Money: The myth we all believe in

One dollar bill notes pass through a printing press at the Bureau of Engraving and Printing in Washington, D.C.

The next time you hold a dollar in your hand, consider this: money is just paper. It has value because you believe it does. And so does everyone else reading this. But why do we believe in money and what purpose does that collective faith in money's value serve? We asked Adam Waytz, a psychologist and assistant professor of management at Northwestern University's Kellogg School of Management.

"As far as I can tell, money is a shared illusion," says Waytz. "We have a lot beliefs in various systems, whether it's the universe or government or organized religion, that serve more of an existential function to give us a sense that there is some order in the world."

A big part of money's function, says Waytz, is the ability to help us measure things in an understandable way.

"It makes things nicely quantifiable, which gives us a sense that we are living in a just and meaningful society," he says.  And recent studies have proved that money's mere existence creates some interesting psychological effects.

"It makes us feel more independent, more self-sufficient," Waytz says.

But money can make things messy, too. Waytz says: "What that does, at times, is it makes us become more selfish and less altruistic toward others. The other thing that money does is that it inherently changes the nature of social relationships. Money can actually lead us to view social relationships in free market terms, that people are sort of worth more or less than others. And what a lot of this research has shown is that putting social relationships or things that typically don't have a monetary value in monetary terms is it corrupts those things."

Waytz says that putting a dollar amount on social relationships and institutional ideas like friendships, marriage and spirituality leads us to think about things in terms of their market value rather than their social or moral worth.

Will our ideas about money change in the future? Waytz hopes so. He says as money continues to exacerabte inequality -- giving only the wealthy the ability to access and influence certain aspects of life -- people are going to have to address issues of fairness and corruption head on.

About the author

Adriene Hill is a senior multimedia reporter for the Marketplace sustainability desk, with a focus on consumer issues and the individual relationship to sustainability and the environment.
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I enjoyed listening to this on the radio, but I was appalled by the naive concepts of the value of money.

Money is a unit of exchange, created as a universally acceptable bartering facilitator.

In simple bartering, two people simply trade: Andy wants apples and has cheese. Louise wants cheese and has apples. They meet and haggle and come to an agreement on how many apples in exchange for how much cheese. Done deal, fairly easily.

But all too often, bartering gets more complicated:
John has apples and wants fish.
Betty has fish but wants cheese.
Fred has cheese but wants seeds.
Terry has seeds but wants apples.

For all four people to be satisfied, they need to come together and do a four-way trade. Or they need a universally accepted valuable item OR AN IOU NOTE.

In an IOU system, an IOU note works: John gives the apples to Terry in exchange for an IOU note from Terry, redeemable ONLY BY TERRY. John gives that IOU note to Betty in exchange for some fish. Betty gives that IOU note to Fred in exchange for some cheese. Fred gives that IOU note to Terry in exchange for some seeds. It's cumbersome, but it works.

But in a large society, a valuable commodity or a government approved IOU note must be used. In the USA we originally used gold and other precious metals. The value of gold and the value of the dollar were tied together, and dollars were made of gold. But there were problems with that; we soon needed more dollars than there was gold available, so we switched to an IOU note from the government, stating that the government owed the holder THAT amount of gold. Later they switched to fiat dollars.

Now a dollar bill is simply a universally accepted trade facilitator. Whenever a person performs a service or sells something worth one dollar, they get an IOU note saying that they deserve one dollar's worth of ANYTHING that they want. They can trade that IOU to anybody in exchange for one dollar's worth of service or product. It makes the economy run smoothly, and everybody is happy, because they don't have to waste as much time trying to set up a product and service exchange.

However, governments charge a fee for using their IOU notes, called sales tax. That is a steady drain on the amount of money available. But that's another topic.

That is the best description of fiat money I have ever seen including several I have written.

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