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Why is Paper Money Issued by the Government Worth Anything?


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In this episode of Money Creation Explained we are going to cover Why is Paper Money Issued by the Government Worth Anything?

Before the invention of money, goods and services were typically exchanged through bartering. One person might trade bags of wheat for bags of rice, and the like. With bartering it is hard to trade exact values with others or find suitable traders many times and is a time consuming process. Next came metal coins from ancient civilizations which spread to most countries in the form of Gold and Silver which were stamped with pictures that denoted denominations.

In the United States, the first paper money was created in 1690 and represented a bill of credit (also called IOUís) that could be redeemed at a later time for Gold. In essence, the paper money was an IOU (I Owe You) which represented gold, theoretically meaning that the paper was worth actual gold. The US Government writes on all paper money "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE" which means the dollar is an IOU of the US government.

It is not the money itself that creates the value, because the value of the money is not backed by any collateral anymore. Before 1971, paper money was backed by Gold, so the government could only print based on their Gold reserves at Fort Knox (because paper money could be convertible into gold). Nowadays, money is just paper. When the government wants to or needs to print more, it can do so at any time. In essence, the only reason that money is worth anything, is because all the people in society accept it's stored value and carry it's worth in exchange for products and services.

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