What do you think? What makes paper bills valuable? — Purple Pond

Not to idiotize the issue, but, it's demand for them that dictates value. And since money is a medium for assessing demand, then an absolute value on any denomination is futile in assesing.

I'm not an economist, so take several grains of salt...

Printed money is "fiat" currency. It has values because a government declared that it has value. How much value it has is dependent on factors other than the "fiat" declaration.

the value of a fiat currency is validated through trade. I buy $100,000 worth of leather from you. You take the $100,000 and buy $25,000 worth of raw hides from somebody else, and pay workers $75,000 to process the hides into leather. Round and round the money goes. Fiat currency buys all kinds of things, even though it is based on nothing but trust. But trust is a big deal, and if you trust the currency, then it is good.

If trust fails then the value of the fiat currency collapses. Checks and credit cards work in a similar way. I am willing to take your check, or your credit card because I trust the system of payment. If I didn't trust the banking system, I would not take your check or credit card.

Fiat currency is proved in trade and backed up by industrial activity. GDP isn't the same thing as gold reserves, but there is a huge difference between a country of 50 millions people who produce a great deal and a country of 50 million who produce almost nothing.

an absolute value on any denomination is futile in assesing. — Posty McPostface

The foreign exchange market doesn't do that?

What do you think? What makes paper bills valuable? — Purple Pond

Are paper bills ultimately a commodity, albeit a special commodity? If so, then rather than asking what makes paper bills valuable, perhaps we should first ask what makes commodities valuable?

perhaps we should first ask what makes commodities valuable? — bloodninja

Commodities are valuable things. They have value by definition.

I'm basically asking what makes paper bills a commodity?

Because people decided it did. Why does gold have value? Why does physical fitness have value? Why does productivity have value? The value we associate to things is almost never inherent in them. This is the case for everything, not just paper money. Value is created by humans and the reason money has value is bacause a powerful band of humans who hog all of the earth's resources decided it does so if you don't cooperate you die of starvation. In other words, it has value because all those who disagree on whether or not it has value are dead and so everyone alive thinks it has value

The foreign exchange market doesn't do that? — Purple Pond

Perhaps, @andrewk can help with this question. Interested in his input also.

What is it about pieces of paper that make them valuable? I can think of a few reasons. — Purple Pond

And let's not forget that money is also legal tender, backed up by law. This makes it different from example the so-called crypto-currencies and other debt issuance. And as governments have the ability to tax people, we believe that they can uphold the value of the money (and not going into a money printing frenzy).

I think the necessary characteristics for an effective currency are:

1. supply is limited but not TOO limited;
2. general agreement of the society that uses the currency, to accept it in return for goods and services that one is prepared to sell.
3. The smallest denomination currency item has a low enough exchange value that, for any non-trivial purchase, the percentage change in the payment that is made up by one additional unit of the smallest denomination is very low (say, less than 1%).
4. The currency items are not perishable.
5. The currency items are easily portable.

Gold and silver worked as currencies for centuries, as it met those criteria. Small, light silver coins could be used for small denominations. Shells have been used in some island cultures, where they met the required characteristics. It would need to be a type of shell that was common, but not so common that it didn't require a fair bit of effort (time spent searching) to obtain a shell from nature.

When the conditions break down so that one or more of the criteria are not met, people avoid using the currency, resorting to barter or use of a different currency. This has happened reasonably often, when people in economies suffering hyperinflation or concern over counterfeiting resort to barter or the use of precious metals, jewels, or another country's currency.

The foreign exchange market sets the exchange rate between currencies to a temporary equilibrium point that is determined by the relative demand for the two currencies. If the value of the pound against the euro gets too low, people will want to only buy things made in the UK, as they will be cheaper. That will increase demand for the pound, and hence raise the exchange rate of euros per pound. Hence, over the long term, exchange rates are self-correcting. But not in the short, or even medium term, because it takes a long time for manufacturing and trade patterns to change.

What do people think here of the Modern Monetary Theory (MMT)?

To those who don't know the economic school of thought, here's a short introduction:

Modern Monetary Theory (MMT or Modern Money Theory) is a macroeconomic theory that describes and analyzes modern economies in which the national currency is fiat money, established and created by a sovereign government. The key assertion of MMT is that sovereign governments that are the sole supplier of national currency can issue currency of any denomination, and in physical or non-physical forms. Consequently, these governments have an unlimited ability to pay for the things they wish to purchase and to fulfill promised future payments. MMT claims that these governments also have an unlimited ability to provide funds to other sectors, and that because of this, it is not possible for a government that issues its own currency to be bankrupt.

