Money Explained

[Farsight]

I know this might not sound like physics, but bear with me, because Time is Money, isn't it?

 

Show me some money, I say. So you pull out a £10 note. We both know that’s money right?

 

Wrong. Check the small print: “I promise to pay the bearer on demand the sum of ten pounds”.

 

 

Your tenner isn’t really money. It’s what’s known in the trade as a promissary note. A mere promise to pay money. Basically it’s an IOU, but from the Bank of England. OK if you’re in the States or Oz maybe you don’t get the small print, but your buck or buckaroo is still a promissary note, a mere IOU, it’s not really money.

 

 

 

OK you say. How about this here penny? You hand it to me. I turn it over in my hand. It’s coppery and shiny. New. Freshly minted. But what is it? It’s a piece of stamped metal. Nowadays it's copper plated steel, but there’s been all sort of variations involving copper tin and zinc, usually alloyed as a bronze.

 

 

 

 

I could make them in my garage. But it isn’t worth it, especially “Since May 2006, all circulation Canadian pennies from 1942 to 1996 have an intrinsic value of over $0.02 USD based on the increasing spot price of copper in the commodity markets...” Anyhow, a penny is similar to the milk tokens I remember from when I was a kid. And those useless slot-machine tokens I brought home from Blackpool. That shiny new penny is just a glorified milk token, acceptable to more than just the milkman. And what notes and coins are is cash. Money tokens. They aren’t really money. We have to forget about cash.

 

Where do you keep your money? I ask you. In the Bank you reply. Where in the Bank? I say. In the vault, you say. To which I say: But that’s not money, that's just cash. You change tack and tell me your money isn’t in the vault. It’s in your account. You’ve got your salary going into your bank account every month. Whoa. Where is this account? I say. In the bank, you say. Where in the bank? I say. On the computer, you say. I could say "Where on the computer?" but I won't. Because now we’re getting somewhere. Your money is just intangible information, maybe on a computer somewhere. Before they had computers your money was in a ledger. It was just a bit of inky writing in a big black book. With as much real existence as a bit and a byte and a bar tab. And every month your employer tells your bank to reduce his glorified bar tab and increase yours.

 

 

Did you get that? Money is just a glorified bar tab. An agreement about IOUs. Nothing is moving into anywhere, or out of anywhere else. Ah, I can hear you saying, what about the gold standard? Shrug. Gold was only “money” because everybody agreed that this nice and shiny metal was worth having. So were pretty little sea shells once upon a time. Imagine a pirate landing on a deserted island, the native people wiped out by some pestilence. The pirate kicks amongs the ruins, hawking and spitting at finding only sea shells and no gold.

 

 

Because there isn’t any money if people don’t agree that its money. Because money doesn’t exist. Not really. That’s why when you spend money it doesn’t disappear. It isn’t destroyed. You’ve got less of it, and the shop’s got more, but nobody’s really got more or less of anything. It’s just a bar tab. Do you know how money is created? Governments allow banks to lend money to people who build houses and cars and flatscreen TVs that everybody agrees are valuable. Then the money that was magicked out of nowhere really does exist. But it doesn’t really exist because it was never really created in the first place. But it does. And it doesn't. But it gets things done, and it makes the world go round, and everybody wants it.

 

 

Doesn’t really exist. Doesn’t get created or destroyed. Makes the world go round. Everybody wants it.

 

Does that remind you of anything?

 

Does that remind you of Energy?

[Farsight]

This is the link between TIME EXPLAINED and ENERGY EXPLAINED. It's a bit of fun really, but the ontology is sincere and, I hope, relevant to physics. If people don't have a clear idea of what money is, what chance have we got trying to understand things like energy?

 

Moderators: if you feel it's not adequately relevant, please feel free to delete or move.

[InfiniteNow]

I do think it should be moved, as it's more philosophical in nature, but I'm not a mod in this forum.

