Why Does Money Have Value?

Why does our money even have value?

Our money has value because we say it does. That’s really it.

This might be a little abstract, but a dollar bill is just a useless piece of green paper in your wallet unless everyone else believes that it’s worth a dollar.

Green pieces of paper aren’t like chunks of silver or gold -- you can’t boil them down to make anything of value. Cash means something because we as a civilization agreed that it does. That’s why I feel comfortable taking money as compensation for my work at Money Magazine, rather than gold or timber or something else. I know that my landlord or dry cleaner or favorite restaurant will take the cash that my company gives me in exchange for rent, clean clothes and food.

But remember, money is a good just like anything else. And goods are subject to the laws of supply and demand. If you have a lot of widgets and no one actually wants a widget, then those widgets will be worthless.

The same is true of our money. If there’s too much cash out there, that cash will be used to buy things and then prices on goods - like a four-star meal - will rise quickly and each dollar won’t have that much value. That’s inflation. The opposite - deflation - is just as nasty.

So why does your money have value? Because everyone says it does.