There's a primer of these thoughts by one of the founders of the school here, which is quite readable even for the layman and non-economist.

From this primer we get the school's answer (by one of the founders) to the obvious problem of money printing:

Government can always “afford” to spend more (in the sense that it can issue more currency), but if it cannot enforce and collect taxes it will not find sufficient willingness to accept its domestic currency in sales to government.

Put simply, the population will find it does not need additional domestic currency if it has already met the tax liability the government is able to enforce (plus some accumulation of currency for contingency purposes). In that case, raising taxes would increase demand for government’s currency (to pay the taxes), which would create more sellers to government for its currency.

Until government can impose and collect more taxes, its spending will be constrained by the population’s willingness to sell for domestic currency. And that, in turn, is caused by a preference for use of foreign currency for domestic purposes other than paying taxes. While this is not a big problem in developed countries, it can be a serious problem in developing nations.

Thoughts? I still think there's something fishy in this economic school of thought.

MMT does the best job of explaining the current economic system IMO, and I truly wish everyone would become acquainted by it. Every time I hear about we are leaving this deficit to our grandchildren it is like nails on a chalkboard. The amount of political gain each side gets out of the economic ignorance of the public is astounding.

Bitter Crank is right --- money has value because a government says so. The reason why people value US currency is because the US government states that such currency is legal tender, and, furthermore, one can only pay their federal taxes with US currency, which means it's safer to deal with US currency. Historically, the earliest coins all had political symbols on them, as they were issued by a governing authority that made such currency legally available for exchanges.

money has value because a government says so — LD Saunders

and others have confidence in that claim

ne can only pay their federal taxes with US currency — LD Saunders

Absolutely - and as such is used to control inflation with taxes

MMT does the best job of explaining the current economic system IMO, and I truly wish everyone would become acquainted by it. Every time I hear about we are leaving this deficit to our grandchildren it is like nails on a chalkboard. The amount of political gain each side gets out of the economic ignorance of the public is astounding. — Rank Amateur

You are correct that it explains our current system, especially the US situation. I'm not sure how well it explains smaller countries or Third World countries, which even MMT followers admit are a bit different. Argentinians might trust a little less the stability and the long term purchasing power of their currency: an Argentinian of my age has seen 4 different monetary regimes of the Argentinian currency in his or her lifetime. Inflation is now in the +30% range in the country.

Yet the interest on the debt is something that does have an effect, especially if the interest rates rise from the all time historical lows as they have had. It works as long as... the crisis hits. And that monetary crisis can happen, not perhaps tomorrow, but someday.

it only applies to a country with a fiat currency that there is confidence in - believe that is by definition

it only applies to a country with a fiat currency that there is confidence in - believe that is by definition — Rank Amateur

You mean MMT?

That's the problem: everything works fine until a loss of confidence. And I don't think the theory answers the problem of this confidence clearly.

I think there's a deep philosophical problem here: before people believed one way about money, now with fiat currency systems being universal we dismiss the older ideas (such like there being a link with money and precious metals) as nonsense. Everything is fine and nice... until or if our current system collapses. Then afterwards with the knowledge of hindsight of the (possible) collapse people of the future might dismiss us as being so wrong and naive about reality. Just as we do those who believed gold is money.

That's the Basic problem in economics: how the majority of people think, becomes the actual "law" in economics. Once those beliefs change, once the confidence is gone, so does economics change too.

Paper (fiat) money really has no value any more. No real value. There is only a "perceived" value and the success or failure of that fiat currency hangs on the knife edge of that public perception.

In days gone by the US dollar WAS actually backed by a physical amount of gold or silver which was held in a vault somewhere. The bank note was basically a promise from the government/treasury to pay the bearer their share of that gold/silver. Hence it did have value back then as the notes were underpinned by real assets.

Of course the fraudulent bankers did away with all of that years ago. Now the fiat bank notes are NOT backed by physical silver and gold. They are nothing more than bits of worthless paper which, come the inevitable collapse of the system, people will suddenly realise.

