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May 11, 2011 / 74

Some Monetary Basics (Part II)

(First published version – Dec 24, 2008 (cont.) This part edited and expanded May 11, 2011)

ELECTRONIC MONEY

But like specie, currency had limitations too. Have you ever seen a $10,000 bill? Nope. As far as I know, they don’t make them in the US. So spending a $million could be a tedious affair. (And as we all know, today’s Trillion is yesterday’s Billion!) With the advent of the electronic age it became possible to keep up-to-the-split-second track of transactions – so instead of changing the currency, electronic money was created. I know people who don’t have check books, don’t carry money. They just have a debit card. I’ve always advised that diversity is good – and having diverse methods of paying for things is really good! One of the people I know who only have debit cards found out that I perhaps wasn’t as dumb as she thought when the power went out in Ontario for a week or two – and she couldn’t even buy a cup of coffee at Timmies!

So, trade goes on, and even though they are just making an electronic transfer of numbers from one account to another, people still talk about “dollars” because at least in the USA for the present, that is the word we use to infer the value of things.

FULL FAITH AND CREDIT

Since we don’t back the currency up with metals and such any more – what IS behind the US dollar? Why do people accept it in exchange for goods and services? The US Currency is “backed by the full faith and credit of the United States Government.” Period. Nothing else.

Now – I used to think that that phrase meant that the US stands behind every dollar in circulation including the electronic ones, you know – sort of an honor-bound thing to provide value in return for dollars – to “redeem” dollars with something of real-world value. I was wrong. What that phrase means is that “as long as people have faith in the dollar (faith that it has value), and as long as the US Government can borrow to back it up, then the dollar is worth something.”

If people lose faith in the dollar – it’s worthless. It doesn’t even make good toilet paper ’cause it’s not very absorbent.

If the US government loses the ability to borrow, the dollar loses its value as a currency.

WHAT USE IS A DOLLAR?

Now we take a leap from WHAT a dollar is – to how it can be used.
– It can be used as a ruler – yes – the US Dollar is EXACTLY 6 1/8 inches long. So you can measure a fish with one and tell if it’s legal length.
– But mostly it is used to measure value – which makes it a medium of exchange. A pair of boots is worth HOW MANY chickens? Dunno? Well… if you have a Medium of Exchange (in this case the dollar), you can figure out how much in “dollars” the boots are worth to you, and then see how many chickens you can get with that many dollars. But remember – the dollar itself has NO intrinsic value!!! So since it functions as a medium of exchange, you use it as a commodity that REPRESENTS (symbolically) boots and chickens. You can PRETEND it’s a bunch of chickens and instead of trading 34 chickens for the boots, you can just hand over an equivalence in dollars and not bother with the chickens at all.

(To be continued…)

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