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2. Money as an agreement

In the previous blog “Functions of Money” the three functions of money were described. But does that make us understand what money is? If you would wash ashore a deserted island in a lifeboat with a few suitcases loaded with money, you would quickly find out that the best way to use your money there, would be to use it to light a fire. My ATM card will not be of any use when I travel westward along the Amazon River deep into the rainforests. And I will probably not get far with my Euro banknotes if I want to pay for gas in a gas station in an unpopulated area in the southern United States.


This shows that money in itself - coins, banknotes, cards - has no value. Money is only money when people agree to assign value to it and when they act accordingly. People can mutually agree to consider shells, coins, banknotes or whatever, as money. And this money can serve as money, and fulfil the functions of money, as long as people act in accordance with this agreement.


In modern society, money is increasingly less a physical object such as a coin or a banknote, but has adopted a 'virtual' character: money is a number on your screen, by transferring portions of that number to others, you pay.


Long ago the value of money was connected with the object that served as money, for example a gold coin. Nowadays, money has the nature of an agreement and it keeps its value as long as that agreement is complied with. Money can perform its functions when we agree that money is money.


So money has a lot to do with the trust people have in the agreement they have made with each other. Money and faith are like the two sides of a coin. But faith does not give money value, and on the basis of faith alone, money cannot execute the three functions it has.

For that, something else is needed, something that has to do with the question: how does money acquire its value?


John Hogervorst

April 2014

John  |  2014 04 02  |  Permalink  |  Share


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