Saturday, July 3, 2010

The Value of Money

Yesterday my mother called me to say that she is taking my six year old son to see a coin collector since he has been pestering her with questions about money. Motivated by his interest in buying yet another Ben 10 toy that I won’t get for him (jet ray, shake ray, I don’t get it...), he has become a little obsessed with finding ways to get money. Who invented it? Can he invent his own money, he wants to know. Would people take his invented money? Who makes the money? Can’t he just print some out on our printer? Who decides what its worth?

So back to the coin collector. My first reaction was that it seems a little silly and boring. What’s he going to show him, some bunch of coins from around the world? So what? But then I took a look at some of the coins and turns out it’s a very fascinating lesson in the history of money that sparked some interesting breakfast conversation today. The coins are all from ancient civilizations around the world and hark back to the first invention of money. Here are some of them:

They’re not perfect in shape and are pretty crude. You could so easily counterfeit these, was my first reaction. But that’s OK, my husband said, these coins have intrinsic value. They’re worth the metal they’re made from – x grams of brass or silver for instance. So if you wanted to counterfeit them, you would have to spend the equivalent value of energy and time to mine the metal and that has worth exactly equal to its value.

Our typical text book definition of money is as a store of value. In the last few years I have been thinking of money as being a proxy for potential energy that we accumulate on some level – since it provides the power to do work and reconfigure things. So that money should have intrinsic value (like metal) makes sense to me. You could actually calculate its value in units of energy, say joules. Today we have decoupled currency from any ‘actual value’ and created fiat money. Which means money is no longer linked to something with intrinsic value like gold bars. Given this, its ‘value’ can get progressively more distorted. With this disconnect it takes on a different life and dynamics that I’m still trying to get my head around.

So to my son, I have to say, ‘I have some notional answers to your questions and this is how I’m thinking about it, but in all honesty, sweetheart, I’m almost as baffled as you are. Why don’t you go ask Dad.’

'And, hey, I already told you that we are not going to buy another Ben 10 toy right now'.


  1. My 8 year-old son informs me that you are far too harsh to his cousin... whatever your byzantine musings on money, inherent value, potential energy, etc, there is always, but always, enough money for one more Ben 10 toy.

  2. On a more serious note, isn't it true that money (not the note or the coin) still has the inherent value of creating a tie to the economic life of the nation.

    As you have noted before, weak ties are vital. Isn't money a weak tie? Having rupis ties you to the Indian economy. That has the value of those rupis plus the value of the tie into the economy.

    The U.S. dollar has whatever value it has against other currencies as well as the value of tying you to the world economy. On some level (and ideally) the exchange rate between the rupi and dollar would incorporate not just the equivalency of their power to buy an amount of rice, but would also incorporate how valuable it is to be tied to the internal Indian economy vs. the international economic community. Maybe this is part of the exchange rate and maybe it's not. And I suppose it's true that it is impossible to accurately reflect this value of economic binding because that value is variable between individuals.

    I think I don't fully understand yet what my hypothesis of the economic binding value of money really means. Is it even a valid way of thinking about things?

  3. hi mam, we have a section in Mini-MBA where we talk about evolution of money...may be if we could translate our Mini-MBA in English...he can :)