Understanding the Economy: Why Does Money Have a Value?

Money itself has no value. If you don’t like to look at pictures of national heroes, what we call money is nothing but paper; we are the ones who value it in a country and economy. At this point money gains value, but this is not a value of money itself; The value of money is appraised by people who use it on earth.

Of course, this was not always the case. In the past, precious metals such as gold and silver were used as currencies.

In the past, the value of the money in your hand depended on the value of the metal from which it was made because you could melt it and use it for anything else. Not so much, just as much as 50 years ago, many countries’ currency notes were of a gold or silver standard (or a mixture of the two). This meant that; you could go to the central bank with the paper money in your hand and get gold when the value of that paper money is.

The gold standard in the US came to an end in 1971 when Richard Nixon, the then president, abolished the practice of converting paper money into gold. Since then, the gold standard has not been used in any major economy. The system that is currently used in countries and the value of money does not depend on any consumer goods is called the nominal money system. So to put it roughly, the pieces of paper in your pocket are only pieces of paper.

Beliefs that Value Money

So, how do we explain that the papers in your wallet have value that is not on any paper?

Simple. Money has limited supply and demand; people always want money. We want money because we know that other people want money; so that we can meet our needs by giving money to those people. The people you pay will also use that money to meet their needs.

Ultimately, goods and services are important in the economy, and money is a tool that allows people to bypass the less attractive goods and services to the goods and services they want. People earn money to buy goods and services in the future by selling (ie working) their labor.

Our money system is built on a belief shared by everyone; so as long as people continue to believe that money has value, the system will continue to function.

So what can make us renounce this belief? It is unlikely that anything else will replace the money in the near future because the disadvantages of the conflict of mutual desires are well known to humanity. Even if the money will change, there is a time frame where people can replace the old currency with the new one. For example, the transition of the euro to countries in the euro was in this way. So the concept that we call money will not disappear completely; only today’s money will evolve into other money in the future.

Nominal Money

Essentially worthless and indirectly accepted to be valuable and generally made from paper money is called fiat money. This term is derived from the act of at fiat gelen which means “to be’ in Latin.

Nominal money has no particular value; it has been considered valuable in the system created by humans. According to the laws of the country, the value of the paper, which is referred to as money, is guaranteed by the güv trust and credit of the state ”. In other words, the laws say; this paper itself has no value, but you can rely on it because there is state support behind it.

Future Value of Money

Then why should we think that our money will not be valuable to others? What if our money is not as valuable in the future as it is now? If the inflation of money rises above a certain level, people will want to get rid of their money as soon as possible. Inflation and the rational response of citizens to the situation is a major source of pain for an economy.

People will not sign business agreements that include future payments because they will have doubts as to whether the money they demand will be paid to them. Therefore, business activities go through a serious decline. Inflation can cause the café to change prices every few minutes, or to go to the bakery with a wheelbarrow full of money to buy a loaf of bread, as in Germany after World War I.

The belief in money and the stability of its value is not harmless. If people lose faith in money supply and value of money, the economy comes to a halt. The Central Bank therefore makes great efforts to keep inflation at a certain level. A little inflation is good, but the high loss is great.

Money is inherently a good thing, as long as it is governed by supply-demand axioms. The value of money is measured by the supply-demand for money and the supply-demand for products in the economy. The price of a good is measured by how much money is needed to buy it. Inflation occurs due to the decrease in the value of money as the price of the goods rises and occurs under the following conditions:

Money supply rises
Product supply decreases
Demand for money drops
Product demand increases
The key action that has led to an increase in inflation is the increase in money supply. Inflation may be for other reasons. For example, if a storm breaks down and leaves the banks intact, the amount of goods will decrease, so there will be a tremendous increase in prices, resulting in inflation.

But such situations are very rare. Inflation is mostly due to the fact that the money supply is faster than the supply of goods and services.