Trust in Money

When initially posed with the questions ‘what is money?’, ‘where does money come from?’, ‘how much money really is there?’, and ‘is money even real?’ it often seems that no one really has any answers. From a broad perspective, it seems that the idea that our designated currency holds “real” value is just something that is universally agreed upon and understood. How can people trust and have faith in a monetary system that one day holds value and one day might completely disappear? Although at one time seemingly unimaginable due to the trust that people instill in the monetary system, it is evident that the “traditional” way of demonstrating wealth and paying for things is becoming more and more obsolete as time progresses on… if it were ever all that important to begin with.

In the case of “The Island of Stone Money“, it seems that absolutely anything can be given value and denoted as currency. As told by Milton Friedman, large stone wheels were used as money on the Island of Yap. Counterintuitively, due to the fact that the one to twelve foot long stone wheels were far too large to move, the currency was not reduced to possession and ownership of the stones was based on bare acknowledgment. So without having any literal assurance of the existence of their wealth the natives of the Island of Yap placed an incredible amount of trust and faith in their monetary system. As told by William Henry Furness III, the writer of the book “The Island of Stone Money”, it was once acknowledged that one of the wealthiest families on the island had an enormous stone wheel that lied on the bottom of the ocean. Without anyone ever seeing it this currency still held marketable value. Although it seems completely crazy and irrational to have a monetary system that works this way, when taking a step back and examining our dollar bill as compared to the stone wheel, we also don’t seem to have any literal assurance of the existence of our wealth. It is all based on unquestioned belief and the idea that our currency is real and rational. Our dollar bill simply represents the idea that money exists.

‘Where does money come from?’ seems to be the “million dollar question” when asked to any average person. Although, after listening to The Invention of Money: Act II and how The Federal Reserve creates and controls money and the overall economy, a lot of mystery still seems to lie behind how money can just be spontaneously created. As told by Alex Blumberg, The Fed creates money out of literally nothing. Basically, The Fed buys treasury bonds at banks and they simply change the number on the account to create money. The power that The Fed holds over the economy tends to draw many questions like ‘how can it be managed?’, ‘how can it be trustworthy?’, and ‘do they even know what they’re doing?’. As explained by Blumberg, the question of ‘should there be more or less money?’ is a balancing act between the state of the economy and inflation. It’s like steering a large truck, you cant see the effect for a long time after, as said by Gerald Driscol, so ultimately how do we know that The Fed knows what they’re doing? The beauty of “the idea of the central bank” and The Fed is that it is an independent institution that is not government controlled. As told by the tour guide at The Federal Reserve, it creates money out of nowhere, it creates interest all the time, and it never loses money. The only thing that The Fed is dependent on is the trust of the people. What happens when The Fed can’t pull us out of the next financial crisis? What happens then? The value of the money is based on trust.

As of recently, the idea of internet-era currency has come to fruition and has become increasingly popular. As explained in “The Bubble Bursts on E-currency Bitcoin“, Bitcoin has come to light as a system “free of politics and human error”. Although, as told by Steve Hanke, it remains a very uncertain venture due to the fact that it is not backed by any commodity. Not being backed by commodity and being a digital currency come with many risks aside from rationality and trustworthiness like other monetary systems, there is also increased and abundant risk associated with security. Like all forms of currency it seems that there is no way to remove the associated risk and secrecy associated with where your money actually goes.

Overall, it is evident that the idea of money, and currency in general, is something that ultimately seems like it will never be perfected. The devotion and trust that people put into monetary systems while also putting their wealth at great risk is really what gave me the best idea of the true value of currency. As stated in “The Island of Stone Money”, when the native people of the Island of Yap were asked to do labor by the German Government they were reluctant to do so until the government threatened ownership of their stone wheels. They were truly devoted to their monetary system and they all shared the same unquestioned beliefs. As explained in The Invention of Money: Act II, people have put an incredible amount of trust in The Federal Reserve, which in turn adds to the value of the money. Without trust there is no value whatsoever. And finally, in relation to “The Bubble Bursts on E-currency Bitcoin”, people have begun to put a large amount of trust in digital currency like bitcoin and its in turn allowing for more opportunity in digital currency. Ultimately, after reading and listening to these articles, it is clear that without the trust of people money is nothing. Without a devotion to the currency no one believes it is “rational” and without trust there is no value in that currency. Although the physical objects we have traditionally used to demonstrate wealth and pay for things has become more and more obsolete, it is evident we are moving forwards facing similar risks.

References

Friedman, Milton. “The Island of Stone Money.” Diss. Hoover Institution, Stanford University. 1991. https://miltonfriedman.hoover.org/internal/media/dispatcher/215061/full

Renaut, Anne . “The bubble bursts on e-currency Bitcoin.” Yahoo.com. 13 April 2013.  https://sg.finance.yahoo.com/news/bubble-bursts-e-currency-bitcoin-011626425.html

The invention of money. This American Life. 19 February, 2018. https://www.thisamericanlife.org/423/the-invention-of-money