When I was younger I always believed that money was like magic. It was this thing that I would here about everyday, but never really understood or thought about what it actually was. Every two weeks my dad would earn an amount of it from his work, and then he would use that money to pay our bills, allowing me to live in my house. But hearing things like “A trillion dollars disappeared from the stock market this week,” intrigued me. How can that amount of money just disappear? Where did it all go? Where was it in the first place? What is money?

During my time learning about money, I read an essay titled “The Island Of Stone Money” from Milton Friedman. In his essay, Friedman talks about the island of Yap and their history, in term of money. The currency that was used in Yap was known as fei, which were large, stone wheels with a whole in the middle. These large stones had to be brough 400 miles on boats from another island to Yap, and took a full crew to gather them. The interesting thing about this currency was the fact that, when spent, the large, stone coin would not move. It would sit wherever it originally was and everyone would just accept the fact that it was know owned by another person. To me this original idea sounded so absurd. The stone could just stay at the original owners house, but be owned by another person entirely? But in examining other cultures and peoples this idea of stone money and “ownership” without actual ownership, began to make more sense. When the German people eventually became the owners of the island of Yep, they wanted paved roads to be made there. But the people of the had no use for paved roads, due to them not using carriages or anything on wheels to get around, and just walking around barefoot. They refused to build the roads that the Germans wanted. So the Germans sent a representative to walk around end put big, black crosses on their large, stone money. This in turn scared the people of Yep, and made them believe that their money was worth nothing. The people of Yep scrambled together and put together the roads that the Germans wanted. After this was done a German representative came back and removed the black crosses from their money which made the people of Yep believe they had value again. It’s crazy to think that just changing the look of their money made them believe that it was less valuable than it was before.

In the podcast titled “The Invention Of Money” from the group This American Life, they begin to talk about Brazil and it’s economy in Act 1. Brazil was in a dire economic situation, where inflation was up by 80%. This meant that the second you were paid by your job, prices would go up and your money would lose value. The reasoning that inflation of this scale occurred was because the Brazilian government needed kept creating money that would end up in the economy. Over a large amount of time, multiple presidents tried and failed to fix the economy, and prices only continued to skyrocket. How did this issue get fixed? A group of 4 people created a fake currency, that would be used to reinstate peoples trust in the economy. This currency, called URV’s, was meant to be seen as a stable currency. 1 URV would equal a specific amount of Brazilian currency, and while the conversion from the Brazilian currency to URV’s would change, the actual value of the URV would not. This would mean that all prices would stay the same. This simple change of adding URV’s to the economy brought back peoples trust in currency and steadily made inflation go down. This goes to show just how much of the economy is based of of the peoples trust in currency. After Brazil’s economy was in a better state, they issued a new currency called the real that would replace the old Brazilian currency and the URVs. Brazilians have so much faith in their currency now that most shops will allow you to buy a product and pay for it over a period of multiple months.

The idea that a fake currency can be used to balance out a real currency sounds so absurd. URV’s were never printed, no one had anything to show for them, yet people believed in them, just like that of the stone money from Yap. And our country itself has also had similar dealings with fake currency. In Act 2 of the same podcast from the Yap story, they begin talking about the federal reserve. The federal reserve is a group of people who’s sole job is to decide how to balance the economy. They are the group who can put money into, and take money out of, the economy. During the 2008 financial crisis, the fed had to do somethings that it wouldn’t normally do, to avoid an economic recession. They had to add an absurd amount of money into the economy that wasn’t there. The original cause of the 2008 financial crisis was the housing market. Many houses went up in price and were being bought and sold for way more then they were originally worth, which led to their prices eventually crashing. Intern, the fed had to buy 1.25 trillion US dollars worth of property and mortgages to add enough money to the economy. This was something completely wild for the fed and was completely unheard of until then, but it did work to stop the economy from crashing. Now the Fed wants to go back to normal as to not make people lose faith in the dollar bill.

Money is an extremely complex and confusing part of our world. The fact that so many economies around the world are held up by nothing more then the idea that there is value somewhere is absolutely absurd. If all people just stopped believing that money had value, the world would be a very different place.

References:

Friedman, Milton. “The Island of Stone Money.” Diss. Hoover Institution, Stanford University , 1991.

Joffe-Walt, Chana . “How Fake Money Saved Brazil.” NPR.org. 4 Oct. 2010. 30 Jan. 2015. http://www.npr.org/blogs/money/2010/10/04/130329523/how-fake-money-saved-brazil/ 

“The Invention of Stone Money.” 423: The Invention of Stone Money. This Is American Life, WBEZ. Chicago . 7 Jan. 2011.