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The value of money is determined by the demand for it, just like the value of goods and services. The first is how much the dollar will buy in foreign currencies. For this reason, the value of money fluctuates throughout the trading day. That is the amount of dollars held by foreign governments. The more they hold, the lower the supply. That makes U. No matter how it’s measured, the dollar’s value declined from to Most of the economies in the world had even slower growth. That made traders want to invest in the dollar as a safe haven. It’s made travel to Europe very affordable.
HY is that dollar bill in your pocket worth anything? One answer is that it’s valuable because it says it is. To the left of the portrait of George Washington, the dollar proclaims: «This note is legal tender for all debts, public and private. Dollar bills are «fiat» money — they are valuable because the government in power says so. People can, however, write contracts that specify payment in other currencies. If a contract specifies payment in euros, dollars will not fulfill the contract, despite what is printed on them. A more profound, and perhaps slightly unsettling, reason that a dollar has value is simply that lots of people are willing to accept it as payment. In this view, the value of a dollar comes not so much from government mandate as from social convention.
$1 Silver Certificates, 1935 and 1957
Paper money is issued by governments around the world and is used by people to store value and purchase goods they need for their everyday lives. Paper money has value because a large number of people agree to its value so it becomes useful as a bartering tool. Instead of trading sheep, shells or grain, we now rely on paper money because it has a common use for almost everyone. The first use of paper money by a Western nation occurred in when a French officer in the military paid the troops using parts of playing cards that represented that amount of money that they were supposed to be paid.
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In an article in the New York Times on January 15, , Berkeley professor of economics Hal Varian raises a fundamental question: why are the dollar bills in people’s pockets worth anything? According to Varian, there are two possible explanations for this: the dollar bills carry value because the government in power says so or because people are willing to accept it as payment. He concludes that the value of a dollar comes not so much from government mandate as from social convention. And yet that still doesn’t tell us why the dollar bill in our pocket has value. To say that the value of money is on account of social convention is to say very little. In fact, what Varian has told us is that money has value because it is accepted, and why is it accepted? Obviously this is not a good explanation of why money has value.
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While it may be true that money makes the world go around, it is not inherently valuable. Unless you enjoy looking at pictures of deceased national heroes, these colorfully imprinted pieces of paper have no more use than any other piece of paper. It is only when we agree as a country to assign a value to that paper—and other countries agree to recognize that value—that we can use it as currency. It didn’t always work this way. In the past, money generally took the form of coins composed of precious metals such as gold and silver. The value of the coins was roughly based on the value of the metals they contained because you could always melt the coins down and use the metal for other purposes. Until a few decades ago, the value of paper money in many countries, including the United States, was based on a gold or silver standard, or some combination of the two. The piece of paper money was simply a convenient way of «holding» that particular bit of gold or silver. Under the gold or silver standard, you could actually take your paper money to the bank and exchange it for an amount of gold or silver based on an exchange rate set by the government. Believing that this system undermined the U. Nixon took the country off the gold standard in Since Nixon’s ruling, the United States has operated on a system of fiat money, which means our currency is not tied to any other commodity. So these pieces of paper in your pocket are just that: pieces of paper. So why does a five-dollar bill have value and some other pieces of paper do not?
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How Does Money Acquire its Value?
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