So like...em...where does MONEY come from?

[grumbler]

What I don't get though is how early money developed. Sure, gold is rare, but so what? Why does that make people want it rather than something that is actually useful? Magpie complex shouldn't explain it all.

Gold was useful as a value-storage mechanism because it couldn't be created, was rare, and had a low storage cost (didn't die, rot, rust, etc).  Early coinage was undertaken simply to standardize the weight of precious (i.e. rare and enduring) metals.

Paper currency developed when there was a lack of gold for sufficient currency to match the "money value" being created, with the understanding that it was "good as gold" because the issuer would exchange gold for it on demand.  Because it was more convenient than gold, few such exchanges actually took place. 

[grumbler]

You sell a crapload of opium to a chinese trader. You can either get a big pile of silver coins for it, which you have to guard and transport back to England, or you can get a note from a big english bank which the chinese acquired, on which the bank in england will give you the exact same amount. Which one will you choose?

The silver, because I am spending it in China to buy the goods that will make me money.

I only sell opium to get the silver necessary to buy the Chinese goods.  If the Chinese would buy my textile products, I probably wouldn't be selling them opium to begin with.

[Josephus]

My impression was, when I learned about this several years ago, that basically money worth something because everyone agrees it worths something. Nothing more behind it.

Intersting...so if I stop believing in its value, I can make all my debts go away. 

Anyways thanks for clearing some of this up for me.

[PDH]

Money "comes from" physical or mental labor which others wish to acquire.

Marxist, go back to Russia.

[grumbler]

My impression was, when I learned about this several years ago, that basically money worth something because everyone agrees it worths something. Nothing more behind it.

Not strictly true.  So long as you can pay taxes with it, it has some "objective" value.

[grumbler]

Marxist, go back to Russia.

Marxists don't "get" money, whereas I do. 

[PDH]

Marxists don't "get" money, whereas I do. 

[Josquius]

Isn't that abolished after letting go of silver/gold standards? Or do you mean that the issuer guarantees you can go to the store and buy groceries with it?

By the time that was done though the power of the state had grown huge and money was completely accepted.

You sell a crapload of opium to a chinese trader. You can either get a big pile of silver coins for it, which you have to guard and transport back to England, or you can get a note from a big english bank which the chinese acquired, on which the bank in england will give you the exact same amount. Which one will you choose?

eh....thats the bit I did understand and semi-explained in my post. Its the earlier stuff I don't get. Why is the gold worthwhile. Its only in modern times with electronics and the like that it has actually become useful.
Sure, people have liked jewelry since before recorded history but to base our entire civilization on things looking nice...are we so shallow?

[Admiral Yi]

Why is the gold worthwhile.

Gold and silver don't rust.

[Martim Silva]

[FIXED] OK...Probably the silliest question ever on this forum, and there have been a few. But bear with me.

I was at church last night, and started day dreaming. And started thinking about money and more specifically...since it doesn't go on trees...Where does it come from?

Actually, money would be rarer if it grew on trees.

The vast amount of money in existence (do not confuse it with the money that physically exists) is an expression of debts contracted, and is created by the banks.

How does this work? In a simplified way, imagine Mr. Smith wants to buy a $400,000 house. If he gets approval by the banks (something which was rather easy before the Summer of '07), then he signs papers in which he promises to repay the debt with interest (let's say it would amount to an extra $300,000 over 30 years). When he does that, that promise has become money - because what the bank loaned him is now marked as a $700,000 'asset' by the bank.

So, $300,000 have just appeared into existance.

In addition, banks leverage themselves. What does this mean? That they are allowed to lend far more money than they actually have. The exact amounts varied over time (up until recently, a bank could lend 9 dollars for every dollar it actually had, for example), so the bank did not truly need to actually have the $400,000 it lended to Mr. Smith, just $40,000.

Which means that, when it made the loan, it created another $360,000. In effect, $40,000 'made' $700,000, all based on Mr. Smiths' pledge to repay the loan.


Of course, this is just a basic example - in reality, banks leverage themselves far more than 9 to 1 (often 30 to 1, or sometimes 60 to 1). Also, in some countries [even in Europe] banks don't really even have to prove they have even 10% of the values of the loans.

In order not to wait the 30 years, banks often bundle loans [classified by types], evaluate them by their full 30-year value, and then sell them to other banks. Which mark these as assets and in turn give out loans based on those. Based soley on the promises of the debtors to repay.

And i'm not even talking about the derivatives, which allow for these sums to be multiplied many times over.

In other words, the vast majority of the money in existance is not created by national states [as per the western model that is], but by the financial institutions. And its base is debt. Pure and simple. And it is why western ecomomists are intent on trying to solve a crisis originated by an excess of debt by issuing even more debt.

This is also why, when there is a deleveraging crisis like the current one, which makes banks basically inoperative, you risk a systemic failure - no debt, no money. So, and because there is so many nations needing money that there simply isn't enough demand in the debt markets to buy all the Treasuries issued, some goverments [like the US and the UK] are now trying to print themselves out of the problem - by printing money and then buying their own debt in order to recapitalize the banks.

[it is the national equivalent of writing checks to oneself and then trying to convince the creditors you have the money you owe them because you have those checks written by you to you]

[Martim Silva]

Sure, people have liked jewelry since before recorded history but to base our entire civilization on things looking nice...are we so shallow?

Gold is an excellent metal [soft, bendable, immune to the effects of time], and is always in demand by craftsmen. So, it was a good choice for money - you could trade it by their wares anytime.

[Siege]

My impression was, when I learned about this several years ago, that basically money worth something because everyone agrees it worths something. Nothing more behind it.

That, and trust in government, state, economy etc.

So, if people lose their trust in the government, state, economy, etc.....

[Martim Silva]

So, if people lose their trust in the government, state, economy, etc.....

That's when the government has to enforce the acceptance of its currency (by force if needs be), and prevent the development of alternative currencies - which is why the US Government jailed 'gold hoarders' during the Great Depression.

Of course, if the state is too weak to enforce its currency, then everyone gets reduced to pay their stuff with cigarrettes or some other alternative.

[grumbler]

So, if people lose their trust in the government, state, economy, etc.....

See Wiemar Germany, or Russia in the early 1990s.

[DGuller]

The dependence on trust is, IMO, a vastly underappreciated Achilles heel of the modern economy, and not just when it comes to monetary system.  Most of the people seem to be have a rather fatalistic attitude about this, something like "Well, if the trust is lost, then the world ends, so why worry about it?"