America Runs on Fiction

Today it takes a matter of seconds to log in and check your bank account balances. We can see the totals and can view past transactions at any time with just a matter of a few clicks. This leads you to think your money is sitting in a vault and can be accessed at any time. However, when you take a deeper look into those numbers appearing on the screen a question becomes clear, where is my money? When I was paid, I wasn’t handed cash or a check it was a scheduled transaction that changed the numbers appearing on my screen. When I purchase my morning coffee, I tap a card on a machine and the vendor trusts the transaction was processed. Although it is not a new concept, our money is fictional and only operates correctly due to our citizens willingness to accept the shared belief that it has value.

In the NPR podcast, The American Life, Chana Joffe-Walt discusses the value of currency in an episode titled “The Invention of Money.” She interviews and explains the recession and period of hyperinflation that plagued the Brazilian economy from the 1950’s all the way until the 1990’s. This is when four economists hatched a plan to trick the people that a new form of currency, the URV, had value. Prior to the URV’s creation Chana illustrates just how bad the inflation was with the price of a pair of sunglasses, “say they’re selling for $10. One month later, with 80% inflation, the price is $18. Six months later the sunglasses are $340. And by the end of the year, that price tag reads more than $10,000.” To curb this lasting dilemma four economists created the URV and declared that all wages, taxes, and prices would be listed in the new stable currency. Every day a conversion chart would be sent out from the central bank with the new conversions but the price at the store would stay the same. With this new stability in the market people began to believe in the URV which in return helped lower the inflation rate. Eventually the belief became so strong that when the next new currency, the Brazilian real, replaced the URV people believed in its value and the Brazilian economy was no longer plagued with inflation. Walt’s states, “everyone in Brazil, collectively, as a country, tricked themselves into believing that this fake currency was real. More real than the actual physical bill they were holding in their hands. And that made all the difference. That made it real. For money, it’s crazy but that’s all you need. People to believe in it.”

Another example of this shared belief  is illustrated in a writing titled “The Island of Stone Money,” by Milton Friedman. His writing discusses the island of Yap and their use of a completely impractical currency that is made of large, quarried stones called the Fei. Not only are these stones extremely impractical to exchange they are quarried on another island nearly 400 miles away and transported back to Yap by raft. Over time the citizens of Yap grew tired of rolling these cumbersome stones around and the new idea of ownership was created. Freidman writes, “after concluding a bargain which involves the price of a Fei too large to be conveniently moved, its new owner is quite content to accept the bare acknowledgment of ownership and without so much as a mark to indicate the exchange.” For this type of money to work all of the citizens on Yap must believe in the currency or else they are nothing more than large stones. Milton further illustrates the tale of the largest stone the people of Yap ever quarried. There is only one problem, “an enormous Fei, whereof the size is known only by tradition; for the past two or three generations it had been, and at that very time it was lying at the bottom of the sea!” The most valuable stone had not made the treacherous journey back to the island, yet the people still accepted the stones worth based on its creation.  

Going forward, crypto currencies are becoming more of a mainstream investment. Applications such as Coin Base have given investors a lower barrier of entry to the market and have even offered investors the opportunity to purchase fractional shares.  Jeff Reeves penned an article for Market Watch where he discusses the pros and cons of the crypto currency. Almost immediately Reeves touches upon a key point, “a bitcoin is simply worth whatever a random person is willing to pay.” He then asserts Bitcoin has a, “lack of true value.” As was previously discussed this does not discount the worth of money as it is very similar to the Island of Yap and the American dollar. However, there is one key distinction that makes it different, the people do not have a shared belief in its value. In the first two cases both Americans and the people of Yap believe in their form of currency, so the value is relatively stable. Whereas with Bitcoin, it is still too early for the population to agree that this digital coin has value. Additionally, he touches upon another reason people are hesitant to invest, “if your account is hacked and your bitcoins are stolen, you have little recourse to catch the thieves.” When using the crypto currency it is nearly impossible to track who bought or spent it. While some people see this as good thing, the typical investor does not have confidence that the currency is both safe and valuable.

In conclusion, money cannot function as planned without the shared belief it has value. Since modern economies have moved from commodity back money to a fiat currency it has been illustrated time and time again that the driving factor needed for a stable economy is the belief it has value. Ultimately, the paper in our pockets and the numbers on our banking apps rely on our minds to create the value.

References

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

Reeves, J. (2015, January 31). Opinion: Bitcoin has no place in your – or any – portfolio. MarketWatch. https://www.marketwatch.com/story/bitcoin-has-no-place-in-any-portfolio-2015-01-28

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