In World History we’re currently studying the Roman Empire, and today we began the section of the chapter that deals with the fall of the (western) empire. In trying to lay out the problems that plagues Rome, the textbook spends a fair amount of time on the idea of inflation. (Side note: of course, given the circumstances, “a fair amount of time†amounts to about a paragraph.) We spent some time talking through the concept. Everyone in the class could relate to the idea that things used to be cheaper than they are today. We all have older relatives or neighbors to tell us about that, after all. As we talked about the idea that coins containing less of a precious metal might be worth less, one student asked a very good question:
Why should it matter what the coin has in it? If the coin says it’s worth a certain amount, it should be worth that amount.
I can’t tell you how happy I was to get that question. I loved the thought that went into it, and the refusal to just take what I was saying for granted (or just tune it out). But I also loved that it raised a topic that my philosophical side has pondered for a long time: What the heck is money, anyway?
I mean, I have a rough understanding of the difference between the gold standard vs. a fiat currency, for example. When I was a teenager, I used to think of money as congealed time. “It took me three hours to earn this 20 dollars,†I would say to myself. “Is this CD going to be worth 2 ½ hours of my time?†Even with this thought process, I did not always make sound financial decisions. But it helped. But I put aside the more fundamental question: why was I willing to trade my time and labor for pieces of paper with numbers on them, and why was the record store willing to trade me a CD for those pieces of paper?
Well, I was willing to do the former because I believed that the latter was true, and events justified my conclusion. But when you get right down to it, those pieces of paper are only usable in trades because we believe in them. And human history is full of pretty irrational examples of such beliefs. From tulips to Pets.com shares, people are capable of changing their mind pretty quickly about what certain things are worth. Indeed, we don’t even need the pieces of paper anymore – we’ll take numbers on a computer screen. It’s an amazing example of human beings creating a reality just by believing in it. So it fascinates me, and I keep looking for better ways to conceive of this magic thing we call money.