Money: Fiction or Factual

 

 When I hold money in my hand, I can feel its physical characteristics. I can sniff its crisp smell. This thin, green, linen paper contains the wealth of the beholder. I can feel these physical characteristics so that means money is absolute right? The physical properties of money are real, but the faith behind it is what makes money hold its value. NPR’s broadcast on “The Lie That Saved Brazil” and The Island of Stone Money perspectively shows the fiction behind money and the faith that makes it real.

Milton Friedman, in The Island of Stone Money, discusses the island of Yap, which used limestone as a means of currency. These stones were so massive that they were not able to be moved from owner to owner. Although the people of Yap could not hold their money physically, they believed in the value it held and, therefore, they knew the money they possessed was worth something.

Analogous to the people of Yap, faith in the system is what leads us to believe the money in our bank account is there. The only way to know if the money I have in the bank is real would be to physically possess the money and deposit it into my account. But once I deposit that money, then it is at the bank’s will to hold on to it or loan the money out. Once the bank lends the money out, I lose physical contact with it all over again.

Friedman, in his book, The Island of Stone Money, claims that the bizarre concept of fei “is that its owner doesn’t need to reduce it to possession. 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, the coin remains undisturbed on the former owner’s premises.” Similarly, though we do not physically have hand-to-hand contact with all the money in our possession, we reassure ourselves of the value simply by checking our bank balances. It would be unmanageable to carry $5,000 around, which is why we trust the banking system to hold our money.

The people of Yap have a more assured relationship with their money than we do. Every Wednesday I check my bank account to see that my paycheck was placed into my account. Although I don’t see the physical money, I know that I was paid and I have $300 more in my bank account. The people of Yap would have the same assurance by visiting where their fei is kept to assess the value they possess.

Even if the limestone had no actual value, the value the people of Yap believed it possessed was powerful and enough to mean something to them. To support this claim, if I were to bring fei into a bank, it would hold no worth to them and they would not accept it as a means of payment. That is because there is no actual value behind it but the people of Yap were told it was currency therefore they believed it. This can be said about the US dollar. The government has assigned a value to each bill, which is how we know how much a one-dollar bill is worth. But if they told us a one-dollar bill was worth five, we would also believe what we were told. See what I’m saying? We know the value of our currency because the government has assigned a value to a piece of linen.

The changing value of a currency is the fault of the government and contributes to rising inflation. Brazil suffered from high inflation rates from the 1980s through the 1990s. In 1990 their inflation rate was measured to be 80% a month and prices were rising every day. The leading cause of inflation is money being printed faster than the growth of the economy. In the US, after the economic crisis, 2.4 trillion dollars were printed and dispersed into the economy in just 15 months. The printing of this cash flow caused a period of inflation which led to price increases. These rising prices also contribute to things like housing market crashes.

Money is easily made by just adding a few zeros to a computer and then bam, money has been created and now is circulating through the banking system. But this easy creation of money causes the economy and citizens to suffer. In Brazil, despite attempts by numerous presidents, the rate of inflation seemed almost impossible to bring down This inflation spike was caused by large sums of money being printed to build the new city of Brasilia. It wasn’t until 4 economists stepped in that there seemed to be hope for the value of the cruzeiro.

The common theme between the Yap, the U.S., and Brazil is that money has no actual consistent value but the belief that it does is enough for the citizens to believe in their system. NPR’s broadcast “The Lie That Saved Brazil” details how the government was able to trick 150 million people into believing that the new currency implemented was real. These four economists came up with the idea for the virtual currency URV.

The new currency, URV, is money that would never actually be printed but when people looked at their bank accounts they would be able to access this money. The idea that the money would never be printed comes from the basis that this currency would never be real and the cruzeiro would still be the national currency in the eyes of the government. But in the eyes of the citizens, the newly proclaimed URV would be their form of payment. Paychecks, taxes, store items, and bills were all paid using URVs.

With the invention of this new currency, prices seemed to stay consistent and inflation was no longer a concern for those purchasing items. Every day the bank would publish a conversion chart of cruizeros to URVs. Although the price of URVs would not increase, the number of cruzeiros in one URV would increase every day. This was able to trick people into believing they were paying a consistent price for items like milk every day. In reality, the government was converting the URVs people were paying into cruzeiros. This helped raise the price of the cruzeiro without concern and in return raised the economy. With the help of these four economists, Brazil’s economy was able to skyrocket to 8th in the world.

Just like Brazil’s use of virtual currency, Bitcoin has become a new virtual currency that we are seeing all around the world. How does one know if the value of their bitcoin is worth something if they are not physically seeing it? Just like the URV, you don’t but because people believe in its value, it is used as currency with spending power behind it. Since bitcoin is a virtual currency just like URV, it is likely that you will never see the cash in hand but you can access it online.

Jeff Reeves in “Opinion: Bitcoin has no place in your — or any — portfolio”, stakes a claim that “Proponents like to talk about how bitcoin has no central bank or authority behind it as a net positive, but that fact also means a lack of true value. A bitcoin, then, is simply worth whatever a random person is willing to pay.” Just like the cruzeiro, the value of bitcoin is never stable, thus meaning the value surges and then drops frequently. The instability of value leads people to have less faith in their system of currency.

The cruzeiro was not a trusted means of currency to the people of Brazil because its value was constantly changing similar to bitcoin. The URV became the trusted currency for the people of Brazil because its value stayed consistent. The constant change in value goes to show that behind currency is no actual set value but the value of inflation costs.

What do all of these currencies have in common? Faith in value is what allows us to pay using this currency. The government has told us the value behind the currency and we have no choice but to believe in it. If there was no faith in the currency, like the cruzeiro, the inflation rate would continue to rise and people would stop believing thief money is worth something. The physical existence of money is a front for the scam that tells us this piece of linen is worth something.

Works Cited

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

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

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