The truth is that the fraudulent bankers have been engaged in Fractional Reserve Banking for many years. This lets them "lend" out 100 dollars for every single real dollar that exists. So for every 101 dollars in the system (in the computers) only 1 dollar actually exists and the other 100 dollars are completely fictitious. The banks lend this fictitious money to people and charge them interest for the privilege. Thus they are making money from thin air.

Many people know that if everyone went to their bank tomorrow to withdraw their total account funds in cash, the banks would shut their doors quickly as that money simply does not exist The money we perceive that we own is just a number in a computer system. There are no physical bank notes underpinning the number in our bank accounts and there are no physical assets like gold/silver backing the bank notes.

This system will eventually collapse because you can't go on inventing fictitious money forever. It's like adopting leaves as currency, eventually there will be so many leaves in circulation that they will become worthless. It is vital therefore that our wealth, large or small, is held in physical assets and not as a fictitious number in a computer system. Turn your "money" into gold, silver, housing or other valuable assets to protect yourself from the inevitable collapse.

It's also worth noting that the USA's chronic debt problem is in no small part due to this fraudulent banking. The privilege of printing the bank notes does not belong to the country, or to the people. It's belongs to the Federal Reserve. Over the years the ability to print money has switched back and forth between private entities (the fraudulent bankers) and governments. While ever the privilege sits with the bankers, the people suffer. The bankers own the country and charge the government for any bank notes printed.

The history of this money printing privilege is fascinating and there's an excellent potted list of the key people throughout the years in the link below. It is the history of "The moneychangers":

https://www.bibliotecapleyades.net/sociopolitica/sociopol_globalbanking26.htm

Commodities are valuable things. They have value by definition. — Purple Pond

This is completely wrong, commodities don't have value by definition, but through the labour expended to produce them. Commodities have exchange-value through being brought and sold on the marketplace. And commodities have use-value through their use.

A useless commodity, however, does not have value even though labour was expended to produce it, and similarly has no exchange value as it is useless and cannot be exchanged. Value, exchange-value and use-value are thus dialectically tied together.

Money is the universal symbolic representation of this capitalist value system is it not? What gives money value? It gets value from what it represents, which is ultimately human labour.

This system will eventually collapse because you can't go on inventing fictitious money forever. It's like adopting leaves as currency, eventually there will be so many leaves in circulation that they will become worthless. It is vital therefore that our wealth, large or small, is held in physical assets and not as a fictitious number in a computer system. Turn your "money" into gold, silver, housing or other valuable assets to protect yourself from the inevitable collapse. — Pilgrim

There's a discourse that promotes this view and the so-called "perma-bears" have told this for decades. I read a lot of these similar things in the start of this Milennia in the 2000's, but then I started thinking.

In economics usually every economist has some point. It's not as one school of economists are correct and others wrong. Believing in "one camp" and thinking that the other camp is nefarious or ludicrous doesn't get you far. Unfortunately some sell the story like this: watch out for the evil bankers! Similarly others think that investing in gold is silly.

One should actually ask just how fragile is the system. Sure, the bank creates part of the money from thin air when you take a loan. Yet is it so artificial? You have a job and you intend to pay it. People will pay taxes.

I understand that paying taxes supports the value of a fiat currency: IF you do not pay your taxes with the fiat currency, you will suffer the consequences. The only way to avoid the problem is to produce income for yourself (thus accumulating a store of fiat currency) OR live under a bridge, and frugally at that, so you don't need any of the fancy toilet paper.

But it seems to me that the nation has to be robustly productive in order to make fiat currency work.

The unrecognized nation of West Cupcake has a very small population, produces ugly root vegetables that nobody wants (West Cupcakers don't want them either, but that is all they have to eat). The Parliament of Cupcake decides to issue paper currency so they can buy something better -- beets, maybe. Or even parsnips. A small press in Thailand prints up a batch and sends it off, but keeps enough to pay for the printing.

What will happen to this currency? Nothing. The money will not become worth anything to anybody because there is no production leading to an accumulation of wealth in any form. They dig up their ugly roots, eat them, and then plant some more. That's it for economic activity.

Suppose the West Cupcakers discover that they are sitting on a pile of rare earths, gold, excellent petroleum, and an extra thick rich seam of copper, tin, and zinc. The ill-fed Cupcakers pick up their shovels and start filling bags of product to ship out of their previously unused harbor. Business is brisk.

