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Say I have €1000 (or $1000) on a bank account. What is that money really?
Is it a value stored on some computer at the bank where I have the bank account, a value stored at the central bank of the currency (in the case of the euro the European Central Bank) or something else?
And if it is just a value stored on a computer somewhere, why do we give it so much worth?
Money is, in essence, debt. More broadly, it's a system of clearing and credit. That entry in the computer means that the bank owes you \$1000, which is worth whatever others are willing to exchange for that sum— one way of thinking about it is that if you have \$1000, you have a general claim on the rest of society for \$1000 worth of whatever society produces.
The fact is that most money is in the form of loans (debt), not currency. This is well-explained in a recent Bank of England paper.
Money ultimately is trust and perception. We trust that the United States and the vendors here will exchange the paper or digital money we give them for something we desire. Once this trust is in place and we have a system that functions on a particular monetary system with defined characteristics (total money in circulation, methods of exchange, denominations of physical money, means of accounting, etc.) we then assign values to physical things on the basis of that system and our perceptions of those things.
Money has no intrinsic value. You cannot eat it, build a worthwhile shelter out of it, etc. It doesn't meet your physical needs. Thus, without trust people seek desperately to trade their currency for physical goods. This makes the demand for money plummet, while the demand for physical goods simultaneously skyrockets. The purchasing power of that money falls and you get hyperinflation. Examples of this can be seen in the Weimar Republic after World War 1 and Kenya, that both experienced this situation when trust in those currencies fell and the central banks overprinted money.
Another interesting example can be found in fame. Take a sports shoe for example. That shoe may be worth some amount purchased from the retailer. However, say that shoe is signed by an incredibly famous athlete. With a very small value of ink and seconds of that athlete's time, the shoe's value will skyrocket without any addition of utility. The only thing that has changed is perception.
The last example I will point to is the US debt. Currently, the United States claims approximately $20 trillion of debt. The physical currency does not exist. That money could never exist. 20 trillion is an incomprehensibly large number. Never in my life have I ever encountered something, and decided, "Hmm, that seems like around 20 trillion." It is not a physically realizable quantity. In other words, its perception, imagination if you will.
Ultimately, money is a system of perceived value that only functions properly while all parties involved with the currency trust that it will continue to be a means of exchange for physical goods that meet their needs and wants. Any currency that is not trusted will fail.
While a lot of the answers here are great, and offer quite a broad and academic view of the definitions of money. I like to think of "money" as simply the way we measure and keep track of human labor and intrinsic value of things. Since after all, most money's worth can come either from an object's (a "good's") perceived intrinsic value in a society or the value of a person's work (or services) within that society.
This Where does fiat money get it's value from? : neoliberal thread answer this question. I quote some comments, but edited them for grammar.
Link. JacobNails 2 years ago.
“This note is legal tender for all debts, public and private.”
You'll find this phrase on US bills, and it's an important part of why fiat currency has value.
If you owe money to the government, your government has promised to accept the dollar (in the US) or the Euro (in EU countries) as a means of paying that debt. You can also settle any private debts in that currency unless otherwise specified.
Functionally, it means that the stability of fiat currencies as a store of value is as strong as people's faith in their government to honor its own legal code, which for most developed nations will be basically certain.
Link. Integralds 2 years ago.
This question probably deserves a tidy five-paragraph FAQ. The two best brief answers are:
Public finance as a source of monetary value. Money has value because the government has decreed that taxes must be paid in terms of specific coins, notes, and their equivalents. Hence private citizens must own a bit of money at some point in the year to pay their taxes. In "ye olden" days this method was used to encourage circulation of a specific ruler's coinage.
Trade as a source of monetary value. Otherwise worthless paper money has value because we all agree to use that paper in exchange of goods and services. A dollar has value because I know that if I have a dollar, I can find someone else who will accept that dollar in exchange for goods. He will accept that dollar because he knows that later, he can trade it for goods. In equilibrium, our beliefs are self-sustaining and dollars do indeed have value. I know this motivation makes a lot of people uncomfortable, but it happens to be correct.
Link. spydormunkay 2 years ago
Fiat currency effectively derives its value from the value of the goods, services, and assets sold within the state where the currency originates.
Ex: Whenever demand for American goods goes up, the strength of the dollar increases. Why? Because since demand for goods is so high, people demand the dollars to acquire them. As competition for dollars increases, the cost of attaining dollar increases.
The reason why fiat currencies are superior to "asset" (gold) standards is because fiat currencies represent a nation's productivity rather than an arbitrary asset.
Asset standards on the other hand are currencies pegged to the value of assets that may have nothing to do with their economies in any way shape or form. If their national productivity were to outpace the arbitrary standard they adopt, they'd face huge deflationary pressures. Whereas if their national productivity were to slow down in relation to their standard, they end up facing inflation.
Also, the value of the currency is inherently tied to the state's ability to regulate it (central bank) and enforce it. Stronger states tend to have stronger currencies.