 

However, there was a really good program on the Discovery Science channel a while back called Understanding: Money. You should give it a look if the opportunity presents. :)

 

The Science Channel :: Episode :: Money

 

 

Cheers. ;)

[Farsight]

OK thanks, maybe a bunch, but hey. I've got Sky+ here in the UK so I'll see if I get this channel. Jan 31 2007 8:00am noted. Did it say "money is agreement" or similar?

[Tormod]

Because there isn’t any money if people don’t agree that its money. Because money doesn’t exist. Not really.

 

Interesting post but I don't quite agree. Money represents value, I'll agree to that. But what sort of value?

 

In a barter society, you *trade* stuff. There is no "money" as such, but things have value. I'll trade you my pig for ten chicken. The value of any item is decided by the participants, through haggling.

 

This is very common in many parts of the world.

 

Only when the basic necessities of hunger etc are covered, can money actually play a part. Money then becomes a tool to represent relative wealth. Money represents *buying power* and, unlike energy, it can be accumulated. It can also be handed over and change owner.

 

The value of *currency*, which is what you actually write about, is something else. Money is anything that can be stored and traded for something. Currency is a given denomination of money (for example, dollars). When you hand a dollar bill over to someone, you give them (like you say) a guarantee that this bill can be exchanged for so much of whatever has been decided to be the common denominator of trading power (which is gold). That's why gold is stored in federal banks.

 

Alternatives to gold are diamonds and other scarcities.

 

I do agree completely that the *value* of these things change and the parties must accept the valuation. This mechanism is, basically, what we call the market.

 

I think your thread belongs in social science rather than physics. ;)

[Farsight]

Ugh, Social Sciences, they remind me of the Banking Industry.

[CraigD]

If there are no objections, I’ll move this thread to Social Science, not to disparage an interesting and worthy topic, but because it appears more focused on the social aspect of money (salaries, wealth, etc.) that the mathematical (bookkeeping) or the physical (composition of dynamics of paper, coins, information systems, etc).

[InfiniteNow]

Sounds good Craig.

 

 

 

Paper money relies implicitly on trust, trust in the system to make good on their promise of backing the note for exchange. The paper or the minted coin mean nothing, it's the backing of the state which gives it it's strength.

 

1,000 years ago, if someone said they would give you a green rectangular piece of paper for 4 head of cattle, they'd have either laughed or shot at you. It's only because the state backs that paper and it's worth that it has become an accepted method of trade.

 

Interestingly, coins went to paper primarily because of the weight issue. Those who had to make large purchases would literally need a wheelbarrow to transfer all of the coins involved. So, to lighten the pockets and prevent folks' trousers from dropping, they starting printing paper currency. ;)

[Tormod]

Interestingly, coins went to paper primarily because of the weight issue. Those who had to make large purchases would literally need a wheelbarrow to transfer all of the coins involved. So, to lighten the pockets and prevent folks' trousers from dropping, they starting printing paper currency. :D

 

I thought it was because it's relatively easy to forge coins, whereas paper is harder!

[InfiniteNow]

Well, there were likely several reasons leading to the decision (the opposite of what you said being another). :D

[Qfwfq]

Gold was only “money” because everybody agreed that this nice and shiny metal was worth having.

Because this nice and shiny metal was worth having? Nonsense!

 

When first the Spaniards started landing on the shores of South America, the natives still thought that gold was a very handy stuff to pick out of river beds, simply due to how malleable it is. It was so great to fashion it into useful things such as fish hooks, for instance. So easy to shape that it wasn't worth keeping the thing for the next time you need it, just drop it when you're through with it and next time you make another one, just like that.

 

The Spaniards of course saw their point so well that they were grabbing as much of it as they could, carting it back home to make fish hooks and other little things, goodness knows how many fish hooks they made back in Spain with the stuff and to heck with those natives if they soon started finding less of it lying around. I s'pose those natives just had to start keeping their fish hooks to use again next time. :shrug: