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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?

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  • $\begingroup$ What makes you think it is just a value stored on a computer somewhere? $\endgroup$ – Rathony Jul 26 '16 at 14:36
  • $\begingroup$ I heard that most currencies today are fiat money, so it is not backed by another thing of worth, such as gold. So if it isn't backed by anything and you don't have it as a physical object (such as coins or bank notes), I think it must be a digital value. $\endgroup$ – Kevin Jul 26 '16 at 14:45
  • $\begingroup$ Do you mean you can't buy gold with $1,000 in your bank account? $\endgroup$ – Rathony Jul 26 '16 at 14:47
  • $\begingroup$ No I mean that $1000 dollar does not represent a certain amount of gold, just like it doesn't represent a certain amount of gummy bears or anything else (although you can certainly buy a lot of gummy bears with $1000). :) $\endgroup$ – Kevin Jul 26 '16 at 14:50
  • $\begingroup$ Please edit your question to include your comments. $\endgroup$ – Rathony Jul 26 '16 at 14:52
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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.

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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.

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