred to me as being a possibility. The currency of the people of Yap and their methods of trading it, seemed so foolish to me until I realized that it wasn’t so different from our currency here in the United States. We look at numbers on a website that tell us what we own, but rarely ever have physical objects to represent the amount we own. Not only does the physical currency not exist for us, but also to the people we pay, and then the people they pay, and so on. Overall listening to the NPR podcast really got my brain spinning on the idea of currency. My final thoughts on currency are that it is merely just a concept based on the value given by the people that use it. Similar to how most jobs in today’s environment require a college degree because it is valued. It doesn’t mean we have more knowledge in the subject than someone without a degree, but we just have a piece of paper showing our “worth,” and employers will take our word for it. 

References:

1991 island stone money – hoover institution. (n.d.). Retrieved February 14, 2022, from https://miltonfriedman.hoover.org/internal/media/dispatcher/215061/full

Goldstein, J., & Kestenbaum, D. (2010, December 10). The island of Stone Money. NPR. Retrieved February 14, 2022, from https://www.npr.org/sections/money/2011/02/15/131934618/the-island-of-stone-moneyYahoo! (n.d.). The bubble bursts on e-currency bitcoin. Yahoo! News. Retrieved February 14, 2022, from https://sg.news.yahoo.com/bubble-bursts-e-currency-bitcoin-064913387–finance.html?guccounter=1