Now, because they have something that everybody wants, they are able to trade for apples, bananas, pork chops, and cheese. They never eat another ugly root vegetable. And they now have to pay taxes to support the governments efforts to control the now burgeoning mining industry.

Isn't this the necessary support for MMT? Real business?

It gets value from what it represents, which is ultimately human labour. — bloodninja

perma-bears — ssu

The trouble with all schemes for surviving the collapse of money is that no representative commodity, be it gold, diamonds, silver, or any thing else, will survive the collapse. Once the currency system dies, we will revert back to bartering of useful goods. A big diamond on a thick gold ring will probablyly not trade for as much as a wormy apple. (Well, maybe a very wormy apple). What will matter is whether one can eat it, drink it, wear it to keep warm, or dig or shoot with it.

Old fashioned luxury goods like very fine china, jewels, and race cars won't be worth much.

Isn't this the necessary support for MMT? Real business? — Bitter Crank

Sure. For the government to get tax income there has to be income that can be taxed. It's so simple.

The trouble with all schemes for surviving the collapse of money is that no representative commodity, be it gold, diamonds, silver, or any thing else, will survive the collapse. — Bitter Crank

I'm not so sure about that. Currencies might collapse, money in general to collapse is a peculiar idea. In fact, a currency crisis isn't at all an end of the World. Life, even economic life as we know it hasn't stopped in Argentina or even in Zimbabwe. After all, the international monetary system was indeed on the brink of collapse during the financial crisis. Had it collapsed, the consequences wouldn't have been actually so dire. The Fed could have secured the bank savings of the people and rearranged the whole US banking system as could have the ECB done. The US administration has the ability to intervene in the markets equivalent to declaring martial law. It just hasn't had to do it (and likely won't do as rich people control the US).

To make an example, let's assume that the US administration and Congress would f*ck up everything even worse than we have ever seen. Thus there would be a serious crisis in confidence on the US dollar and the US would default on it's debt (rather see too high levels of inflation). Now in that default the creditors of the US would take a haircut. And after that everything would be nice and shiny for the next US administration. Do you really think that the global money markets wouldn't give the US money after a default? They'd be back in a week. After all, it's been well over 40 years since the last time the US defaulted. So it's a pretty rare occasion.

Large financial crises are events where there happens a huge transfer of wealth from one pocket to another.

" What makes paper bills valuable? "
Inertia and social convention. It was originally a proxy for gold (and one could ask, what makes gold valuable?), but this evolved over time, and the link was eventually severed. Inertia took over, but it remains a social convention.

The other question is : what is its value? It's value is labor: work-hours. So its subjective to how much you make.

The trouble with all schemes for surviving the collapse of money is that no representative commodity, be it gold, diamonds, silver, or any thing else, will survive the collapse. — Bitter Crank

I'm not so sure about that. — ssu

I should have been clearer. The situation I was thinking of was farther out than the collapse of currency. I was thinking more along apocalyptic lines, the demise of the central state, anarchy, survivalists, etc.

Survivalists and like minded people who worry about surviving the coming apocalyptic social/political crash caused by "something" other than nuclear war, think that if they have silver and cold coins, a hide-a-way in the hills, 6 months worth of canned tomatoes and beans, an axe and a gun (guns, of course, lots of guns) they will do just fine.

Survivalists don't buy my argument that gold, silver, and diamonds just won't be worth anything after this grand crash, because you can't eat them, keep warm with them, and so on. They have a belief that there is "essential value" in gold that transcends everything else. It doesn't, of course.

After the crash, gold, or maybe old postage stamps, could function as currency provided that people had faith in odd bits of gold or old postage stamps. Faith here being the belief that the next seller would take the 2014 Forever stamp celebrating zinnias (or wtf) as payment.

one could ask, what makes gold valuable — Relativist

3 things:

1. Limited supply; were gold as plentiful as copper or aluminum, it wouldn't be so valuable.
2. Its inherent properties (conductivity, resistance to corrosion, is malleable...).
3. It's yellow color is appealing. It takes a nice enduring shine and keeps it. (On the other hand, it's too soft for many applications, so it has to be alloyed.)

