What makes money and currency valuable?

Question

What makes money and currency valuable?

Answer 1

It used to be gold, now it's just faith..seriously.  It's the bandwagon effect.

Answer 2

The reserves.  A bank note is really a promise that the country which issues it will back it to its face value.  

In fact the origin of bank notes is that originally people used to barter, for example a pig for 10 chickens or for a few days labour.  This was diffficult to manage because the rate of exchange was never sure so people started to use gold.

Gold was too heavy to carry around so people used to deposit it with gold deposit shops which issued receipts and rather than to get the gold from the shop each time a transaction took place the receipts were exchanged for goods and services.

So the receipts became bank notes and the gold depositories became banks.

When countries took over currency management they set up a central bank to take care of the gold and even until the 1970's major currencies such as US and UK were on the gold standard and gold was literally shipped backwards and forwards across the Atlantic to balance the accounts.

These days such balancing is done by computer but still the currency represents the value of the reserves held by the country which issues it.

The value of currencies fluctuates according to the reserves as they increase and decrease due to the balance of trade.

Answer 3

What makes any currency valuable? Nothing but perception and confidence in the medium of exchange being used.

Even if gold and silver coin were used as currency, when used as currency the specie (coin) still represents a specific exchange value for wealth—goods and services. The intrinsic commodity value of gold and silver becomes moot when the coin is used as currency. When used as currency, people keep the gold and silver coin under their bed mattress not because of the intrinsic commodity value, but for the future exchange value.

When used as a commodity, the exchange value as currency becomes moot, and vice-versa. If you do not believe this, reflect back to the early days of this nation. No sooner had Congress established the exchange value of gold coin, the commodity value of gold increased and the gold coin ceased to circulate as currency. Congress tried to rectify that situation years later by establishing a new exchange ratio for gold coin. That effort too was undone—by gold rushes. The gold rushes increased the supply of gold, thus lowering the commodity value of gold coin and in effect raised the commodity value of silver coin. Soon thereafter silver coin ceased to circulate as currency.

All currency, regardless of substance serves as a claim on the total wealth of the society. All currencies serve as a public utility, nothing more.

What makes a Federal Reserve Note valuable for exchanging wealth is the same as that for any currency—public confidence. Regarding every day consumerism, the substance of the currency is irrelevant. All most people care about is whether the currency being used will retain purchasing power to exchange wealth. All currencies, regardless of substance, are used strictly based upon public confidence. All currencies are accepted for what they represent—the anticipated ability in the future to obtain wealth—goods and services.