Those are historical reasons. Consider that exchanging gold for other stuff sets each thing's value relative to gold, which then establishes their relative value to each other. Values fluctuate due to supply/demand.

I should have been clearer. The situation I was thinking of was farther out than the collapse of currency. I was thinking more along apocalyptic lines, the demise of the central state, anarchy, survivalists, etc. — Bitter Crank

And just how realistic is the Mad Max -scenario? It's great for Hollywood, but I think the catastrophy-movies and zombie-movies aren't the most likely reality (although the movie Hotel Ruanda about the genocide in that country has some scenes right out from a zombie movie).

We have plentiful examples of nations collapsing to civil war and anarchy, yet what is noticeable is how the economy still works and how quickly the whole society can turn around afterwards. Ruanda is actually the perfect example. The whole survivalist thing is very American in that way it promotes the individual, yet what is totally dismissed is that even if the central state would "demise", there's the state and communal level that can quite well organize themselves. Survivalist ideology in the most extreme is silly fantasies and totally out of touch of reality, but perhaps the people get a kick out of it. They can pretend to be like some pioneers living on the American frontier again totally independent of the outside World somehow living what America truly is about. That you can endure a week long electricity shortage or prepare for natural disasters is something totally different, if that is called survivalism.

Survivalists don't buy my argument that gold, silver, and diamonds just won't be worth anything after this grand crash, because you can't eat them, keep warm with them, and so on. They have a belief that there is "essential value" in gold that transcends everything else. It doesn't, of course. — Bitter Crank

Gold as an investment is totally fine, but the survivalists (and some tea-party Republicans) give it an odd status. Yet to think that gold, silver and diamonds wouldn't have value is very strange. I think you underestimate the adaptability and durability of people, the society and commerce.

I think you underestimate the adaptability and durability of the society and commerce. — ssu

Probably so. And I actually don't expect any sort of grand social meltdown without a nuclear war--and if the nuclear war is thorough, we won't be around to worry about it afterwards.

I looked up US defaults -- I was surprised. I didn't think the US had every defaulted, but not so (at least technically).

Gold as an investment is totally fine — ssu

As long as you buy low and sell high.

And I actually don't expect any sort of grand social meltdown without a nuclear war--and if the nuclear war is thorough, we won't be around to worry about it afterwards. — Bitter Crank

Actually got into a heated debate about this issue in this Forum. Because the politically incorrect truth is that even a nuclear war likely wouldn't ruin everything as there would be parts of the World like Africa and South America that are extremely unlikely targets in any possible confrontation. Not even Russia and the US would be literally destroyed as pockets of smaller urban areas in the middle of nowhere would avoid being targeted. After all, in the US there are over 19 000 cities while Russia has bit over 4 000 nuclear weapons.

One really has to go for the mass extinction events the World has seen to disrupt or end human society globally. As nothing is as adaptable as humans.

As long as you buy low and sell high. — Bitter Crank

Not many do that, actually. Remember the cryptocurrency thread in this Forum? I put that to be the final indicator for the top and the bubble to burst as people interested in philosophy would start talking about investing in cryptocurrencies. Now when nobody's interested, well...

a nuclear war likely wouldn't ruin everything — ssu

Daniel Pentagon Papers Ellsberg was an analyst for the DOD. His sense was that nuclear war was seen to be survivable because the Russians and Americans both based their models on the destruction of nuclear blasts. If blasts were all there were, then a nuclear war would probably not ruin "everything". What was not modeled was the effect of say 2000-3000 nuclear blasts followed by massive firestorms throwing many, many tons of soot, combustion products, pulverized minerals (concrete, brick, etc.), and other matter very high into the atmosphere--much the way a big volcano eruption does. The amount of sun-reflecting matter would be enough to lower global temperatures for several years. It would NOT be a glaciating event. It would be several -- maybe 10 -- global, long winter seasons, followed by short frost filled springs, summers too short to grow much, leading into short frost filled autumns, and then back into "old fashioned winter".

The sudden cooling wouldn't kill people directly as much as it would starve billions. Plus there would be radiation, total disruption of industry, culture, transportation, communication, etc. Life would continue both for some people and for some species. For many species the disruption would be too severe to survive.

Africa, South America, and Australia would not be affected instantly, and maybe not as severely, but the idea that an all-out nuclear war would not be a global event is untenable.